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

Transcription

1 Strategic review of the Reserve Bank of New Zealand s payment and settlement systems Response to submissions November 2014

2 2 Executive Summary 1. The payment and settlement systems that the Bank operates require significant investment in the near future. To underpin these investment decisions, the Bank undertook a strategic review of its payment and settlements operations with a view to identify and consider the strategic issues that the Bank needs to incorporate into its planning and investment decisions. 2. The strategic review has allowed the Bank to explain its vision and principles, and specify the core requirements necessary to deliver these principles. The review has also allowed the Bank to seek feedback from industry on the strategic questions that the Bank faces. This feedback has helped confirm a number of considerations and clarify others. 3. A key conclusion from the review is that, in future, the services currently provided by ESAS and NZClear are likely to be provided by new technology that is separated or modular. 4. A second outtake from the review is that the Bank is still open around the ownership question of security settlement systems, and would like to investigate further the options that might be available. The Bank remains of the view that securities settlement is not a core central bank business and is keen to understand whether alternative providers might exist who would deliver benefits to the financial system. 5. The objective of the next phase of work is to investigate and identify an appropriate replacement technology solution for ESAS and an appropriate business or replacement technology solution for NZClear. Along with the vision, principles, and core requirements, this work will determine the roadmap for the payment and settlement systems that the Bank will operate in the future. The intention is to undertake this work across three work-streams operating in parallel. Those work-streams will: i. Identify a technology solution to replace ESAS by seeking proposals from vendors and deciding on the appropriate solution for implementation. ii. iii. Explore technical replacement solutions for NZClear from the vendors identified in (i) for the Bank to implement if no alternative provider of securities settlement services proves suitable. Assess the suitability of alternative providers of securities settlement services by developing an assessment framework and seeking expressions of interest from industry. 6. None of these work-streams will presuppose an outcome and all options remain open to the Bank. The Bank expects this work to be undertaken over the next year and will be keeping industry informed as progress is made. It is the Bank s intention to release Request for Proposal / Expression of Interest documents in the first quarter of 2015.

3 3 Background 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 s requirements of those systems in anticipation of substantial upgrades that will be necessary over the next 2-5 years. 2. Outputs from that review included a vision for the provision of payment and settlement services, principles that support that vision and a list of core requirements for systems that the Bank believes are necessary to achieve those principles. During the review, the Bank also assessed the architecture for, and the functionality of, ESAS and NZClear. That assessment identified a number of strategic issues the Bank needed to address, which will impact the future operation of its payment and settlement systems. 3. In May this year, the Bank invited industry stakeholders to provide feedback to the outcomes that emanated from the review and in particular: i. The Bank s vision, principles and core requirements for the provision of payment and settlement services by the Bank; ii. The strategic issues impacting the future provision of payment and settlement services provided by the Bank; and iii. The potential business and technical solutions that could address these strategic issues. 4. The Bank received 22 submissions to the consultation paper. This document provides a summary of industry feedback on the questions the Bank posed and sets out the next steps that Bank will be taking as it considers the suitability of different technical and business solutions for the future provision of payment and securities settlement. The Bank s vision, principles, and core requirements 5. An important output of the Bank s strategic review was the development of a vision for payment and settlement services and a set of high-level principles that support the delivery of that vision. Vision: 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 ii. Supporting settlement operations. Principles: i. Systems are designed and operated so that domestic and international standards of resilience and reliability are met. ii. Users needs are met and services are efficiently delivered and priced appropriately. iii. The business structure and technology enable delivery of innovation and growth.

4 4 iv. Governance arrangements are consistent with the regulatory framework, stakeholder needs, and the public interest. 7. In addition, the Bank identified four core requirements that must be carried forward, which are necessary, but not sufficient to deliver on these 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. ii. iii. iv. For systemic risk management and liquidity management reasons, high-value fixedinterest 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 Settlement Before Interchange (SBI) or Continuous Linked Settlement (CLS) processing to be halted. 8. The Bank was interested as to whether industry s views on the vision, principles, and core requirements aligned with those presented in the consultation paper by the Bank or whether there were additional elements that the Bank should consider. 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? 9. There was general support of the Bank s vision and consensus that the delivery of the principles would support the vision. Question 3: Do you think these principles are being met now? 10. Respondents were of the view that the principles were being met. However, some respondents agreed with the Bank that issues related to the technology underpinning the existing systems (complexity etc) were hampering the ability of the Bank to deliver on some principles notably on delivering innovation and growth, speed to market, and flexibility. There was also a view that the Bank could do more to meet user needs either on its own or through the use of different Bank or user governance structures (e.g. a management committee). Question 4: What other principles should the Bank consider?

5 5 11. The majority of submitters thought the principles outlined in the consultation paper were appropriate, although some additional thoughts were offered. 12. One suggestion was for the inclusion of a separate principle relating to system security. Security is a very high priority for the Bank and significant investment is undertaken to maintain and enhance system security. 13. The Bank believes security of its systems is captured in principle (i). The global standard setters for financial market infrastructures, which include payment and settlement systems, are the Committee of Payments and Market Infrastructures (CPMI) and the International Organisation of Securities Commissions (IOSCO). Their latest set of Principles for Financial Market Infrastructures (PFMIs) incorporate the identification and management of security risks by operators. 14. One respondent also suggested that the principles should include a macro-financial stability principle and a principle that systemic systems, such as NZClear, should be located in New Zealand with unequivocal ability for regulators to direct and, if necessary, control operations. This strategic review is from the perspective of the Bank as an owner and operator of settlement systems and therefore does not address regulatory issues. However, the Bank has been reviewing Part 5B of the RBNZ Act, which covers the regulatory oversight of payment and settlement systems. One objective of that review is to consider whether the Bank s powers are sufficient to address prudential objectives such as the location of infrastructure, and the powers of direction and control if necessary. It is the Bank s view that a well-functioning systemically important system will contribute to macro-financial stability. Principle iv. anticipates that the system will be structured to deliver stakeholder needs and broader public benefits, which includes, amongst other things, macro-financial stability. The Bank continuously monitors the functioning of payment systems and their impacts and reports on them every six months in the Financial Stability Report. 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? 15. Most respondents to the consultation agreed with the core requirements identified. It was acknowledged that there are subtle differences between the core requirements specified and business requirements, which addressed the agreed delivery of services to users. Both core requirements and business requirements deliver on the vision and principles specified. 16. A number of submitters believed the ownership and operation of NZClear should be included alongside ESAS in the core requirements. The future ownership and operation of NZClear is definitely within the scope of this work in this strategic review and in the next phases of the project, which will consider and implement solutions. Principle 4 and the wider public benefits that a settlement system must provide for will be particularly germane to the Bank when assessing its options around the future ownership and operation of security settlement systems.

6 6 17. Some respondents considered that the location of these systems in New Zealand should be a core requirement. There is no existing regulatory requirement for payment or settlement systems to be based in New Zealand. This may need to be considered following the Bank s Review of its statutory payment oversight powers 1 or as part of any undertakings by a new service provider should the Bank decide to cease providing securities settlement services. 18. One respondent thought requirement (iv) should be broadened to cover business continuity management in general and not just a major telecommunication failure for example dealing with a potential failure of the SWIFT service. We note that the appropriate monitoring and management of all operational risks are requirements under CPMI/IOSCO principles and therefore covered by the principle (i). 19. Three respondents thought all security settlement in New Zealand should be line-by-line rather than batched and netted. However, one respondent requested that we rationalise why fixedinterest security settlement needed to be line-by-line. 20. Line-by-line settlement (or multiple-batch processing during the settlement day) is suggested by international standard setters as the appropriate settlement approach for large value payments or security settlement systems 2. This is clearly the case for ESAS, which settles around $25 billion per day, but it is the Bank s view that this should also be the case for NZClear, which settles in the vicinity of $6-$8 billion per day. 21. Line-by-line settlement allows the settlement system and financial system in general to manage settlement risk, counterparty credit risk, and systemic risk, as exposures are not built up during the settlement day. The build-up of exposures can lead to systemic issues because of the difficulty of unwinding positions in the event of a participant failure. The cost for participants of line-by-line settlement is in having to hold more liquidity to make larger payments more frequently. 22. It is not uncommon for equity and derivative transactions to be batched and settled periodically during the day. This is usually achieved through the use of a Central Counterparty (CCP) with trades being novated to the CCP (whereby the CCP interposes itself between the buyers and sellers as a legal counterparty and becomes the buyer to every seller and vice-verse) and credit and settlement risks being managed by the posting of collateral, the provision of liquidity support, and by the capital held by the CCP. Strategic issues facing the Bank 23. The Strategic Review identified five key issues the Bank would need to consider or incorporate into its near-term infrastructure and operating model decisions. The strategic issues, listed below, impact the resilience, security, capacity, capability, and efficiency of future payment and settlement services. i. The Bank requires a roadmap for the future provision of payment and settlement services by the Bank. 1 In March 2013 the Reserve Bank issued a consultation paper setting out its proposals on strengthening its statutory payment oversight powers. A summary of and response to submissions received was released in October These documents can be found at: 2 CPMI / IOSCO Principle 8: Settlement finality.

7 7 ii. iii. 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, as currently provided by NZClear, 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. A roadmap for meeting user needs and facilitating innovation 24. The Bank s roadmap will inform its strategic and technology decisions. For the Bank to deliver on its principles and vision, the roadmap must incorporate the Bank s requirements, industry requirements, and the functionality that industry participants will need in the future. For this reason, the Bank utilised the consultation to increase its understanding of industry s critical needs and industry s views on forthcoming innovations and developments that could affect financial markets and set future demands on infrastructure. Meeting user needs 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? 25. Respondents identified a broad range of critical user needs, some of which are in place now, some of which are desirables that would need to be delivered as a result of innovation or changes to the existing systems, some of which are in the control of the Bank, and some of which are not. A summary of critical user needs could be summarised as: Critical characteristics reliability, simplicity, flexibility, cost effectiveness, robustness. Desirable features ease of access, customer support, operating responsiveness. Critical functionality requirements maximum straight-through processing, the ability to settle continuously during the day, and the existence of auto-repo and liquidity solutions. Future functionality preferences 24/7 availability, and real-time or near real-time retail settlement capability. Question 8: Are these needs met by the existing systems? If not, why not? 26. In general, respondents indicated that stakeholder needs are being met, although it was noted that the system is not positioned to meet some requirements or the functionality was not currently available: The future requirements identified above (e.g. 24/7 availability) were not met as yet.

8 8 Some innovations are difficult to implement because of ESAS and NZClear operating on a single platform. The system is not user friendly and is slightly cumbersome, but system support is very good. Innovation 27. From a strategic and operational perspective, the Bank s view is that it should not be specifying the innovations that the market should embrace. However, in making its technology decisions, the Bank must be cognisant of the direction of change to ensure those decisions do not inhibit or constrain market-driven innovation and development. Question 9: What key innovations will shape the direction of payments and settlements in the future? 28. Respondents identified a number of innovations that they thought were on the horizon that needed to be catered for, would affect the payments experience, and would have implications for payments and settlement systems in the future. 29. A generic list of innovations affecting the payments experience included: The blurring of retail and wholesale defined payments, which would be driven by customer demand and the availability of new technology. The evolution of new retail payments products such as digital wallets and internet-based payment products. The demand for real-time or near real-time retail payments. Regulation driving changes to systems and regional consolidation of settlements infrastructure. An increasing demand for access to payments and settlement systems by new users, which would require clearer access criteria. An increasing demand for access to systems through different devices such as mobile technology. 30. Respondents also provided comments on innovations that industry would like to see in the systems operated by the Bank. These included: ESAS: 24/7 availability with seven-day valuation, Meeting international standards in messaging e.g. ISO22002, Real-time or near real-time retail payment solutions. NZClear Security settlement two days after trade date (i.e. T+2), Meeting international standards in messaging e.g. ISO22002, Inter and intra-day reporting capability, Pre-settlement matching and netting capabilities, Flexibility in settlement currency including AUD, USD, RMB.

9 9 31. The Bank has analysed innovations in payments and settlements internationally and agrees that technology and customer demand are driving innovations relating to retail payment processes and products. Many countries are developing infrastructure that allows for real-time or near real-time payments solutions. For example, Australia is developing a Real-Time Gross Settlement (RTGS) retail solution while Mexico, Sweden, UK offer near real-time retail payments solutions. New Zealand s SBI platform follows the latter group in providing a near real-time payment solution, although increasing the speed of payments through SBI will require cross-industry investment and commitment. 32. The desired innovations identified by respondents will need to be considered by the Bank. There are obvious advantages from introducing these innovations some come hand-in-hand with development and progress of payment and settlement practices while some provide a beneficial service to some members only. All need to be assessed against the economics of providing the services. Question 10: Which of these innovations do you think will be most critical for the Reserve Bank to incorporate into its roadmap? 33. While most respondents thought all of the innovations outlined in Question 9 were important, the following were repeatedly expressed as priorities: providing seven-day value and operating 24/7. real-time or near real-time retail payments so as to facilitate a broad range of product developments. international standards in messaging that provide better reporting capability. Question 11: How will these innovations affect you and your requirements of payment and settlement systems? 34. It is clear that implementing innovation will require change within organisations and coordination across industry participants. Economic assessments of change must incorporate the costs and benefits to all stakeholders including consumers, providers of systems, and users of systems. Because of the way payment systems processes and products are developing and the presence of new players in the market, the assessment must also look beyond the demands of traditional payment system participants. Question 12: What are the main drivers to innovation in payments and settlements infrastructure, e.g. regulation, technology, customer demand? 35. Respondents agreed that customer demand, technology, and economics (including the need to find operational efficiencies) were the key drivers for innovation. The benchmarking of services and prices against global best practices was also seen as providing a lead to innovation. Respondents thought that while regulation had been a driver of some large developments, it was less of a driver of evolutionary changes. 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?

10 The Bank received some comments on the desirability of line-by-line settlement for retail payments in New Zealand. Respondents thought the existing infrastructure could be leveraged to deliver a very near-time retail payment experience that would meet demands. There was a view the costs of a RTGS infrastructure would outweigh the benefits in our market. However, it was noted that New Zealand could leverage off the developments being undertaken in Australia to build a RTGS retail payments platform. 37. The general consensus was that a near real-time system with real-time clearing, but frequent batched settlement, was appropriate for the New Zealand retail market. There was comfort that speed of payments through the SBI system could be increased if necessary and meet customer demands, although, as noted, this would require industry coordination, investment, and commitment by participants. Changing the infrastructure 38. ESAS and NZClear exist on the same computer platform and share the same logical and physical database. This set-up has delivered significant efficiencies to the Bank and financial markets over the years due to lower licensing costs and the efficient use of Bank development and operational resources. However, it is now clear that there are drawbacks from having conjoined systems. Drawbacks include increased complexity, a disproportionate time spent on maintenance relative to innovation and development, and a significant cost to introduce innovations to the systems. As a result, the Bank was interested to know whether there were innovations that users would have expected the Bank to implement that might have been put aside because of the cost and complexities associated. 39. The drawbacks identified also give cause for us to reconsider whether operating conjoined systems represent the best approach to delivering ESAS and NZClear services going forward. How the infrastructure is structured is largely an operational matter for the Bank. However, as the review has suggested separating the existing infrastructure or providing future services using separate infrastructure, the Bank is interested as to whether this might have an impact on stakeholders. 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? 40. Respondents noted that there were a few innovations that have been on the Bank s to-do list for some time, particularly related to reporting capabilities within NZClear and pre-settlement matching. Other innovations that participants would like to have seen include T+2 settlement, multi-currency settlement, and the settlement of other products. 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? 41. Most respondents did not think there would be major impacts from running separate infrastructures for ESAS and NZClear. The most likely possibility was for increased costs in

11 11 running separate systems. An advantage identified by some respondents was the lower probability of a problem in NZClear affecting ESAS. The provision of securities settlement services by the Bank 42. The Bank has operated NZClear since In 1998 the ESAS system was developed and migrated on to the NZClear system to form the basis of the core infrastructure we operate today. 43. The Bank has previously considered its role in providing securities settlement services ahead of major investment expenditure. However, on each occasion, and for various reasons, the Bank chose to continue operating NZClear and invested in new technology. One reason for previous decisions has been the lack of suitable alternatives capable of providing NZClear services. 44. It is uncommon for central banks to own and operate securities settlement systems. 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. Moreover, operating a securities settlement system can present risks to the Bank that it is not as well placed to manage as other infrastructure providers. 45. With the Bank facing a significant infrastructure investment again, it is appropriate to consider whether there might be alternative approaches to delivering the Bank s principles and providing securities settlement services including from a private sector provider. 46. The Bank approached this issue by requesting comments on the perceived pros and cons of Bank versus private sector ownership and operation of securities settlement, and whether there are costs from having two settlement infrastructures operating in New Zealand that, in some cases, duplicated services. The Bank was also interested in whether market participants thought there were conflicts of interest in the Bank being both a regulator and operator of a settlement system. Evidence of significant conflicts of interest could lead to the Bank searching harder for an alternative operating model or provider. Question 16: What benefits does the Bank s delivery of securities settlement through NZClear deliver? 47. It is clear that the Bank s ownership and operation of NZClear delivers comfort and confidence to market participants, particularly international participants when dealing in New Zealand dollar denominated debt instruments. This is probably related to the stability brought about by the size of the Bank and its balance sheet, but also reflects on the Bank s experience in securities settlement and its financial stability objective. 48. Other comments noted that the NZClear system was secure, stable, highly automated and reliable, and had functionality and support that met users demands. The delivery of a model 1 Delivery-versus-Payment (DVP) 3 system was also crucial to system stability. 3 DVP model 1 refers to systems that settle transfers of both securities and funds on a gross (or obligation-by-obligation) basis. In comparison, a model 2 system settles securities transfer obligations on a gross basis, but settles funds transfer obligations on a net basis. A model 3 system settles transfer obligations for both securities and funds on a net basis.

12 12 Question 17: What drawbacks exist due to the Bank s ownership and operation of NZClear? 49. The main drawback identified was that the Bank was conservative and maybe slow in making decisions around development, although once decisions were made, delivery of change was exemplary. Respondents noted that there was potentially an under-investment in technology renewal and an over-investment in technology support. Both of these features could affect the take-up of innovation. 50. Other drawbacks identified were that, as a public sector entity, the Bank may be less focused on cost control; ownership by the Bank potentially provided a barrier to having a single settlements infrastructure in New Zealand; and, as discussed previously, some respondents noted that operating both systems on one platform introduced risk into the system. Question 18: What benefits might arise if the securities settlement services currently provided by the Bank were provided by the private sector? 51. It was apparent that some respondents approached this question by considering the consolidation of existing systems. In the event of all securities being settled by one provider, the key benefit would be that participants would only have to belong or connect to one system, which should, in theory, result in a reduction in costs. Additionally, it would eliminate the requirement to transfer assets from one platform to another to facilitate settlement (i.e. NZClear to BaNCS and vice versa) in the case of exchange-traded equities. It would also remove the anomaly that currently exists around alternate settlement cut-off times in the two clearing systems. 52. Some respondents note that a more commercial approach for securities settlement could lead to faster innovation, greater resilience, and increased BCP support. Additionally, were an experienced operator of depository / clearing systems to assume the role as operator, it may be able to leverage existing technology, resources and experience and thereby benefit participants in this way. 53. There were a number of respondents who did not think there would be benefits from NZClear being operated by the private sector particularly those organisations that were only involved in settling fixed interest securities. Question 19: What drawbacks might exist if the securities settlement services currently provided by the Bank were provided by the private sector? 54. The main view of respondents was that financial benefits for users might not be forthcoming if provided by a private sector monopoly. Without competition, there would be little incentive to innovate and pricing could actually increase unless monopolistic services were rigorously overseen by the appropriate regulator(s), which in itself would increase costs to the system. 55. Other potential disadvantages included risks to confidence (particularly international counterparties) if the provider lacked credibility or did not have a history of reliability of systems and services, and quality of support.

13 13 Question 20: What views do you have on whether the Bank should continue providing security settlement services? 56. A majority of respondents supported the RBNZ remaining as owner or operator of security settlement services. The drivers of this view were maintaining the status quo; that RBNZ ownership provided stability and confidence to international participants; a view that profit motive should not be the primary objective of providing security settlement services in a small market such as New Zealand; and the perceived lack of alternative options. There were additional comments that if the Bank was to continue operating security settlement services, there should be changes to the governance structures and transparency of operations. 57. However, there was also support for the view that it was not essential for the Bank to provide these services and that if an alternative provider could be found that met user requirements and delivered on the principles outlined, then the Bank could exit the business. 58. A challenge when considering this question and the responses to it is that those responses can only reflect the current service delivery model. What is known is that the Bank will need to make changes to how payments and settlements services are delivered. What is unknown is what changes will be made and what implications those changes will have on the service delivery model, cost of delivery etc, which could influence views as to whether the Bank should continue providing security settlement services. This would suggest more information needs to be gathered on the potential options available to the Bank going forward. 59. A number of respondents noted that, if the Bank was to exit securities settlement, then the risks around any change of control to the new service provider would need to be assessed and managed. It was also highlighted that the Bank should only exit if the new provider was subject to clear service delivery standards and consequences for unsatisfactory performance. Costs of having two settlement infrastructures Question 21: Do market participants face additional costs because of the two separate settlement infrastructures operating in NZ? Question 22: Are these costs significant? 60. There was not a great deal of response to these questions. Those that did respond thought there were additional costs because of the two separate infrastructures. However, there was not a strong sense that these costs were significant. It was noted that there were benefits from having two settlement infrastructures in the form of system redundancy in some cases and resilience in the event of crisis. Conflicts of Interest 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?

14 Again, respondents were not particularly exercised by any real or perceived conflicts of interest brought about by the Bank s varying roles in payment and settlement systems. Respondents believed the controls and procedures in place would mitigate conflicts if they existed. 62. Some respondents thought the Bank should consider increasing transparency by making regulatory oversight reports on NZClear available to the user community. This would also mitigate any perceived conflict risk, and keep the market well informed on governance and operational controls and compliance. Another respondent suggested a change in the governance structure of NZClear would also reduce any conflict risk. Potential Options for the Bank 63. The strategic review of the Bank s payment and settlement systems was not expected to identify a specific solution to the Bank s technology and business questions going forward due primarily to the many unknowns at this point. However, the Bank was interested in whether industry had any views or preferences on potential solutions. To motivate discussion, the Bank presented four potential high-level architecture options to industry. Each option would 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. ii. Redevelop or build a proprietary conjoint system for ESAS and NZClear. iii. Buy separate off-the-shelf replacements for ESAS and NZClear. iv. Redevelop or buy a replacement for ESAS and develop a strategy for the provision of securities settlement services either by the Bank or an alternative provider. 64. These options highlighted the two strategic decisions faced by the Bank at this point: i. A technology decision for the systems that the Bank will own and operate going forward. ii. A business decision on whether the Bank should own and operate a securities settlement system going forward. Question 25: What other options might exist? 65. There was a general view from respondents that the options were well covered and support for some options, including those that led to a split in the supporting technology. Question 26: What is critical for evaluating these options? 66. Respondents provided a broad range of factors as important in evaluating options. The most frequently cited were the ability to deliver on the principles and core requirements outlined by the Bank. Other factors included: reliability, flexibility, and cost effectiveness of the chosen approach;

15 15 the ability to address the complexity and support cost prevalent in the existing platform; the ability to leverage existing expertise in payments and settlements solutions; the ability to support existing business models and the flexibility to adopt future innovation without prohibitive cost. 67. It was noted that the financial implications of the different options, those presented and any others, would need to be considered in the final decision. Question 27: Are there any other issues that the Bank has not identified that it needs to take into account when considering options? 68. There was a general view that any solution considered would need to include a forward-looking element with strong roadmaps for systems, innovation, and improvements in the provision of functionality. There was also a question as to whether future solutions would consider the provision of any services by an offshore provider. Conclusion and next steps 69. The Strategic Review has been a necessary step ahead of the investment expenditure facing the Bank. It has allowed the Bank to explain its vision and principles, and specify the core requirements necessary to deliver these principles. The vision, principles, and requirements will anchor the Bank s infrastructure decisions going forward. The feedback from industry to our high-level questions has been beneficial and it has helped confirm a number of considerations and clarify others. 70. A key conclusion from the review is that, in future, the services currently provided by ESAS and NZClear are likely to be provided by new technology that is separated or modular rather than conjoined. This approach will remove the complexities and risk present in the existing system, and allow those systems to access innovation and meet customer demand. 71. A second outtake from the review is that the Bank is still open to considering private sector ownership of security settlement systems, and would like to investigate further the options that might be available. The Bank remains of the view that securities settlement is not a core central bank business and is keen to understand whether alternative providers might exist who would deliver benefits to the financial system. What is clear is that industry participants set high standards for the provision of security settlement services and the Bank agrees with this standpoint. Consequently, any assessment of alternative providers undertaken by the Bank will be against a stringent framework of business and functionality requirements as well as regulatory and wider public interest criteria. Next steps 72. The objective of the next phase of work is to investigate and identify an appropriate replacement technology solution for ESAS and an appropriate business or replacement technology solution for NZClear. Along with the vision, principles, and core requirements, this work will determine the roadmap for the payment and settlement systems that the Bank will operate in the future. At this stage, the intention is to undertake this work across three workstreams operating in parallel. Those work-streams will:

16 16 i. Identify a technology solution to replace ESAS by seeking proposals from vendors and deciding on the appropriate solution for implementation. ii. iii. Explore technical replacement solutions for NZClear from the vendors identified in (i) for the Bank to implement if no alternative provider of securities settlement services proves suitable. Assess the suitability of alternative providers of securities settlement services by developing an assessment framework and seeking expressions of interest from potential providers. 73. None of these work-streams will presuppose an outcome and all options remain open to the Bank. The Bank expects this work to be undertaken over the next year and will be keeping industry informed as progress is made. It is the Bank s intention to release Request for Proposal / Expression of Interest documents in the first quarter of 2015.