Consultation on Assessing Sufficient Equivalence – May 2009 2. Background

Under Section 820A of the Corporations Act 2001 (the Act), a person operating a clearing and settlement (CS) facility in Australia is required either to hold an Australian CS facility licence or be granted an exemption from the licensing requirement.

A licence may be granted under Section 824B(1) of the Act if, among other things, the Minister for Superannuation and Corporate Law is satisfied that ‘the applicant has adequate operating rules, and procedures, for the facility to ensure, as far as is reasonably practicable, that systemic risk is reduced and the facility is operated in a fair and effective way.’ If, however, the applicant is authorised to operate a CS facility in the foreign country in which its principal place of business is located, it can apply for a licence under Section 824B(2) of the Act. A licence may be granted under this alternate regime at the Minister's discretion, and only if the applicant satisfies certain requirements, including that it is subject to a regulatory regime in its principal place of business that is sufficiently equivalent to that in Australia ‘in relation to the degree of protection from systemic risk and the level of effectiveness and fairness of services’ it achieves.[1]

The term ‘sufficient equivalence’ is not defined in the legislation. In 2002, ASIC published Regulatory Guide 54 (RG 54), Principles for cross border financial services regulation, which articulates a general approach to regulating foreign providers and foreign facilities, services and products. Among the ten principles set out in RG 54, four (Principles 7–10) relate specifically to establishing whether an overseas regulatory regime is equivalent to that in Australia. In particular, according to RG 54, an overseas regime is sufficiently equivalent where it:

  • is clear, transparent and certain (Principle 7);
  • is consistent with the relevant international principles (Principle 8);
  • is adequately enforced in the home jurisdiction (Principle 9); and

  • achieves the outcomes that are achieved by the Australian regulatory regime for comparable domestic markets (Principle 10).

    RG 54 (Section 4.13) suggests that the ‘outcomes’ achieved by an overseas regime for CS facilities will be deemed equivalent to those achieved by the Australian regime, if:
  • the clearing and settlement process operates reliably and is not at risk of failing;
  • users of CS facilities are confident that the facility operates fairly and that settlement obligations will be met;
  • the facility and its participants are properly supervised so that breaches of the law or the facility's rules are likely to be detected and disciplined; and
  • systemic and other risks relating to default are anticipated and appropriately dealt with.

Under the Act, the Reserve Bank has responsibility for oversight of licensed CS facilities in respect of matters relating to financial stability. In particular, the Reserve Bank has determined Financial Stability Standards with which CS facility licensees must comply on an ongoing basis, and against which a formal assessment is carried out at least once a year.

RG 54 predates the Financial Stability Standards, which were determined by the Reserve Bank in 2003. There is, therefore, a case for establishing specific regulatory guidance as to how, in practice, the Reserve Bank would assess sufficient equivalence with the protections afforded by the Financial Stability Standards. The approach outlined below builds upon the principles established in RG 54.

Footnote

Section 827A of the Act specifies a number of matters that the Minister must consider in deciding whether to grant a licence. These include any relevant advice received from ASIC or the Reserve Bank. In some circumstances, perhaps where an overseas applicant was seeking a licence under Section 824B(2) to operate a facility to serve a particularly large or systemically important market in Australia, the Reserve Bank could advise the Minister that licensing under the alternate regime for overseas facilities was not appropriate – notwithstanding sufficient equivalence – and that the applicant should apply for a licence under Section 824B(1). Under such circumstances, the exemption under the varied Financial Stability Standard for Central Counterparties would not apply and the licensee would be assessed in full against the Standard. [1]