2007/08 Assessment of Clearing and Settlement Facilities in Australia 4. The Financial Stability Standards

The Financial Stability Standards

In May 2003, the Reserve Bank determined Financial Stability Standards for central counterparties and securities settlement facilities. The standards are supplemented by a set of detailed measures that the Reserve Bank considers relevant for meeting each standard Attachment 1).

The standard for central counterparties is as follows:

A CS facility licensee must conduct its affairs in a prudent manner, in accordance with the standards of a reasonable CS facility licensee in contributing to the overall stability of the to the extent that it is reasonably practicable to do so.

The original standard for securities settlement facilities was varied in June 2005 to ensure that small securities settlement facilities, which are unlikely to affect the overall stability of the Australian financial system, are not subject to unnecessary regulation. The standard is as follows:

A CS facility licensee must conduct its affairs in a prudent manner, in accordance with the standards of a reasonable CS facility licensee in contributing to the stability of the Australian financial system, to the extent that it is reasonably practicable to do so.

This standard only applies to CS facility licensees that provide a facility where the value of financial obligations settled in a financial year exceeds a threshold value of $100 million. When this threshold is exceeded for the first time, the provider of the facility must meet the the standard by the beginning of the next financial year.

The standards are deemed to comprehensively cover matters relevant to the assessment of systemic risks arising from the activities of licensed facilities. As such, the Reserve Bank fulfils its obligation to assess whether a facility is ‘doing all other things necessary to reduce systemic risk’ also by reference to the measures underpinning the Financial Stability Standards.

Determination, Variation and Revocation of Financial Stability Standards

Section 25M(1)(a)-(c) of the Reserve Bank Act requires that the Payments System Board describe standards for CS facilities determined during the year and any variations or revocations of existing standards.

No standards for CS facilities were determined by the Reserve Bank under Section 827D(1) of the Corporations Act during the year to June 2008. No existing standards were varied or revoked.

The Reserve Bank is, however, considering a variation to the Financial Stability Standard for Central Counterparties whereby, subject to certain conditions, the standard would not apply to an overseas facility that was subject to an overseas regulatory regime deemed to be sufficiently equivalent to that in Australia. The objective of this proposed variation is to establish a framework for regulation of overseas facilities that does not impose an unnecessary regulatory burden, while ensuring competitive neutrality. With increasing incidence of cross-border provision of clearing and settlement services, this is becoming an important issue for regulators internationally.

The Reserve Bank is also considering a variation to Measure 3 (Understanding Risks) of the Financial Stability Standard for Securities Settlement Facilities, to require the collection and publication of data on cash equities securities lending activity. This follows the recommendation in the Reserve Bank's Review of Settlement Practices for Australian Equities that transparency and disclosure of securities lending activity be improved.

More generally, the Reserve Bank examined the case for amending some of the measures underpinning the Financial Stability Standards to more directly address specific identifiable risks. The current standards and measures are largely principles based and there are few prescriptive requirements. The Reserve Bank continues to favour this approach, recognising that best practice will evolve over time. Nevertheless, the Reserve Bank would introduce more prescriptive measures if this were deemed necessary.