Regulatory Impact Statement
Executive summary
The proposals in this paper reform the law regulating futures exchanges and clearing and settlement systems so as to facilitate a more robust legislative framework that meets the expectations of potential international participants.
The proposed reforms involve:
- rationalising the regulatory framework for securities and futures exchanges – these are desirable from a policy perspective to provide for simpler administration of the regime, but are not legally necessary to allow establishment of a futures exchange or clearing and settlement system;
- amendments so that the New Zealand regime for clearing and settlement systems better conforms with IOSCO recommendations – these are considered commercially necessary to give the platform international credibility and thus make it more attractive to potential international participants; and
- technical amendments in response to the emergence of emissions units in New Zealand (both NZ ETS units and non-NZ ETS units), and the way they fit into New Zealand's current regulatory environment.
Adequacy statement
The Ministry of Economic Development considers that the RIS is adequate according to the adequacy criteria.
Status quo and Problem
There are some practical difficulties which arise out of the current law regulating futures exchanges and clearing and settlement systems which mean that it is difficult for a person to establish an efficient and robust trading platform for futures contracts for any commodity (including emissions units). These problems include:
- A perception that the New Zealand regulatory environment does not conform with international best practice, as reflected in the recommendations of IOSCO. This has an impact on the ability to attract domestic and international participants to New Zealand markets;
- Different regulatory treatment of securities exchanges and futures exchanges, and the compliance costs associated with needing to seek regulatory approval twice; and
- Current regulation of clearing and settlement systems was developed with a different focus (ie focused on the payments system rather than the underlying securities/commodities market), before the IOSCO recommendations were made and includes no formal monitoring and enforcement role for the securities market regulator.
Current legislation regarding clearing and settlement systems focuses on the integrity of the payment system, rather than managing the risk of non-delivery of the commodity or security being traded. This means that current New Zealand law does not provide sufficient certainty for participants regarding finality of a futures contract cleared and settled through the existing regulatory framework.
While it is possible under current New Zealand law to establish a clearing and settlement system associated with a securities or futures exchange, at a practical level the current law does not sufficiently promote confidence for potential customers regarding the regulatory environment.
An opportunity has been identified to establish in New Zealand a regional market for emissions unit products. To capture this opportunity, it is important that the legal and regulatory framework in which emissions unit markets in New Zealand operate provides for clear regulatory treatment of emissions units, and more generally that regulatory settings for market infrastructure in New Zealand is appropriate to attract domestic and international participants to New Zealand markets.
Objectives
Overall - to capture the opportunity to establish a regional emissions unit market in New Zealand and will contribute to New Zealand's international reputation on climate change issues, as well as create a platform for growth of emissions trading in New Zealand.
Clearing and settlement systems - to ensure that trades in securities and other products on a multilateral trading platform can be cleared and settled through a clearing and settlement system that has the confidence of international and domestic participants.
Rationalising the regulatory framework for securities and futures exchanges - to streamline the application procedures for approval as a registered exchange for securities and an authorised futures exchange.
Technical amendments - to provide certainty for market operators and market participants as to the regulatory treatment of emissions units, and thereby reduce transaction costs arising out of the current uncertainty.
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