Consultation Paper: Strategic review of the Reserve Bank of New Zealand s payment and settlement systems

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1 Consultation Paper: Strategic review of the Reserve Bank of New Zealand s payment and settlement systems The Reserve Bank invites submissions on this Consultation Paper by 18 July Submissions to and enquiries about this consultation should be addressed to: Mike Wolyncewicz, Chief Financial Officer Reserve Bank of New Zealand, P.O. Box 2498, Wellington 6140 Or ed to: Please note that a summary of submissions may be published. If you think any part of your submission should be withheld on the grounds of commercial sensitivity, or for any other reason, you should indicate this clearly. 12 May 2014

2 2 1. Introduction 1. On 28 November 2013, the Reserve Bank of New Zealand ( the Bank ) announced it was undertaking a strategic review of the payment and settlement systems that it owns and operates namely Exchange Settlement Account System ( ESAS ) and NZClear Securities Settlement System ( NZClear ). The review was initiated to consider the Bank s and industry requirements of those systems in anticipation of substantial upgrades that will be necessary over the next 2-5 years. As a result, the scope of the review is forward looking and considers future demands and drivers for the provision of payment and settlement services by the Bank. 2. The Bank has appointed Ernst & Young to assist with the review, and to help develop a strategy for the development of the Bank s payment and settlement services. 3. Since the announcement, the Bank has developed a vision for the provision of payment and settlement services, principles that support that vision, and some core requirements that the Bank believes are necessary to achieve those principles. The Bank has also assessed the architecture for, and the functionality of, the payment and settlement systems. That assessment has identified a number of strategic issues to address that will impact the future operation of the Bank s payment and settlement systems. 4. Section 2 of this consultation paper provides a high-level overview of the payments and settlements environment and the rationale for this review. Section 3 outlines the Bank s vision for an effective and efficient payment system and the principles that underlie that vision. Section 3 also outlines four core requirements of the Bank s current payments infrastructure that it believes are necessary, but not sufficient, to deliver on the principles. Section 4 discusses the strategic issues that are relevant to the Bank s provision of payment and settlement services now and going forward. Section 5 provides a high-level overview of the potential alternatives that the Bank could consider for the future provision of payment and settlement services. 5. The Bank invites industry stakeholders to provide feedback to the questions contained in this document on the following aspects of the payment and settlement systems it operates: i. The Bank s vision, principles and core requirements for the provision of payment and settlement services by the Bank; i The strategic issues impacting the future provision of payment and settlement services by the Bank; and The potential options, identified by the Bank, which could address the strategic issues. 6. The Bank requests responses to the consultation questions to be submitted by 20 June The Bank will analyse the feedback received and incorporate that information into its future planning for the payment and settlement systems that it operates. The Bank will publish a summary of submissions in due course.

3 3 7. Submissions can be sent to: Mike Wolyncewicz Chief Financial Officer Reserve Bank of New Zealand P.O. Box 2498 Wellington 6140 Or ed to: 8. Enquiries can be addressed to: Mike Frith Manager Market Operations (Auckland) 2. Context 9. Modern economies are dependent on the safe and efficient processing of transactions. The smooth functioning of payment, clearing and settlement systems increases users confidence in those systems and, ultimately, public confidence in financial markets. The functioning of these systems has an impact on the stability of financial institutions, markets, and systematic stability. Such systems also assist Central Banks to discharge their statutory functions such as the implementation of monetary policy. Consequently, it is no surprise that that Central Banks have taken a prominent role in the smooth functioning of payment systems, such as operating ESAS. 10. The Bank s role in payments and settlements can be defined by the following three dimensions: i. As a regulator of payment and settlement systems to meet its financial stability objectives, i As a participant, both transacting and settling with market participants, through its financial markets operations in order to meet its monetary policy implementation objectives, As an owner and operator of New Zealand s critical payments and settlements infrastructure ESAS and NZClear. It is the third of these three roles that is the focus of this strategic review. 11. The payments landscape in New Zealand is characterised by thin volumes and relatively low transaction values when compared with larger countries. However, to deliver the appropriate support to financial markets and the economy there is still a need for payments and settlements infrastructure that manages risk appropriately, enables innovation, and maintains our international reputation. 12. In New Zealand, the Bank owns and operates two real-time gross settlement systems. These systems are:

4 4 i. ESAS, the system that processes payment instructions between settlement account holders. NZClear, the system that primarily allows members to settle the sale and purchase of securities lodged in the system through delivery versus payment ( DvP ). NZClear also allows members to make cash payments to each other. 13. The ESAS and NZClear systems have delivered sound performance over many years. The characteristics of the Bank s payment and settlement infrastructure are: Characteristic Resilient Secure Capacity Capability Efficient Evidence Few instances of Reserve Bank originated payment system performance issues. Strong focus on building system and infrastructure redundancy. Clear and proactive management of upstream payment system changes. Ongoing focus on system security and integrity. Strong controls over access. Proactive development of system capacity. Existing infrastructure has sufficient residual capacity based on current processing methods. Delivery of Real-Time Gross Settlement in a number of payment categories. Providing securities settlement services and solutions that the market has either not been able, or willing, to fill. Operates 23.5 hours, 7 days a week. ESAS is managed within an efficient cost-recovery fee model. NZClear is managed within a moderate profit/recovery model. 14. Broadly, there are three originations of payments retail originated payments, wholesale originated payments and third-party originated payments. All three originations are settled in ESAS, utilising a particular payment interface. The diagram below describes how various originations of payments are processed and settled in ESAS and NZClear:

5 5 ESAS System Exchange Settlement Account System The ESAS is used by banks and other approved financial institutions to settle their obligations on a Real- Time Gross Settlement (RTGS) basis. SWIFT AUS (internal NZClear-ESAS interface) SWIFT Retail Originated Feeder System Third Party Originated Feeder System Wholesale Originated Feeder System SBI NZClear AVP (incl CLS) ES Direct SBI: Settlement Before Interchange This service settles the transactions submitted to ESAS in respect of files containing retail transactions between bilateral pairs of accountholders. Once the transaction is settled in ESAS, the associated file of retail transactions is released to the destination bank. The SBI service involves a closed user group administered by Payments NZ Limited. NZClear, New Zealand s central securities depository and principal securities settlement platform for the financial services industry. The Reserve Bank is the system operator of NZClear. AVP: Assured Value Payment This service settles large-value transactions submitted to ESAS via ESAS-SWIFT Interface, and provides Real-Time Gross Settlement of interbank transactions across the exchange settlement accounts held with the RBNZ. Registry Interface Member Interface NZX Interface Originators User X User 1 User 2 Regist ry NZClear member e.g. Citibank Nominees ESAS Account Holder NZClear member trading on NZX e.g. First NZ Capital Securities ESAS Account Holder User 1 User 2 User X 15. Retail payments are primarily low-value and high-volume payments made by individuals and small businesses. Normally, low-value retail transactions are not time critical. Settlement before Interchange ( SBI ) is the main channel for retail originated payments. 16. Wholesale transactions represent a relatively small number of high-value and time critical payments. Wholesale payments are offered to government agencies, pension funds, institutional customers and corporations. Wholesale payments are delivered via SWIFT using the Assured Value Payments ( AVP ) and Continuous Linked System ( CLS ), which are interfaced with ESAS. 17. Third party-originated payments primarily represent debt, equity securities and highvalue cash transfers between NZClear members. All payments, whether for the settlement of securities transactions or just cash transfers, are irrevocable once they are settled by NZClear. The irrevocable nature of the payment, together with the DvP mechanism for security transactions, means that NZClear provides a quality securities settlement and cash payment facility recognised by international standards. 18. ESAS and NZClear exist on the same computer platform and are inter-linked. ESAS and NZClear run on a single ORACLE SPARC T-Series server and share the same physical and logical ORACLE database. Because of the proprietary nature of ESAS and NZClear, the legacy systems have become very complex and changes and enhancements added to the systems over time have increased system complexity

6 6 and maintenance challenges, including managing IT security. Added to this, systems must continue to be upgraded to keep the underlying software up-to-date and to enhance functionality to meet the industry s needs. 19. The current ESAS and NZClear hardware is due for replacement. While the software and hardware of the current ESAS-NZClear system can still be supported, the underlying hardware only has two years of remaining support life while software has on going upgrade requirements. 20. It is most likely that the Bank will need to make a significant investment in the near future to address these matters. As a result, the Bank believes it is timely to assess the Bank s and industry s requirements and to review its role in providing payment and settlement services to ensure the investment decisions made incorporate market developments and users future needs. 3. The Bank s vision, principles and core requirements Vision 21. The Bank s vision for high-value payment and settlement services is reflected in the following statement: The Bank supports economic growth by promoting a sound, efficient and dynamic payments and settlements environment, which maintains national and international confidence and reliability, and enables innovation. We will achieve this, within acceptable financial and economic boundaries, via: i. Appropriate regulation and supervision; and Supporting settlement operations. This vision provides the basis to consider decisions and changes facing the Bank in relation to operating payment and settlement systems. Principles 22. The Bank has identified the following principles to support the delivery of the vision: i. Systems are designed and operated so that domestic and international standards of resilience and reliability are met. i iv. Users needs are met and services are efficiently delivered and priced appropriately. The business structure and technology enable delivery of innovation and growth. Governance arrangements are consistent with the regulatory framework, stakeholder needs, and the public interest. 23. These principles relate to reliability, efficiency, service delivery, national and international confidence, innovation, and the recognition that the operation of the

7 7 payment and settlement systems impacts not only the direct users, but also the wider economy. Core requirements 24. The Bank has identified four core requirements that must be carried forward. The four core requirements are necessary, but not sufficient, to deliver on the principles: i. The Bank must continue to own and operate ESAS given that ESAS is central to the financial system and the Bank s statutory functions. i iv. For systemic risk management and liquidity management reasons, high-value fixed-interest security settlement needs to be line by line, i.e., real-time gross settlement and not batched/netted. The Bank has technical requirements for the provision of liquidity to financial market participants that must be met. For example, NZClear currently delivers an automatic overnight reverse-repo function. A mechanism needs to be available that gives the ability for authorised institutions to obtain liquidity on a collateralised basis from the Bank at any time. The Bank needs to ensure that the systems provide adequate failover alternatives for crisis scenarios. For example, the third level contingency ( 3LC ) facility in NZClear is a crucial back up in the event of a SWIFT failure and can be used where a deep-seated failure would otherwise cause SBI or CLS processing to be halted. 25. The first two requirements are consistent with principles relating to public interest, international standards and confidence in New Zealand s capital markets. Requirements three and four are outcome based, but are currently delivered easily and efficiently because of the Bank s ownership and operation of NZClear and the operation of ESAS and NZClear on the same computer platform. They also relate to principles pertaining to sound operation of New Zealand s capital markets, systemic issues and the ability to meet user needs. Question 1: How does the Bank s vision for payment and settlement systems align with what you think the Bank s payment and settlement systems should deliver? Question 2: Do you think the identified principles will deliver on that vision? Question 3: Do you think these principles are being met now? Question 4: What other principles should the Bank consider? Question 5: Do you agree with the Bank s views on the four core requirements specified? Question 6: What other core requirements would you include in this list?

8 8 4. Strategic issues 26. The Bank has identified five strategic issues in the current environment that will impact the future state of the payment and settlement systems it operates. These issues will be considered and addressed during this review and include: i. The Bank requires a roadmap for the future provision of payment and settlement services by the Bank. i iv. ESAS and NZClear, as they are currently structured, cannot individually access innovation. The current infrastructure is complex and difficult to maintain. It is an open question whether the Bank s principles, which support its vision, would be better met if security settlement services were provided by the private sector rather than the Bank. v. The Bank believes the conflicts of interest between its role as operator and regulator are managed, but would like to get industry feedback on the matter. These strategic issues are discussed below. i. The Bank requires a roadmap for the future provision of payment and settlement services by the Bank 27. The Bank is developing a roadmap for the future operation of payment and settlement systems owned by the Bank. The roadmap will inform the Bank when it makes strategic and technology decisions. 28. For the Bank to deliver on its principles, the roadmap must incorporate the Bank s requirements, industry requirements and the functionality that industry participants will need in the future. 29. In addition to the four core requirements identified, the Bank s principles are elaborated through the business requirements and operating model agreed with users or in specified performance standards observed by the Bank as an operator. Some of these include: i. The System should be designed and operated in accordance with the "Principles for financial market infrastructures" issued by the Committee on Payment and Settlement Systems (CPSS) and the International Organisation of Securities Commissions (IOSCO). i iv. The System should be available for at least 23.5 hours per day, 7 days a week and operational between 9am am the following business day. During core business hours the System will achieve minimum availability of 99.9%. The System should have clearly defined procedures for the management of risks that specify the respective responsibilities of the system operator and

9 9 the participants and provide appropriate incentives to manage and contain those risks. v. The System s rules and procedures should enable participants to have a clear understanding of the system s impact on each of the risks they manage. vi. v vi The System should provide a means of making payments that is practical for its users and efficient for the economy. The System should have objective and publicly-disclosed criteria for participation that permit fair and open access. The System should be open, flexible and competitive with no unwarranted barriers to entry. 30. The Bank would like to know if users needs are being met. Question 7: What are your critical user needs that payment and settlement services provided by the Bank must meet in relation to speed, innovation, development and capability? Question 8: Are these needs met by the existing systems? If not, why not? 31. The Bank s roadmap must also consider innovations and future developments in payments that could affect financial markets and require changes to infrastructure. 32. Innovation and future developments in payment and settlement systems can be domestically or internationally driven. Domestic developments that have led to significant changes to infrastructure include the introduction of SBI and the development of NZX s new settlement system, which incorporates a Central Counterparty. International trends in technology such as mobile payments and swipe card technology are often introduced early in New Zealand. Closer to home, the Reserve Bank of Australia is implementing a strategy to improve financial system efficiency, which includes an objective of having payment and settlement systems that have faster processing speeds and the ability to make real-time retail payments by the end of Changes or innovations can occur across the payments system chain. The concept of the payments system chain is elaborated in the diagram below. The diagram explains the different roles played by payments infrastructure in providing the payments experience.

10 10 RBNZ, FMA Regulatory oversight Origination Processing Settlement Initiate payment Capture payment Book payment Store and forward Settle Clear Support Banks, Non-banking institutions RBNZ NZClear ESAS Securities Retail payments Wholesale payments 34. Banks and non-banking institutions play independent roles in initiating and dispatching a payment request and validating and approving a payment for settlement. While the settlement infrastructure is capable of providing real-time gross settlements, the end-to-end payment experience is also dependent on the way in which electronic payments are processed by individual banks. As such, the demands and change drivers for operating payment and settlement systems exist across the entire payment value chain. While the focus of this review is on the Bank operated processing and settlement components of the payments chain, to develop a roadmap, the Bank must also consider the future demands related to payments origination, processing and settlement that might not have a direct impact on the Bank. Question 9: What key innovations will shape the direction of payments and settlements in the future? Question 10: Which of these innovations do you think will be most critical for the Reserve Bank to incorporate into its roadmap? Question 11: How will these innovations affect you and your requirements of payment and settlement systems? Question 12: What are the main drivers to innovation in payments and settlements infrastructure, e.g. regulation, technology, customer demand? Question 13: Do you foresee real-time gross settlement for retail payments occurring in New Zealand in the near future? If yes, what will be the drivers? If no, what are the barriers?

11 11 ESAS and NZClear, as they are currently structured, cannot individually access innovation 35. ESAS and NZClear have operated well for New Zealand and delivered significant benefits to financial market participants, in particular, the economies of scope delivered by ESAS and NZClear operating on the same computer platform. 36. A downside of sharing a computer platform is that innovations to either NZClear or ESAS might not be delivered as easily as if the systems were operating on separate platforms. This is primarily because changes to one system necessarily involve changes and costs to the other, which creates issues as each system has different support requirements and risk profiles. In particular, NZClear is more complex than ESAS and requires more supporting resources. While some innovations have been introduced (e.g. SBI), other possible innovations could be hampered by the current infrastructure design. Prioritising future developments can be difficult under the current business model. 37. The Bank is aware that changes to its systems must be able to deliver on the important innovations in the future. For example, technology change has created and is creating opportunities to make existing payments systems safer and more efficient. Technology is also accommodating the industry s growing need for new types of payment models. An important strategic decision to be made by the Bank when considering technological solutions will be how that technology accesses or delivers innovations. Question 14: What payment or settlement system innovations would you have expected or like to have seen that have not been delivered by the Bank? Question 15: Looking forward, if we were to change the current infrastructure, e.g. separate NZClear and ESAS, but retain SWIFT messaging for communicating between systems, how would that impact you? i The current infrastructure is complex and difficult to maintain 38. The current infrastructure providing the Bank s payment and settlement systems is aging and is increasingly complex to maintain due to the legacy IT architecture coupled with layers of changes made throughout the years. The complexity increases maintenance costs and introduces potential risks that have to be managed. Some of those risks arise because ESAS and NZClear share the same computer platform, but have different risk profiles. 39. Looking forward, maintaining and enhancing the systems whilst meeting user needs and security requirements will be increasingly difficult without change to the underlying technology. New technology would be able to deliver innovation, better risk management and better service delivery. 40. The determination of a technology solution is not within the scope of this strategic review. However, the Bank does acknowledge that in making decisions around

12 12 technology change, it will need to be mindful of the implementation complexities, the timeframe for implementation, and the change management involved for the Bank and its stakeholders. The Bank is also aware that introducing new technology could have implications for the business and operating models of the Bank and services received and costs faced by the users. iv. It is an open question whether the Bank principles that support its vision would be better met if security settlement services were provided by the private sector rather than the Bank 41. The Bank established the NZClear system in At the time the Bank was involved in the securities registry business providing services to a number of issuers of fixed-interest securities. NZClear improved efficiency and risk management and facilitated real-time settlement on a DvP basis for equities and fixed interest trades amongst participants in wholesale securities markets. The Bank took the lead on the introduction of NZClear because it was unclear whether other financial institutions were prepared to take the initiative or incur the cost. 42. The clearing of the cash leg of transactions through NZClear changed in 1998 when ESAS was developed and became a real-time gross settlement system. Since that time, the Bank has undertaken a number of technological upgrades to the systems and developed interfaces between the systems and users. On several occasions the Bank has investigated whether an alternative provider could operate NZClear or take over the provision of these services. However, on each occasion, either the potential provider withdrew or it was decided that alternatives could not provide an advance on the existing technology or benefit to the financial market. 43. There are advantages and disadvantages of the Bank operating NZClear: i. The economies of scope and cost savings from having ESAS and NZClear on the same computer platform have been significant, although as noted, may not produce net positive benefits going forward; i The provision of real-time gross settlement for fixed-interest security settlement offers a public benefit as it addresses a systemic risk that the market might not address itself under commercial terms; However, because the Bank does not operate with a strict commercial focus, it is possible that the Bank might not maintain the system or develop capability on the basis of commercial demand. 44. Given market developments in recent years and developments in technology, the Bank is interested in understanding the drivers behind the viability of a private sector provider of NZClear settlement services and whether the principles outlined by the Bank could be better met by that provider.

13 13 Question 16: What benefits does the Bank s delivery of securities settlement through NZClear deliver? Question 17: What drawbacks exist due to the Bank s ownership and operation of NZClear? Question 18: What benefits might arise if the securities settlement services currently provided by the Bank were provided by the private sector? Question 19: What drawbacks might exist if the securities settlement services currently provided by the Bank were provided by the private sector? Question 20: What views do you have on whether the Bank should continue providing security settlement services? 45. As the Bank and NZX both provide financial markets clearing and settlement services and jointly have the objective of supporting the development of New Zealand s capital markets, there is a perception that the Bank and NZX are duplicating settlement services, which adds costs to market participants. Question 21: Do market participants face additional costs because of the two separate settlement infrastructures operating in NZ? Question 22: Are these costs significant? v. RBNZ believes the conflicts of interest between its role as operator and regulator are managed, but would like to get industry feedback on the matter. 46. Amendments were made to Part 5C of the Reserve Bank Act in 2009 to extend the availability of designation to securities settlement systems (e.g. NZClear) as well as pure payment systems. As part of the regulatory changes made, a joint regulator model was developed where the Prudential Supervision Department (PSD) within the Bank and the Financial Markets Authority (FMA) shared prudential oversight responsibilities for security settlement systems. At the time, PSD already had (and still have) sole responsibility for regulating pure payment systems (e.g. ESAS and CLS) while the FMA already had a conduct of business regulatory role for securities trading. One reason for the joint regulator model was to avoid potential conflicts of interest from the Bank regulating a system that it owned and that was in competition with another entity. Internally, the Bank also developed segregations of duties and strict reporting lines to avoid the potential for conflicts between regulatory and operational parts of the Bank. For example, senior managers and staff responsible for operating ESAS and NZClear were removed from policy committees and working groups that considered regulatory issues. The diagram below shows how the Bank s organisational structure separates its operational, market and regulatory responsibilities.

14 14 Separation of duties Governor Head of Operations Head of Financial Stability ESAS & NZClear Operations Financial Markets Prudential Supervision ESAS/NZClear Helpdesk Monetary policy implementation Regulatory policy Business Development (including IT) Regulatory oversight 47. The Bank believes these measures have worked well to mitigate conflict of interest issues and does not lead to a substandard provision of payment and settlement services. However, the Bank would like to test this view with industry participants. Question 23: Does the Bank s role in NZClear present a conflict of interest for the Bank? Question 24: If so, how does this conflict manifest itself, and what actions could mitigate the identified problems? 5. Potential options 48. The objective of this consultation is to undertake a strategic review of the issues facing the Bank as an owner and operator of critical financial market infrastructures. The challenge is that it is easy to fall into a discussion around solutions rather than issues and this does not necessarily advance the process because there are many unknowns around the range of different options at this point. However, the Bank recognises that a high-level discussion on possible options might help in prompting strategic discussions or uncovering additional strategic issues. 49. There are two strategic decisions facing the Bank: i. A decision on the operating model or architecture solutions for the systems that the Bank currently owns and operates. A decision on the business model that the Bank should implement, particularly whether the Bank should continue to own and operate a securities settlement system.

15 15 Operating model options 50. Four potential high-level architecture options are presented below. Each option will have different implications for users and, potentially, the services provided by the Bank. i. Maintain things more or less as they are, but with an upgrade to hardware and software, i iv. Redevelop or build a proprietary conjoint system for ESAS and NZClear, Buy separate off-the-shelf replacements for ESAS and NZClear, Redevelop or buy a replacement for ESAS and develop a strategy for the provision of securities settlement services. i. Maintain things more or less as they are, but with an upgrade to hardware and software 51. This solution involves maintaining the operating environment of the existing infrastructure by replacing hardware as it is due for replacement, which will be necessary in the next two years, and continuing to patch and maintain software as required. This solution maintains the co-joined ESAS and NZClear infrastructure. Under this option all existing and future maintenance challenges remain and the strategic issues, in particular the 2 nd and 3 rd issues, are not resolved. The option minimises the short-term capital reinvestments, but only defers significant decisions for up to 5 years. This option will have no impact on service levels to the current users, but the on-going challenges of maintaining the systems could have an implication on costs and consequently fees for users. Redevelop or build a proprietary conjoint system for ESAS and NZClear 52. This solution involves replacing the existing systems with a new proprietary system based on the latest technology architecture. This option would maintain the co-joined infrastructure of NZClear and ESAS and therefore retain the economy of scope benefits for users. It would most likely retain existing functionalities and capabilities as desired, such as auto repo, while the use of new technology would address the existing complexity challenges associated with flexibility and serviceability and open the system up for new innovations. This option is expected to have the least impact on users of the system, but would require a major capital reinvestment. Additionally, the development and implementation of a proprietary conjoint system would not be a simple proposition and, depending on the technology adopted, longevity of the system might become an issue. i Buy separate off-the-shelf replacements for ESAS and NZClear 53. This solution involves building a new system based on standard off-the-shelf solutions to replace ESAS and NZClear. This option would address medium-term issues and provide a capability and development path that is tied to global solutions and suppliers of those solutions. It will also, subject to software releases being

16 16 maintained, provide a sustainable management path for the Bank and system users. The Bank is aware of a number of viable off-the-shelf RTGS payments solutions that could replace ESAS and that are used by other Central Banks. Regardless, users are likely to be impacted as a standardised solution might not be able to provide the existing range of service capability. iv. Redevelop or buy a replacement for ESAS and develop a strategy for the provision of securities settlement services 54. This option splits the ESAS and NZClear infrastructure and adopts different development pathways and strategies for each system. Physical separation of the systems would provide a level of flexibility going forward by allowing the introduction of change and innovation to each environment independently, although would require the development of an interface between the two systems. 55. The ESAS replacement would be an up-to-date solution, which could either be a proprietary solution or an off-the-shelf solution. The solution would set the ESAS replacement as a priority. The Bank could then take time to develop the appropriate strategy for the provision of securities settlement services. This could be done through the existing NZClear system for a short period before a longer-term solution was developed internally or bought off the shelf. During this period, the Bank would also consider the appropriate business model for providing securities settlement services. Business model options 56. The Bank has stated that it will continue to own and operate ESAS or its replacement. There are more long-term business model options for NZClear and its replacement, which will need to be considered. Options involve whether the Bank should continue providing securities settlement services and whether that should be within the existing organisation structure, or whether a suitable private sector provider was available. If the Bank was to continue providing securities settlement services, it would take the opportunity to assess whether services were being provided appropriately or should be provided on a more commercial basis. For a private sector provider to be suitable it would need to be willing and able to deliver on the principles and core requirements that the Bank has identified. Question 25: What other options might exist? Question 26: What is critical for evaluating these options? Question 27: Are there any other issues that the Bank has not identified that it needs to take into account when considering options? 6. Conclusion 57. It is important to regularly assess the Bank s payment and settlement infrastructure and it is timely to do so now. The Bank s payment and settlement systems sit at the

17 17 heart of the financial system, are critical to the New Zealand economy and require application of strict risk management and strategic planning. This review of the Bank s infrastructure should ensure that it can meet industry requirements for the next years. 58. The Bank s provision of payment and settlement services has delivered sound performance and excellent value to the users and the wider economy over the years. However, the aging IT infrastructure and the strategic issues in the current environment, coupled with recent market developments and technological enhancements, have led the Bank to consider what changes it must make to its payment and settlement systems to ensure the Bank s vision and principles for the provision of payment and settlement services can be met and industry s future requirements can be delivered efficiently. 59. This consultation will allow the Bank to incorporate feedback from the industry stakeholders on the Bank s vision, principles and core requirements for the provisions of the payment and settlement services, the strategic issues impacting the future provision of the Bank s services and the potential options which could address those issues.

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