Financial Market Infrastructure Bill passes third reading

The Financial Market Infrastructure Bill (Bill) has passed its third reading. It will now be sent on for the Royal Assent, before becoming law.

The Bill repeals Parts 5B and 5C of the Reserve Bank of New Zealand Act 1989 (RBNZ Act) and replaces it with a new regime under the proposed standalone Financial Market Infrastructures Act to regulate and supervise payment and settlement systems.

Links to the Bill and the Reserve Bank’s media release are available.

Who needs to read it? Why?

The Bill is relevant to all financial institutions and businesses that operate or participate in the financial markets and financial system in New Zealand. It potentially represents a significant broadening of scope for the regulation of market infrastructure, going well beyond payment systems.

Specifically, it is intended to establish a new regime to cover Financial Market Infrastructures (FMIs) which are defined as any multilateral system for the clearing, settling, or recording of any of the following:

  • payments;
  • personal property, or transactions involving personal property, within the financial system; and
  • other transactions within the financial system.

An FMI includes (without limitation) payment systems, central securities depositories, settlement systems, central counterparties and trade repositories.

What does it cover?

Under the new regime:

  • The Reserve Bank will be the sole regulator of “pure payment system” FMIs (being multilateral systems solely for the clearing or settlement of payment obligations).
  • All other FMIs will be jointly regulated by the Reserve Bank and the Financial Markets Authority.

The Bill provides for different treatment of designated and non-designated FMIs.

Designated FMIs will either be:

  • FMIs identified as systemically important and deemed into the regime, taking into account prescribed factors (e.g. the number/types of persons who are direct/indirect participants, the concentration of financial risks in the FMI, and the nature and scope of the FMI’s activities); or
  • FMIs that have opted into the regime (by applying for a designation notice).

The main focus of the new regime is on designated FMIs which will be subject to enhanced regulation. The Bill provides for:

  • The designation process – under which Minsters acting on the recommendations of the joint regulators can determine which FMIs will be designated FMIs.
  • Standards – the joint regulators to make legally binding standards for designated FMIs.
  • Monitoring and oversight – powers for monitoring and investigation of designated FMIs by the joint regulators.
  • Oversight of rules – designated FMIs must have rules and any changes must be approved by the joint regulators.
  • Crisis management – designated FMIs must have contingency plans, and may be subject to regulator directions and/or statutory management.

For non-designated FMIs:

  • The joint regulators’ powers are limited to information gathering and the ability to require operators of these FMIs to obtain an independent report in respect of the business or operation of the FMI.
  • These powers are intended to be used mainly for monitoring the broader sector, and identifying whether an FMI has become systemically important (and so may need to be designated FMIs).

There is a range of enforcement and penalties imposed by or under the Bill. Specifically:

  • breaches of requirements imposed directly by the Bill could result in criminal offences or civil pecuniary penalties;
  • breaches of requirements set in standards result in civil pecuniary penalties;
  • joint regulators have the ability to issue remedial notices requiring breaches to be corrected; and
  • joint regulators have the ability to enter into enforceable undertakings.

Our view

FMIs play an essential role in our financial system – from supporting day-to-day payments to settling financial products transactions.

We welcome the introduction of a comprehensive regulatory regime, which will help bring New Zealand in line with international practice.

As the Bill is intended to regulated financial market infrastructure operators and participants beyond those currently regulated under Parts 5B and 5C of the RBNZ Act, it is important for those entities to consider how their business will be affected.

What next?

Some of the Bill’s provisions will come into force on the day following the Royal Assent, including the powers to:

  • require information, reviews, and independent reports;
  • make, revoke, or amend designations of FMIs; and
  • set standards for designated FMIs.

However, most provisions will come into force later by Order in Council(s), and no later than three years after the date of Royal assent)

There will be a transitional phase of about 18 months, which will be used to designate FMIs. Public consultation will also occur during this phase on important implementation matters such as the design of standards.

At the end of the transitional period, the remaining provisions of the Bill will come into force and Parts 5B and 5C of the RBNZ Act will be repealed.

If you have any questions in relation to the Bill, are considering how these changes will affect your business, or have any financial regulatory queries in general, please contact one of our experts.

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