RBNZ details wish list of 9 'systemically important' financial market infrastructures in strengthened regulatory regime

By Gareth Vaughan

The Reserve Bank of New Zealand (RBNZ) has put flesh on the bones of its plans to beef up the regulatory oversight of payment and settlements systems, and named nine financial market infrastructures (FMIs) it believes are "systemically important" to New Zealand.

In a consultation paper, which it’s calling for submissions on by July 3, the RBNZ outlines that it wants powers for itself and the Financial Markets Authority (FMA) to be able to recommend to the Government that systemically important FMIs be designated. This would help give the RBNZ and FMA greater powers to better manage crises, or potential crises, involving systemically important FMIs in the post global financial crisis world.

Stronger powers for the regulators would require either changes to the Reserve Bank of New Zealand Act, or a new Financial Markets Infrastructure Oversight Act.

“FMIs that are systemically important can either be a channel for contagion through which risks are transferred amongst system participants, or they themselves can become the source of risks,” the RBNZ says.

“ It is therefore important that these FMIs are sound and efficient on a business-as-usual basis, and even more so during times of stress.”

Voluntary regime

The current Designation Regime is voluntary and gives limited scope for the RBNZ and FMA to keep tabs on all the payment and settlement systems the RBNZ regards as systemically important. This regime doesn't cover all types of FMIs and the RBNZ and FMA don't have any crisis management powers, the RBNZ says.

"The enhanced Designation Regime would give the Reserve Bank and FMA a more comprehensive set of statutory tools to support their oversight of FMIs and the objectives that oversight seeks to achieve,” says the RBNZ.

Under the new proposals, once designated, FMIs would be subject to formal oversight by the RBNZ and FMA, including having standards imposed on them. The RBNZ acknowledges its proposals, resulting in new powers and responsibilities for itself and the FMA, might require additional resource to run once legislation is passed. The RBNZ says it’s considering whether these costs could be absorbed by the RBNZ, or whether it should "seek contribution” from the industry.

'Suasion and industry engagement'

Currently entities have to apply to the RBNZ and FMA to be considered as designated settlement systems. Thus the Designation Regime is run on an opt-in, voluntary basis, with the RBNZ and FMA unable to decide who designated entities should be, and nor can they compel entities to be designated.

In a speech last November RBNZ deputy governor Grant Spencer noted the RBNZ’s regulatory framework in the payments area was “at the non-intrusive end of the spectrum,” in a fast changing and risky world. And for FMIs choosing not to be designated, Spencer said the RBNZ must rely on suasion and industry engagement to promote its stability and efficiency objectives.

In that speech Spencer also discussed events on ANZAC Day 2012, when the exchange of retail payments between banks via SWIFT was disrupted. Although ESAS, or the RBNZ's Exchange Settlement Account System (see details below), continued functioning and banks were able to invoke contingency arrangements, Spencer said there were significant delays to the exchange of payments and to the posting of transactions to customer accounts that day.

"There could easily have been a more widespread disruption of retail payments and commerce if there had not been a public holiday that day," he said in the speech.

RBNZ's wish list

In the consultation paper the RBNZ has named six domestic FMIs that are of systemic importance based on its preliminary assessment, and three offshore FMIs that could be of systemic importance to NZ. 

 The full list of nine is listed and detailed below.

1. The Exchange Settlement Account System (ESAS), operated by the Reserve Bank, is the real time large value inter-bank payment system, processing on average around $30 billion of payments each day. The sound and efficient operation of the money and capital markets hinges upon the smooth functioning of ESAS.

The safe and efficient operation of ESAS has a bearing not only on the markets it directly serves but on New Zealand’s whole financial system. ESAS is used to settle payments associated with, or originating in, a number of other systems, such as the retail payment system SBI. ESAS also has an important role to play in the settlement of foreign exchange transactions in the CLS system.

The smooth operation of that system relies on the ability to make and receive payments in all currencies settled in CLS including the New Zealand dollar.

2. The CLS system is a global high value inter-bank payment system used to settle foreign exchange transactions involving 17 currencies including the New Zealand dollar. Settlement in CLS allows both currency legs to be settled simultaneously. The foreign exchange market is a key financial market in New Zealand. Disruption to the CLS system could re-introduce significant foreign exchange settlement risk to the New Zealand financial system.

3. NZClear, operated by the Reserve Bank, is a securities settlement system that is used to settle fixed interest and equity transactions and cash transfers, with an average total value of around $7 billion a day. It includes a central securities depository that represents a critical record of the beneficial ownership of a substantial proportion of NZD securities.

Any disruption to NZClear could have a significant impact on securities markets. NZClear also provides contingency arrangements for SBI to allow the continued exchange of retail payments in the event that SBI participants are unable to exchange payment instructions using SWIFT. Both NZClear and ESAS are important for the implementation of monetary policy.

4. The NZCDC settlement system includes a securities settlement system, securities depository and central counterparty and performs a key role for all NZX markets. NZX is the only registered exchange in New Zealand and operates both securities and derivatives markets.

5. The Settlement Before Interchange (SBI) arrangements for retail payments are operated by Payments NZ. SBI is used by banks to exchange retail payments, processing on average close to $3 billion of payments each day. The net inter-bank positions settle in ESAS.

6. Paymark is a network for processing point of sale debit and credit card transactions in New Zealand. It provides switching services for the majority of point of sale transactions, processing on average around $140 million of transactions daily.

7. LCH Clearnet Ltd (LCH) is the largest Interest Rate Swap central counterparty (CCP) in the world. Following the financial crisis and associated regulatory reform, the largest four New Zealand banks are now clearing a substantial and increasing amount of their trades in NZD-denominated Interest Rate Swaps through LCH’s Swapclear service. As of December 2014, Swapclear’s total NZD outstanding was NZD $3.2 trillion, representing about 76% of the NZD Interest Rate Swap market.

8. ASX Clear (Futures) is a CCP that clears NZD interest rate futures, including 90 Day Bank Bill Futures, 3 year and 10 year Government Bonds, and NZ energy futures and options traded on the ASX 24 market.

9. DTCC Singapore is a trade repository that major banks are reporting OTC derivative transactions to under the Australian reporting rules.

Four of the nine FMIs are already designated being the RBNZ owned ESAS and NZClear, plus the CLS system, and NZX's NZCDC.  

No taxpayer funded bailouts

The RBNZ notes the list represents a preliminary assessment. If it’s proposed regime is actually implemented, the RBNZ and FMA would conduct “thorough analysis” of each of the nine FMIs, including consulting relevant stakeholders, before making a recommendation on whether they should be designated.

Designation wouldn’t mean the RBNZ, FMA or Crown endorse the FMI or its participants. And nor would designation suggest an FMI would get financial support from the Government in the event of its distress. And if an FMI ceases to be systemically important, its designation could be revoked.

Operators of settlement systems that aren’t considered systemically important by the regulators would still be able to seek designation for legal protection to the netting and settlement of their transactions if they considered the benefits outweighed the costs, and would then be subject to the applicable standards.

Information could be sought, investigations undertaken, statutory manager appointed

The proposed regime would allow the RBNZ and FMA to require information be provided by an FMI operator, participant in an FMI, or infrastructure provider of an FMI. The regulators would also set minimum standards for designated FMIs, and have investigative powers. The latter would enable them to require independent reports on designated FMIs, and the power to enter and search places with a warrant from the Court.

Where breaches occur the regulators already have the ability to issue a public warning. The RBNZ also wants to be able to enter into enforceable undertakings with parties who have failed to comply with their obligations.

There’d also be a range of civil and criminal remedies for breaches along the same lines as under the Financial Markets Conduct Act.

Additionally the RBNZ and FMA would have a range of crisis management powers designed to prevent systemic damage from “disorderly failure” of a participant or the FMI itself. These powers would include the ability to appoint a statutory manager for FMI operators.

This article was first published in our email for paying subscribers. See here for more details and how to subscribe.