6. Designated settlement systems
6.1 The Draft Bill provides that Part 5C of the Reserve Bank of New Zealand Act 1989 should be amended to provide a regulatory regime for the approval and oversight of designated settlement systems (see Part 1 of the Draft Bill). This will remain an 'opt-in' regime, but will be extended to cover systems that settle both payments and products, including securities.
6.2 The new regime will involve the Securities Commission and the Reserve Bank of New Zealand having a joint role in recommending designation of a settlement system to both the Ministers of Finance and Commerce. The two Ministers will have a role in recommending to the Governor General that a system be designated. The joint regulators will have powers to seek changes to designated settlement systems' rules and other matters, through the powers of variation and revocation. This approval and oversight framework will be consistent with the 2004 recommendations made in the report of the Financial Sector Assessment Programme ("FSAP") with respect to ongoing oversight once system rules are approved.
6.3 Specifically, the Draft Bill provides that Part 5C of the Reserve Bank of New Zealand Act should be amended to:
- Extend its scope to systems that settle the delivery of personal property as well as payments: The extension from payments to settlements more generally provides a level of certainty to settlements systems that is only currently extended to payments systems.
- Provide a role for the Securities Commission: The Draft Bill provides that Part 5C will be extended to reflect that the Securities Commission and the Reserve Bank will have responsibilities for the designation, variation, and revocation of designations.
- Encompass the different objectives of the two agencies: While both agencies are concerned with the health and functioning of the financial system, they each view the problem from different but complementary perspectives. The Reserve Bank is primarily concerned with the avoidance of significant damage to the system resulting from the failure of a participant in the system. The Securities Commission is concerned with market conduct and integrity, including any risks the settlement system might have for participation more generally in New Zealand's securities markets. Reliance on a dual regulator regime in the approval of settlement and clearing systems has precedent in other jurisdictions, including Australia.
- Recognise both perspectives in the decision making process that determines whether a settlement system will become 'designated': The Draft Bill provides that Part 5C be amended to provide that the Reserve Bank and Securities Commission will make a joint recommendation to both the Minister of Finance and the Minister of Commerce for a settlement system to be declared to be a designated settlement system. It is considered that involving both Ministers is appropriate given the policy objective of having both systemic risk and market integrity perspectives considered during this process.
- Improve the transparency of the approval process in a manner which is consistent with international standards: Under the Draft Bill, it will become a requirement that relevant international standards pertaining to clearing and settlement systems be considered during the application and variation processes.
- For the purposes of avoiding doubt, include a provision in Part 5C which has the same effect as section 44 of the Securities Market Act 1988: This provision would provide that the Commission may exercise any of its powers under the Securities Act 1978 in performing its functions under Part 5C for the purposes of Part 5C.
- Enable the Securities Commission to charge fees: The RBNZ has authority to charge fees for applications under Part 5C. The Draft Bill extends Part 5C to enable the Securities Commission to charge fees also, subject to the approval of Ministers.
6.4 Further details are included in Part 1 of the Draft Bill.
6.5 It should be noted that clause 7 of the Draft Bill provides that 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.
6.6 The Reserve Bank and Securities Commission have agreed to develop a memorandum of understanding, including the development of procedures setting out their respective roles, responsibilities, and processes. This will ensure both agencies are clear as to their accountabilities and can perform their respective obligations under Part 5C.
Specific questions
In addition to the questions set out in paragraph 1.13, please consider the following questions:
- When considering an application for designation or a variation to an existing designation or to the rules of a designated settlement system, the Draft Bill provides that the Securities Commission and Reserve Bank must have regard to relevant international standards concerning clearing and settlement systems. Is this requirement sufficiently certain?
- Do the decision making processes in the Bill, with respect to approvals, variations and revocations, strike the right balance between certainty required by commercial parties and the ongoing public interest in the robustness and integrity of designated settlement systems? Is it appropriate for both regulators to have to agree to a variation or revocation decision?
- Do the provisions relating to the changing of a designated settlement system's rules, including critical rules, provide clearing participants with sufficient certainty with respect to whether the system is designated at a point in time, and therefore the settlement protections afforded by designation apply?
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