Consultation on Variation of the Financial Stability Standard for Central Counterparties: Oversight of Overseas Facilities 2. Variation of the Financial Stability Standard for Central Counterparties

Under Section 827D of the Corporations Act, the Financial Stability Standards apply to all clearing and settlement (CS) facility licensees, or a specified class of CS facility licensee. In 2003, the Reserve Bank determined standards for two classes of facilities: central counterparties; and securities settlement facilities. The standards are supported by a set of measures that the Reserve Bank considers relevant in assessing compliance. In the case of central counterparties, these measures cover matters such as: the legal framework; participation requirements; risk controls; and governance arrangements.

Under Section 823CA(1) of the Corporations Act, the Reserve Bank is obliged to conduct an assessment at least once a year regarding whether licensed facilities have complied with the relevant standard and, in addition, to assess whether a licensee is ‘doing all other things necessary to reduce systemic risk’. Although these are separate obligations, the Reserve Bank in practice conducts both assessments by reference to the measures underpinning the relevant standard, as these comprehensively cover issues pertaining to the management of systemic risk. The Reserve Bank reports to the relevant Minister on the outcome of these assessments and also publishes its findings.

Currently, two licensed central counterparties are subject to the Reserve Bank's Financial Stability Standard for Central Counterparties. These are Australian Clearing House (ACH) and SFE Clearing Corporation (SFECC), which provide clearing services for the cash equities and exchange-traded derivatives markets. Both facilities are owned by the Australian Securities Exchange (ASX). These central counterparties have been granted licences under Section 824B(1) of the Corporations Act.

A CS facility licence can also be granted under Section 824B(2) of the Corporations Act to an overseas central counterparty if the Minister is satisfied that the central counterparty is subject to a regulatory regime that is ‘sufficiently equivalent, in relation to the degree of protection from systemic risk and the level of effectiveness and fairness of the services they achieve, to the requirements and supervision to which clearing and settlement facilities are subject under this Actin relation to those matters’. ASIC, in conjunction with the Reserve Bank, advises the Minister as to whether an overseas regime is ‘sufficiently equivalent’. In making its assessment, the Reserve Bank would, amongst other things, map the requirements of the overseas regime to the measures underpinning the Standard, and undertake an informal assessment of whether the applicant would meet the Standard at the time of its application.

As the Standard is currently drafted, an overseas facility granted a licence under Section 824B(2) would be required to comply with the Standard and the Reserve Bank would therefore assess the facility against the various measures underpinning the Standard on an ongoing basis. The Reserve Bank, however, sees a strong case for granting an exemption from the Standard where an overseas facility has been licensed under Section 824B(2) (and thus is subject to a ‘sufficiently equivalent’ overseas regime), provided that the facility is able to satisfy the Reserve Bank that it is in compliance with the relevant requirements of the overseas regime. Specifically, the Reserve Bank proposes to vary the Standard to read (new text in bold):

A CS facility licensee must conduct its affairs in a prudent manner, in accordance with the standards of a reasonable CS facility in contributing to the overall stability of the Australian financial system, to the extent that it is reasonably practicable to do so. This standard applies to all CS facility licensees with the exception of any CS facility licensed under Section 824B(2) of the Corporations Act where the Reserve Bank has received an annual statement that the licensee has complied with the requirements of the overseas regulator related to matters affecting stability, in a form and at a time agreed with the Reserve Bank.

The objective of this variation is to establish a framework for regulation of overseas facilities that does not impose an unnecessary regulatory burden, while ensuring competitive neutrality in the Australian regulatory environment.^[1] Given the increasing incidence of cross-border provision of clearing and settlement services, this is becoming an important issue for regulators internationally. The Reserve Bank is keen to ensure that its regulatory arrangements reflect the changing nature of the international landscape for financial infrastructure, while at the same time promoting the stability and efficiency of the Australian financial system.^[2]

It is proposed that the annual statement referred to above would include sufficient information to satisfy the Reserve Bank that the overseas facility was in compliance with the overseas regime. It is anticipated that this statement would also document any specific areas of investigation by the regulator during the period. By providing a channel for ongoing regulatory engagement with the facility, the inclusion of such conditionality in the Standard would be consistent with competitive neutrality vis-à-vis domestic facilities. Another advantage of granting a conditional exemption is that it would offer the fall-back of assessment against the Standard should the licensee fail to comply with the stated conditions.

Separately, information would be sought on a regular basis from the overseas regulator in respect of material changes to the overseas regime, to support assessment of the regime's continued ‘sufficient equivalence’.

If an exemption from compliance with the Standard were granted, the Reserve Bank would continue to have an obligation to assess whether the facility was doing all other things necessary to reduce systemic risk. As noted above, for currently licensed facilities, this assessment is undertaken with reference to the measures underpinning the Standard. An overseas facility would, therefore, be expected to provide additional information to the Reserve Bank, on a pre-agreed frequency, about its activities and the conduct of its business. It would also be requested to provide sufficient information to enable the Reserve Bank to assess compliance with any measures underpinning the Standard that are not considered under the overseas regime.

This information exchange would support ongoing assessment of the facility's role and presence in the Australian financial system and its systemic importance. If an overseas facility were to grow to become a critical component of the Australian financial infrastructure, it might be appropriate to establish a framework for cooperative oversight, as is currently the case for international facilities such as CLS Bank which settles foreign exchange transactions. This would not be precluded by the proposed variation of the Standard or indeed the provisions of the Corporations Act more generally.

Footnotes

While such an exemption may be consistent with competitive neutrality in the Australian market, a reciprocal agreement with the overseas regulator may be required to ensure competitive neutrality in the international context. [1]

The mutual recognition agreement recently signed by the Australian Government, ASIC, and the US Securities and Exchange Commission was similarly motivated. This agreement provides a framework for these agencies to consider regulatory exemptions that would permit stock exchanges and broker-dealers from the United States and Australia to operate in both jurisdictions, without the need for them to be fully regulated in both countries. [2]