2008/09 Assessment of Clearing and Settlement Facilities in Australia 4. The Financial Stability Standards
The Financial Stability Standards
The Reserve Bank has determined Financial Stability Standards for central counterparties and securities settlement facilities under powers conferred in the Corporations Act. The Standards are supplemented by a set of detailed measures that the Reserve Bank considers relevant for meeting each Standard (see Attachment). The Standards may be varied by the Reserve Bank as necessary to accommodate relevant developments in the clearing and settlement landscape. Variations made in 2008/09 are discussed below.
The Standards comprehensively cover matters relevant to the assessment of systemic risks arising from the activities of licensed facilities. As such, in assessing licensed facilities' compliance with the Standards, the Reserve Bank also fulfils its obligation under the Corporations Act to assess whether a facility is ‘doing all other things necessary to reduce systemic risk’.
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 new standards for CS facilities were determined by the Reserve Bank under Section 827D(1) of the Corporations Act during the year to June 2009. The Standard for central counterparties was, however, varied during the period, and a measure of the Standard for securities settlement facilities was also varied.
Variation to the Financial Stability Standard for Central Counterparties
To date, all licensed central counterparties have been required to comply in full with the following Financial Stability Standard for Central Counterparties, irrespective of any other regulatory obligations to which they may be subject:
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 Australian financial system, to the extent that it is reasonably practicable to do so.
With a trend emerging internationally towards increased cross-border provision of clearing services, the Reserve Bank published a consultation paper in October 2008 which set out a proposed regime for the oversight of overseas central counterparties.[1] After a review of submissions, the regime was finalised by the Payments System Board in February and the Financial Stability Standard for Central Counterparties was varied to give effect to the new arrangements.[2] Under the new regime, any overseas central counterparty licensed under Section 824B(2) of the Corporations Act will be exempt from full assessment against the Standard as long as it is able to provide documentary evidence from the overseas regulator that it has met all relevant requirements.[3] This change is reflected in the following addition to the Standard, along with some explanatory guidance.
This standard applies to all CS facility licensees that operate a central counterparty with the exception of those CS facility licensees granted a licence under Section 824B(2) of the Corporations Act 2001. This exception applies only for such time as the Reserve Bank receives annual documentary evidence from the licensee's overseas regulator that the licensee has complied in all material respects with the requirements of the overseas regulator related to matters affecting stability. Such evidence must be provided in a form and at a time agreed with the Reserve Bank.
A licence may be granted under Section 824B(2) at the Minister's discretion, subject to advice from ASIC and the Reserve Bank, and only where the applicant is deemed to operate under a ‘sufficiently equivalent’ regulatory regime in its home jurisdiction. While the concept of sufficient equivalence is explicitly recognised in the Corporations Act, the Act provides no detail on how it is to be assessed. Therefore, the Reserve Bank has also developed guidance on how it would approach the assessment of sufficient equivalence in relation to the degree of protection from systemic risk. Following a further round of consultation,[4] the Board finalised a three-step approach to this assessment in July 2009, considering: the clarity and coverage of the overseas regime; the oversight process of the overseas regulator; and observed outcomes.[5]
Variation to Measure 3 of the Financial Stability Standard for Securities Settlement Facilities
The Standard for securities settlement facilities states:
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 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 standard by the beginning of the next financial year.
An important conclusion from the Reserve Bank's review of settlement practices for Australian equities, released in May 2008, was that improved disclosure of securities lending activity in the Australian equities market could help to enhance the robustness of the settlement process and the functioning of the market. Following this review, the Reserve Bank worked closely with ASX and industry participants to develop new disclosure arrangements and in October 2008 released a consultation document setting out a proposed variation to Measure 3 of the Financial Stability Standard for Securities Settlement Facilities that would have the effect of requiring ASX to collect and publish information on securities lending.[6]
A number of practical issues related to how the new arrangements might be implemented were highlighted in submissions and discussed with industry participants ahead of the finalisation of the regime in February 2009.[7] Under the regime, settlement participants in ASTC will be required to make both transactional and positional securities lending data available to ASX. Non-settlement participants will also be encouraged to report under the disclosure regime. Details are provided in Section 5.3.
Footnotes
The document Consultation on Variation of the Financial Stability Standard for Central Counterparties: Oversight of Overseas Facilities is available at: <https://www.rba.gov.au/payments-and-infrastructure/financial-market-infrastructure/clearing-and-settlement-facilities/pdf/oversight-overseas-oct08.pdf>. [1]
The Notice of Variation is available at: <https://www.rba.gov.au/PaymentsSystem/StdClearingSettlement/notice_of_variation_fsscc_0209.pdf> [2]
The guidance associated with the varied Standard stresses that an overseas central counterparty subject to this regime will retain direct obligations to the Reserve Bank. Furthermore, it is expected that should an overseas central counterparty apply for a licence in respect of a particularly large or systemically important market in Australia, the Reserve Bank would advise the Minister that the applicant should apply for a domestic licence, in which case the exemption would not apply. [3]
The consultation document Consultation on Assessing Sufficient Equivalence is available at: <https://www.rba.gov.au/payments-and-infrastructure/financial-market-infrastructure/clearing-and-settlement-facilities/consultations/assess-suff-equiv/ase-052009.pdf>. [4]
The financial guidance, Assessing the Sufficient Equivalence of an Overseas Regulatory Regime is available at: <https://www.rba.gov.au/payments-and-infrastructure/financial-market-infrastructure/clearing-and-settlement-facilities/standards/overseas-equivalence.html>. [5]
The document Consultation on Disclosure of Equities Securities Lending is available at: <https://www.rba.gov.au/payments-and-infrastructure/financial-market-infrastructure/clearing-and-settlement-facilities/pdf/disclosure-equities-oct08.pdf>. [6]
The document Disclosure of Equities Securities Lending is available at: <https://www.rba.gov.au/payments-and-infrastructure/financial-market-infrastructure/clearing-and-settlement-facilities/consultations/disclosure-equities-0209/desl-022009.pdf>. [7]