Public consultation begins on draft Financial Market Infrastructure Bill

The Reserve Bank of New Zealand (Reserve Bank) has released an exposure draft of the Financial Market Infrastructure Bill (Bill).  Over the next eight weeks, the Reserve Bank will be seeking feedback from stakeholders.

The Government has previously decided to adopt a new regulatory regime for Financial Market Infrastructures (FMIs), and supplementary policy decisions on aspects of this regime were made late last year.

View the draft Bill.

View the cover consultation paper for the draft Bill.

Read the Reserve Bank’s media release.

Who needs to read it?  Why?

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

The draft Bill proposes a standalone Act to cover FMIs. This will replace the existing regime on FMIs which is contained in Parts 5B and 5C of the Reserve Bank of New Zealand Act 1989 (RBNZ Act).

What does it cover?

The FMIs are defined as multilateral systems for the clearing, settling or recording of any of the following:

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

This includes payment systems, central securities depositories, settlement systems, central counterparties and trade repositories.

The Bill provides for different treatment of designated and non-designated FMIs. Designated FMIs will be FMIs that

  • are identified as systemically important and deemed into the regime or
  • have opted into the regime to access the settlement finality and netting protections that are currently included in Part 5C of the RBNZ Act and that will be carried across into the new legislation.

Under the proposed new regime:

  • The Reserve Bank will be the sole regulator of payment system FMIs.
  • All other FMIs will be jointly regulated by the Reserve Bank and the Financial Markets Authority.

In respect of 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. This reflects the fact that these FMIs are not systemically important and do not have access to the legal protections afforded to relevant designated FMIs.

These powers are intended to be used mainly for the purpose of monitoring the broader sector, and identifying whether an FMI has become systemically important (and so may need to be designated under the regime).

The main focus of the Bill is on designated FMIs, which have been identified as systemically important and 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
  • the joint regulators to make legally binding standards for designated FMIs
  • general monitoring and oversight of designated FMIs by the joint regulators
  • 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.

The Bill provides for a graduated and flexible range of remedies for breaches of legal requirements imposed by or under the Act.

The Bill will come into force on a date or dates specified by one or more Orders in Council, but no later than three years after the date of Royal assent.

It is expected that the following provisions will be brought into force immediately on Royal assent.

  • powers to require information, reviews, and independent reports
  • power to designate FMIs for the purposes of the Bill
  • power to set standards (clauses 30 to 34)

A transitional period will then be used to designate relevant FMIs and issue the relevant standards. At the end of this period, the provisions relating to designation notices, standards, settlement finality and the remaining provisions of the Act will come into force and Parts 5B and 5C of the RBNZ Act will be repealed.

Our view

A robust framework for the regulation and supervision of financial market infrastructures is essential to the promotion of a stable and efficient financial system. New Zealand’s existing regulatory regime for FMIs is not mandatory, and relatively limited in comparison to international practice.

For participants in the payment systems currently regulated under Parts 5B and 5C of the RBNZ Act, the new regime represents a significant development but can be seen as an enhanced version of the current approach.

However, for other financial market infrastructure operators and participants, e.g. those involved in securities clearing systems or trade repositories which are not currently subject to specific regulation or supervisor oversight, the changes represent a radically different approach. It will be very important that entities involved in those activities carefully review the draft bill and consultation paper in order to understand whether, and how, their business be impacted.

What next?

The draft Bill comes as a result of the previous three rounds of public consultation. The aim of the current consultation is to specifically seek views on the more granular and technical detail reflected in the Bill.

Submissions close on 26 September 2019 at 5pm. 

It is anticipated that the FMI Bill will be introduced into Parliament later this year.

If you have any questions about the draft Bill or would like assistance with submissions, please contact one of our experts.

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