AUSTRALIAN SETTLEMENTS LIMITED ABN 14 087 822 491 ASL SETTLEMENT MANUAL

AUSTRALIAN SETTLEMENTS LIMITED ABN 14 087 822 491 ASL SETTLEMENT MANUAL

Contents 1. Overview of ASL Process... 3 1.1 The Setup Process... 3 1.2 Payment Clearing Systems... 3 1.3 Service Providers... 3 1.4 ASL Settlement Reporting System (SRS)... 4 2. Funds held with ASL... 4 2.1 Total Mandated Prudential Funds... 4 2.2 Rules Relating to Prudential Funding... 4 2.3 ASL s Responsibilities... 5 2.4 ASL operations in Reserve Bank Information and Transfer System (RITS)... 5 3. ASL Settlements... 6 3.1 Settlements... 6 3.2 Importance of getting it Right... 6 3.3 Timing of Processes to be conducted by Members... 7 3.4 Investments Options for Members... 7 4. SCHEMATIC DIAGRAM OF ASL s SETTLEMENT PROCESS... 8 4.1 SCHEMATIC DIAGRAM OF ASL S SETTLMENT PROCESS - NOTES... 9 4.2 Members Contact Details... 10 4.3 Reconciliation & Acceptance Process... 10 4.4 Significant Difference or Missing Data... 10 4.5 Insignificant Differences Carried Over... 10 4.6 Replenishment of Insufficient Funds... 10 5. Service Levels/Cut off Times... 11 5.1 7:30AM - 9:00AM Process... 11 5.2 Pre-11:00am Process... 11 5.3 4:00pm Process... 11 5.4 4:30pm Process... 12 6. Interest and Fee Allocation... 13 Attachment A ASL Contact Details... 14 Attachment B Internal Use Only... 15 Attachment C Glossary... 16 Attachment D ASL Fees... 17 2

1. Overview of ASL Process 1.1 The Setup Process Australian Settlements Limited (ASL) provides settlement services and represents its members at Tier 1 level at the various APCA clearing streams. When a member nominates ASL as their preferred Tier 1 partner for settlement services, they have to meet certain requirements including the following: Pay the required Mandated Prudential Funds (Pre Funding) to ASL as approved by APRA and the Reserve Bank (RBA); Hold a shareholder/system participant share Agree to voluntary excess funds (agreed amount in excess of the prudential) to cover daily RTGS payments Once agreements are signed and system is set up, member is given access to the Australian Payment Clearing Systems via ASL. 1.2 Payment Clearing Systems Tier 1 Financial Institutions/Authorised Deposit-Taking Institutions (ADI) have made arrangements to clear payments via different streams or clearing streams under the Australian Payments Clearing Association (APCA). ASL on behalf of these institutions provides payment services to its members to be able to transact in four of APCA s clearing streams: Australian Paper Clearing System (APCS) for cheques Bulk Electronic Clearing System (BECS) for Direct Entry files e.g. payrolls, direct debits,credits Consumer Electronic Clearing System (CECS) for EFTPOS/ATM or card transactions High Value Clearing system (HVCS) for Real Time Gross Settlements (RTGS) payments Please note: Australia Post is not governed by the APCA rules therefore Bank@Post transactions are settled outside the standard settlement process. 1.3 Service Providers ASL engages the services of service providers for processing of transactions in various streams as follows: ANZ for Cheques WBC and FDI for ATM/POS transactions FDI for Direct Entry FDI also accept data files for cheques, Bank@Post, Visa transactions, Government Direct Entry Services ASL provides an in-house service for RTGS via ASL Connect. 3

1.4 ASL Settlement Reporting System (SRS) Within the ASL Settlement Reporting System, standard functions will include: Determine the net position against Mandated Prudential Funding; Determine prudential funding positions for individual member institutions; Determine individual member institution usage of its prudential funding and any cover of funding shortfalls by loans from ASL; Determine and reporting member institution positions, and member institution actions and timeframes required to repay ASL members loans and replenish its prefunding to required level; Reporting required by regulators; Audit trails of system activity. 2. Funds held with ASL 2.1 Total Mandated Prudential Funds Total Mandated Prudential Funds (Prudential Funding) incorporate a Designated Excess. Designated Excess funds will not be available for withdrawal. It is proposed that an amount termed RBA ESA Funds will be deposited in the ESA in accordance with the agreement with RBA) members continue to earn the RBA rate at 25 basis points below the RBA official cash rate and the designated excess invested in accordance with ASL s Large Exposure Policy. Subject to negotiations with the deposit takers, members will earn the same return on Designated Excess funds that is currently paid on voluntary Excess Funds. Total Mandated Prudential Funds calculated using the proposed formula are far in excess of any past Negative net Settlement and any previous or current prudential balances, thus reducing ASL s credit risk associated with members being unable to meet a negative settlements obligation. In order to settle an institution s net settlement obligations arising before 9:00am, the system will first access the institution s prudential funds, followed by its excess funds. Instructions to operate on the ESA will be made by ASL only. 2.2 Rules Relating to Prudential Funding Each individual member s Total Mandated Prudential Funds requirement will be the greater of: a prediction of the member s highest negative settlement in the next 12 months (explained below); and the weighted average of its highest negative settlement in each of the past rolling four years and the predicted highest negative settlement in the next 12 months, with each figure weighted in accordance with the table below, and the result indexed by a risk margin of 10%. 4

Period Weighting Forward 12 months (indexed by 1) 40% Past 12 months 25% 13-24 months prior 20% 25-36 months prior 10% 37-48 months prior 5% The prediction of a member s highest negative net settlement in the next 12 months will be based on its highest negative settlement in the past 12 months. This will be indexed by a member wide growth factor which takes into account industry wide settlement growth and general economic activity. Its calculation will be based on the relative difference in ASL s average negative settlement (positive settlements excluded) over the immediate past 12 months and the 12 months prior. An example of this calculation is shown in the table below. ASL s average negative settlement, 2010 calendar year $29,634,341 ASL s average negative settlement, 2009 calendar year $28,296,249 Increase (%) 4.73% Settlement growth and economic activity index 1.0473:1 Members Total Mandated Prudential Funds Requirement will be reviewed monthly using data from a rolling 48 month period (extrapolated 12 months into the future using the growth factor). Settlement activity will be monitored daily and the Total Mandated Prudential Funds requirement adjusted upward on a monthly basis, if required. Downward revisions resulting in funds being transferred to excess funds will be conducted annually (as at 31 December each year). If growth factor is < 1, then indexation will be @ 1.000. 2.3 ASL s Responsibilities ASL displays the following information within the Settlement Reporting System: Balance of prudential funds; Balance of any excess funds received through settlement or deposited with ASL Balance of borrowings from ASL; Balance of investments purchased by the member with excess settlement funds; and Balance of any cash or securities held in a member institution s account within the ASL settlement account. 2.4 ASL operations in Reserve Bank Information and Transfer System (RITS) ASL will have one primary RITS branch that will operate in ESA Funds. ASL s clearing system obligations will reflect in ASL s primary branch. 5

3. ASL Settlements 3.1 Settlements At the end of each day, service providers provide the national collator or the RBA and other Tier 1 institutions with the net obligation for each clearing stream. Once the RBA and the Tier 1 institutions agree to the final settlement figure, ASL s ESA will be debited or credited for the net obligation before 9:00am the next morning. All Tier 1 or direct clearers have till 8:45am to fund their settlements accounts or otherwise be cut out of the payments systems. ASL will settle its members obligations using the prudential deposits the member holds with ASL via the morning settlements process. If a member exceeds its available funds, the member may borrow from ASL with funds to be replenished by 11:00am. If a member is unable to meet its settlements obligation, ASL will take all the relevant steps set out in section 5.2 of the settlements manual. 3.2 Importance of getting it Right The settlements functions to be undertaken by ASL continue to expand to the benefit of the members. The nature and importance of the settlement function attracts the attention and scrutiny of the RBA, APRA and the wider financial services industry. It is therefore essential that all procedures are completed by the responsible parties in an accurate and timely manner, thereby ensuring the correct operation of the settlements function. It is for this reason, as well as the convenience of member institutions, that all participants are encouraged to maintain voluntary excess funds with ASL. Continued performance will further enhance the longer term benefit ASL can provide to member institutions. It is important for ASL to notify member institutions of settlements dates over holiday periods to ensure that they are aware of their impending exposure over such periods. Emails are sent to all members and service providers to ensure alignment of settlements dates. 6

3.3 Timing of Processes to be conducted by Members The Settlements Procedures are time critical and such all deadlines must be strictly adhered to in compliance with APRA and RBA requirements. Section 5 of this manual detail the processes to be undertaken during the day and are documented under Service Levels /Cut-off Times as 7:30am- 9:00am, pre 11:00am, 4:00pm and 4:30pm. These times indicate the time by which the documented processes must be completed. Accordingly, each member institution should strive to conduct their affairs as early as possible. The money market operates soon after 9:00am and often has squared its books early in the day. Member Institutions requiring funds or transferring funds should generally look to do so earlier rather than later. As the National Collator is in Sydney, all times, unless otherwise stated, are Sydney times. 3.4 Investments Options for Members The RBA ESA Funds held in the ESA must be retained in the ESA overnight as required by the RBA, ASL has no discretion. Designated and Voluntary Excess Monies held by ASL are invested with Tier 1 institutions. Settlements Staff transfer any such funds as part of the 4:00pm/4:30pm processing. 7

4. SCHEMATIC DIAGRAM OF ASL s SETTLEMENT PROCESS 8

4.1 SCHEMATIC DIAGRAM OF ASL S SETTLMENT PROCESS - NOTES 1. The net settlement position calculated daily for ASL is the total of the amount that ASL will be required to pay to other ESA holders at 9 AM. The first check is whether there are sufficient prudential funds held by ASL. 2. Each customer s net settlement position is calculated by determining whether it has sufficient prudential funds plus its excess funds with ASL to fund any daily settlement exposure. 3. Once it is established that sufficient funds are available, ASL will continue with its morning settlement processing and production of reports to customers. 4. Daily processing involves the payment and receipt of various deferred settlement payments. In some cases, customers will need to have repaid borrowings in order for the lenders to be able to make RTGS payments. 5. The ESA must be reconciled and replenished at the latest by the close of RITS (normally 4:30 PM). 6. Customers may borrow from the pool of prudential funds for a number of reasons, including unanticipated transactions, operational problems or stress. Specified procedures must be followed when customers borrow. In particular, customers are obliged to repay borrowings by 11 AM. If they do not do so, escalation procedures come into effect. 7. The first escalation procedure is the involvement of senior management both within ASL and the customer(s) affected. Details would be sought from the customer s executives of the anticipated timing of repayment and an assessment made as to the nature of the problem. 8. It funds have not been repaid by 12 noon then the following will occur: the Board and all Executive staff of ASL will be advised. APRA will be notified that a customer has not provided sufficient funds to extinguish borrowings. all network operators, viz. FDI and APCA will be advised that ASL will not be liable for the customer s settlement obligation. all interchange partners, viz. Westpac and ANZ will be advised that the customer should be disconnected from the system. 9. If ASL does not have sufficient prudential funds to cover the morning settlement position, a second series of tests is undertaken. These tests take into account ASL's ability to increase prudential funding by 50 percent. Should the conclusion be that ASL is likely to be able to fund its settlement position, the first step is to notify customers with a shortfall seeking for them to fund their shortfall prior to 9 AM settlement. 10. Lastly, if accounts are not replenished in the appropriate timeframe or ASL is concerned that it may be unable to obtain sufficient funds to settle, discussions will be held with regulators and the industry in order to affect an orderly settlement process. 9

11. The start of the following day may be affected by the previous day's difficulties. It is possible that some customers will have been disconnected from various systems but there will be a settlement exposure for the customers until time of disconnection. This is likely to coincide with reduced prudential funding held by these customers. Planning will be required in conjunction with APRA prior to the end of the first day. 4.2 Members Contact Details For any settlements issues including shortfall in funding, ASL will contact your nominated contact officer by 8:00am. Please refer to Appendix B for list of members contact details. 4.3 Reconciliation & Acceptance Process Before transactions can be accepted and settlement finalised, ASL must reconcile the figures from service providers to the figures supplied by the Reserve Bank via RITS. Settlement will always be made on the RITS figure, but ASL must deal with any instances where the service provider does not agree with this amount or if there will be substantial delays in providing settlement files. 4.4 Significant Difference or Missing Data Attempts will be made to resolve any significant differences prior to settlement. This may lead to some delay in settlement while service providers investigate differences. 4.5 Insignificant Differences Carried Over Small differences occur on a daily basis with DE. The DE differences occur due to files arriving after cut off time. They are therefore incorporated in the following day s settlement figures and balance out on a daily basis. Late BPay amounts that come through on ASL s DE file are sometimes quite large amounts, however we are normally notified in advance by FDI and these amounts also are negated out on a daily basis. Differences occasionally occur with the Westpac Interchange and they are normally related to timing issues. 4.6 Replenishment of Insufficient Funds Funds may be transferred to ASL by cash transfer from banks via RITS or an RTGS payment Inform ASL by telephone that funds have been arranged and with whom they have been arranged. Note: This is important as ASL must be able to identify and accept the transaction in RITS. 10

5. Service Levels/Cut off Times 5.1 7:30AM - 9:00AM Process Before any transactions can be accepted and settlement finalised, ASL must reconcile the figures from service providers against the figures supplied by RITS. Settlement will always be made on the RITS figures. ASL must deal with any instances where service providers figures do not agree with RITS as stated in section 4. ASL reconciliation process or morning settlements process must be completed by 9:00am. Once the reconciliation process is completed and ASL ESA is debited or credited for all settlements obligations, settlements reports are forwarded to members via email. Reports are: Report Name Summary of Settlement Position Reconciliation of Settlement Position Schedule of Account Balances Content List breakdown of morning settlements. It also outlined any shortfall that needs to be replenished. Summary of direct entry files Members account balance 5.2 Pre-11:00am Process All member institutions that need to top up their prudential funds or repay any borrowings are required to replenish funds by 11am. Funds are to be transferred to ASL via RITS as cash transfer or by RTGS payments. Note: If the necessary funds have not been received by ASL by 11.00 am, the following action may be taken by ASL: 11:15 am contact Chief Executive Officer or other responsible officer at member institution; 11:45am inform APRA Once the funds are received, ASL will record the receipt of funds against the relevant member institution s account. 5.3 4:00pm Process RITS cut of time for RTGS payments is 4:30pm unless the RBA extends the cut off time. To meet the 4:30pm cut off time, it is imperative that all cash transfers to and from voluntary excess funds to be completed by 4:00pm. This allows enough time for ASL to commence the end of day processes to meet the RBA imposed 4:30pm cut off time. 11

A mini-reconciliation process is performed at 4:00pm and ASL also starts the first half of the overnight investments process. The investment amount is put up in RITS as a cash transfer for the investment Tier 1 institution to match. 5.4 4:30pm Process The purpose of the End of Day processing is to ensure all transactions have been processed, ESA balance matches ASL system total and to tidy up the system ready for the next processing day. ASL to: Check RITS to ensure SWIFT Day closes Check that RTGS total match what has been settled in RITS Ensure ESA balance match system total Check that first part of the overnight investment has been matched by Tier 1 institution(s) Schedule of account balances are forwarded to members Ensure that ESA balance is as per agreement with RBA Perform the second part of the overnight investment with Tier 1 institution Back up data Check that the second part of the investments have been matched by the Tier 1 institution(s) system shutdown 12

6. Interest and Fee Allocation Allocation of Clearing House Interest takes place on a daily basis. The RBA and Tier 1 bank s interest is distributed on the first business day ASL receives the RBA Interest. An Interest Report will then issue as part of morning settlement. Fees are charged monthly between the 5 th and 7 th day depending on the receipt of billing data by ASL. A Tax Invoice will then issue as part of morning settlement. Two amounts of interest will be calculated as follows: interest on deposits with ASL and held overnight with the Reserve Bank - interest will be calculated daily (credited monthly) on each member institution's proportion of the total mandated prudential ESA deposits; - interest will be calculated on the weighted average interest received on excess funds deposited with Tier 1 institutions (credited monthly). clearing house interest - clearing house interest is paid to or received by ASL on a daily basis for each clearing system. - ASL will calculate interest daily at the crediting interest rate on each member institution's overnight balance in each clearing system. - the total interest calculated will be checked against the amount credited to ASL and any adjustment will be made to avoid rounding discrepancies. - transactions will include direct entry, ATM/EFTPOS and Visa Domestic and next day funds transfers in RITS and Austraclear. ASL will charge fees based on the current Pricing Structure (refer to attachment D) approved by the ASL Pricing Committee and as advise to member institutions from time to time. The breakdown of the ASL fees will be provided in the fees report. The net amount for fees will be deducted from the member institution's account and will flow through to the prefunding or excess amount, as the case may be, of the member institution. The net amount for interest will be credited to the member institution s corporate bank account through the DE system. 13

Attachment A ASL Contact Details ASL Contact List HEAD OFFICE Address: Level 1, 16 Thesiger Court Deakin ACT 2600 Telephone: 02 6281 1588 Facsimile: 02 6285 2036 SYDNEY OFFICE Address: Level 6, 161 Walker Street North Sydney NSW 2060 Telephone: 02 9964 0025 Facsimile: 02 9964 0026 1. ASL SETTLEMENT OFFICERS 02 6215 7400 Glenys Jones Katarina Sharma Candace Beall Robyn Santos 2. Mele Tuifua Manager Operations & Administration Work : 02 6215 7404 Mobile : 0412 987 314 3. Chek Huon Chief Financial Officer Canberra : 02 6215 7402 Sydney : 02 9964 0025 Mobile : 0400 423 416 4. David Jay Chief Executive Officer Canberra : 02 6215 7405 Sydney : 02 9964 0025 Mobile : 0417 959 370 14

Attachment B Internal Use Only 15

Attachment C Glossary APCA APRA ATM BCP BECS BIN BOFA BSB CAL CECS CUSCAL DE DR ESA EFTPOS FDI FDR GBS GDES HBS HVCS IMB ISN NAB NECU PCU RBA RITS RTGS SAA SAE SRS SWIFT Australian Payments Clearing Association Australian Prudential Regulation Authority Automatic Teller Machine Business Continuity Procedures Bulk Electronic Clearing System Bank Identifier Number Bank of America Bank State Branch Cashcard Australia Limited Cards Electronic Clearing System Credit Union Services Corporation Australia Limited Direct Entry Disaster Recovery Exchange Settlement Account Electronic Funds Transfer at point of sale First Data International First Data Resources Greater Building Society Government Direct Entries Heritage Building Society High Value Clearing System Illawarra Building Society Input Sequence Number (SWIFT) National Australia Bank New England Credit Union Police Credit Union Reserve Bank Of Australia Reserve Bank Information & Transfer System Real Time Gross Settlement SWIFT Alliance Access SWIFT Alliance Entry Settlements Reporting System Society For Worldwide Interbank Financial Telecommunication 16

Attachment D ASL Fees 17