2. Summary of Draft Bill
2.1 As noted above, the Draft Bill reflects Cabinet's policy decisions after consideration of the Reform of the Law Relating to Futures Exchanges and Clearing and Settlement Systems and Designated Settlement Systems and the Primacy of Clearing Houses' Interest in Collateral Cabinet papers. These decisions are reflected in CBC Min (07) 22/11 and CAB Min (07) 44/4B.
2.2 The Draft Bill makes amendments to the following legislation:
- the Personal Property Securities Act 1999 ("PPSA");
- the Reserve Bank of New Zealand Act 1989;
- the Securities Act 1978;
- the Securities Markets Act 1988; and
- the Securities Transfer Act 1991.
2.3 In summary, the Draft Bill amends:
- certain aspects of the regulatory framework for trading in emissions units;
- the law relating to the authorisation of futures exchanges and dealers, and the role of the Securities Commission in this area;
- the law relating to the designation of payment systems, extending it to settlement systems, introducing a dual-regulatory regime comprising the Reserve Bank of New Zealand and the Securities Commission, and making more transparent the requirement to consider relevant international standards when recommending designation; and
- the rules governing priority as it relates to collateral provided in a designated settlement system, so that if the operator of a designated settlement system requires collateral to be transferred into the system for the purpose of giving greater assurance of settlement, the operator has certainty of priority in relation to that collateral in the event of default by that participant and is able to realise the collateral immediately if necessary.
2.4 The scope of the Draft Bill is narrower than it might initially appear in relation to the following:
- Registration of futures: These amendments do not create an entirely new system for the registration of futures exchanges. Rather, they extend the current registration and supervisory procedures in relation to securities exchanges to futures exchanges; simplify the authorisation process for futures dealers that are authorised under the rules of an authorised futures exchange; and expressly provide for the trading of futures contracts in emissions units.
- Designated settlement systems: The designated settlement scheme (currently the designated payment scheme) is an opt-in scheme. It does not impose obligations on parties unless they wish to obtain and maintain designation. Further, these amendments do not affect the designations declared under the Reserve Bank of New Zealand (Designated Payment Systems) Order 2004 or any variations made to those designations before the date on which the Designated Settlement Systems Act 2008 comes into force.
- Change to the PPSA: The statutory priority provided to operators of designated settlement systems, is only relevant to designated settlement systems in which the posting of collateral (or another similar arrangement) is used to provide greater assurance as to settlement of transactions. In those circumstances, the interest of the operator in the collateral transferred to it will have priority over the interests of any other person in that collateral, in the event of a default by the participant that posted the collateral. Currently there are two designated payments systems ESAS and CLS, neither of which use collateral for this purpose. This amendment is only likely to have a practical effect if new clearing arrangements develop where there is extensive netting and collateral provided by clearing participants is required to mitigate counterparty settlement risk (e.g., futures and other derivatives).
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