2011/12 Assessment of Clearing and Settlement Facilities in Australia 4. The Financial Stability Standards

The Corporations Act 2001 provides that the Reserve Bank (the Bank) may determine financial stability standards to ensure that clearing and settlement (CS) facilities promote overall stability in the financial system. Accordingly, the Bank has determined two sets of Financial Stability Standards (FSSs): one for central counterparties (CCPs) and one for securities settlement facilities (SSFs) (see below).

Under section 823CA of the Corporations Act, the Bank must assess, at least annually, how well each CS facility licensee is complying with the FSSs and its ancillary obligation to ‘do all other things necessary to reduce systemic risk’. To assist in carrying out this assessment, the FSSs are supplemented by a set of detailed measures that the Bank considers relevant to compliance with the FSSs and other matters relevant to the assessment of systemic risks arising from the activities of licensed facilities (see Appendix A). These measures are designed to align with accepted international principles as set out by the Committee on Payment and Settlement Systems (CPSS) and International Organization of Securities Commissions (IOSCO).

The Corporations Act provides for an alternative regulatory regime for overseas CS facilities granted a licence under section 824B(2). Currently, there are no CS facilities licensed under that section. The Corporations Act allows the Bank to place some reliance in its assessments on the relevant overseas regulatory authority, so long as that authority's regulatory regime is sufficiently equivalent to that applying in Australia.

Section 25M(1)(a)–(c) of the Reserve Bank Act 1959 requires that the Payments System Board describe any new standards for CS facilities determined during the year and any variations or revocations of existing standards. While no new standards for CS facilities were determined by the Bank under section 827D(1) of the Corporations Act during the year to June 2012, and no existing standards were varied or revoked, the Bank plans to update the FSSs to implement the new CPSS-IOSCO Principles for Financial Market Infrastructure (the Principles) which establish minimum standards for the operation of financial market infrastructures (FMIs). A consultation paper outlining the Bank's intended approach was released on 29 August 2012.^[15] As soon as possible following the consultation period, stakeholder feedback will be considered and incorporated into a final set of standards.

Proposed Financial Stability Standards

The proposed FSSs for each type of licensed CS facility aim to meet three objectives:^[16]

• to fully align minimum requirements in the proposed FSSs with those Principles that address matters relevant to financial stability
• to incorporate complementary requirements, as appropriate, to uphold the standards to which CS facilities licensed to operate in Australia are already held under the measures of the current FSSs, and to reflect standards applied to CS facilities in other relevant jurisdictions
• to implement the key elements of the framework for ensuring regulatory influence over cross-border CS facilities, as articulated by the Council of Financial Regulators (the Council).

In order to meet these objectives, the proposed FSSs adopt the structure, form and language of the Principles, but with some adjustments to the key considerations and explanatory notes to incorporate complementary requirements.^[17]

This constitutes a significant change in the structure and form of the FSSs. The current FSSs each comprise a high-level requirement, accompanied by measures relevant to the Bank's assessment of whether a licensee has complied with the applicable FSS. By contrast, in aligning with the structure of the Principles, the consultation paper proposes a more granular set of FSSs for each type of CS facility. Furthermore, by casting the key considerations as individually legally enforceable standards, the proposed FSSs provide for greater legal certainty for CS facility licensees.

It is intended that all licensed CS facilities operating either a CCP or an SSF, whether domestic (i.e. licensed under section 824B(1) of the Corporations Act) or overseas (i.e. licensed under section 824B(2) of the Corporations Act), would be required to comply with the relevant standards. It is, however, proposed that an activity threshold would continue to be applied for SSFs.

The application of the proposed FSSs to all licensed CS facilities (subject to the activity threshold for SSFs) would, in the case of CCPs, constitute a change in the Bank's approach. Under current arrangements, subject to certain conditions, the FSS for CCPs 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.’

However, notwithstanding that a licensed overseas facility would be required to comply with the FSSs, the Bank's assessment of compliance would, in accordance with section 823CA of the Corporations Act and subject to certain conditions, take into account ‘… information and reports from [the] overseas regulatory authority’ in the facility's principal place of business. This remains consistent with the objective articulated when the current exception was introduced in 2009; that is, to deliver a framework for regulation of overseas licensees that did ‘not impose an unnecessary regulatory burden, while ensuring competitive neutrality in the Australian regulatory environment’.^[18]

Footnotes

The Bank's consultation paper is available at <http://www.rba.gov.au/payments-system/clearing-settlement/consultations/201208-new-fin-stability-standards/>. [15]

As in the FSSs themselves, any reference to a CCP or SSF in this section may also be read as a reference to the licensee as operator of the CCP or SSF. [16]

The structure of the proposed FSSs does differ in that the Principles have been drafted to cover all types of FMI, while the proposed FSSs, as now, establish separate standards for each of CCPs and SSFs. While there is a high degree of overlap, the nature of applicable risks and requirements differs by facility type and therefore determining standards specific to the type of facility provides greater clarity to licensees and other stakeholders. The Principles differentiate between FMI types at a number of points, and the proposed CS facility-specific FSSs include only those principles and key considerations that are relevant to each CS facility type. [17]

Since the current 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 …’, the proposed approach delivers a similar outcome. [18]