3. Background Concepts
3.1 This section includes a description of some of the concepts that are referred to in this consultation document and the Draft Bill. The aim of this section is to better enable respondents who do not have the requisite background knowledge to understand the basic concepts behind certain aspects of the Draft Bill.
Clearing Houses and Settlement Systems
3.2 A clearing house is the entity in a settlement system that acts on settlement instructions to settle transactions, clear trades, and collect and maintain collateral in relation to the settlement of trades. All clearing house and settlement system designs are concerned to varying degrees with the level of assurance they provide the clearing participants around completion of settlement. Generally the greater the materiality of exposures and associated risks of a transaction, the more assurance clearing participants will require from the clearing and settlement system before they choose to settle through that system.
Clearing Participants
Clearing participants are entities approved to clear and settle through a settlement system, in accordance with the rules of the settlement system. There are typically participation requirements on clearing participants including capital adequacy, and capability and capacity requirements (e.g., risk management processes). Clearing participants may clear and settle on their own account or on behalf of their customers.
Designated Settlement System
3.3 A designated settlement system is a clearing house and settlement arrangement that is declared to be a designated settlement system under the proposed regime. There are currently two designated payment systems in New Zealand, which have been approved by the Reserve Bank of New Zealand.
3.4 Designated settlement systems enjoy the benefit of legislative provisions designed to improve the confidence clearing participants have in the likelihood of successful settlement. These include, for both designated payment and designated settlement systems, certainty of netting and the protection for clearing participants against a liquidator from clawback of transactions settled through a designated system.
In addition, it is proposed that the operators of certain designated settlement systems have a statutory priority in collateral transferred to them. The designation approval, variation and revocation processes are concerned with ensuring these legislative provisions are only provided when they are in the public interest. Many of the provisions resulting from designation, intended to provide a greater likelihood of final and full settlement, will be prerequisites for major institutions and international participants considering transacting in New Zealand financial markets.
Posting Collateral
3.5 Where a clearing house provides its participants with a level of assurance of settlement of trades entered on its system, posting collateral is one way of assisting the clearing house to meet those obligations and manage credit and liquidity risks in the event of the default of a clearing participant. Collateral provided in a settlement system is intended to cover losses at the time the collateral is posted and the "maximum probable future loss" for the period until the next margin call is required (typically one trading day).
Futures Contract
3.6 "Futures contract" is defined in section 37(1) of the Securities Markets Act 1988.
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