Preferred option
The preferred option is legislative amendments that:
- rationalise the regulatory framework for securities and futures exchanges to provide for simpler administration of the regime.
- Establishes an opt-in regime under the Securities Markets Act for clearing and settlement systems which will better conform with IOSCO recommendations, to give the platform international credibility and thus make it more attractive to potential international participants.
- Make 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.
The advantages of an opt-in approach is that it would:
- Only apply to those clearing and settlement systems that apply for regulation under the new legislation, and accordingly would not apply to clearing and settlement systems regulated under existing legislation (such as the Reserve Bank's "ESAS" system for settlement of financial payments, which is regulated under Part 5C of the Reserve Bank of New Zealand Act);
- Be consistent with current New Zealand law on clearing and settlement, being the opt-in mechanisms under the Companies Act and Reserve Bank of New Zealand Act (except that the proposed pilot scheme would enable a clearing and settlement system to be established in New Zealand that meets international standards as set by IOSCO);
- Facilitate the establishment of a regional emissions unit market in New Zealand that meets international best practice in relation to the clearing and settlement systems through which the market operates, providing one of the key infrastructural requirements necessary to enable the establishment of a regional emissions unit market;
- Avoid the risks of any unintended consequences on other stakeholders in the securities and financial sector, until such time as the impact of more general law reform is fully assessed through a consultation process with stakeholders;and
- Assist in identifying issues for subsequent consideration in a general review of clearing settlement law in New Zealand.
It is also proposed that the application procedures for a registered exchange and an authorised futures exchange be rationalised. This would have the following benefits:
- The powers of the regulator to approve and monitor both securities markets and futures markets would be brought together under one part of the Securities Markets Act;
- It is easier to explain the structure of the market operator regulatory regime to prospective overseas participants in the markets, particularly the futures markets, as NZX seeks to launch a regional emissions market for both spot and futures trading of emissions; and
- Rationalisation brings administrative simplicity for market operators and market participants, and the regulator, in a framework that provides a more principled structure for regulation and better reflects overseas practice.
As the proposed regulatory regime for clearing and settlement is an "opt-in" form of regulation, only those clearing and settlement systems that apply and are registered under the new regime would directly incur the costs of compliance with the new regulatory regime.
NZX, who has indicated that they would "opt-in" to the proposed regulatory regime for clearing and settlement and apply for registration as a registered clearing and settlement system, estimate the cost to NZX of complying with the new regulatory regime would be marginal. While NZX will incur costs in terms of new IT and other systems (including preparation and approval of operating rules) for the new clearing and settlement system, such costs periodically arise for securities markets as systems are updated or adapted as part of normal business procedures. Investment decisions by NZX in IT and other systems will however need to reflect the legal and regulatory regime in which the proposed new system will operate.
It is anticipated that there will also be short term compliance costs incurred by clearing participants who directly interface with the clearing and settlement system, in the form of learning costs of adapting to the new clearing and settlement infrastructure and operating rules. Again, these are costs that market participants will incur in any event whenever conduct rules are amended from time to time or market infrastructure evolves.
NZX has stated that, in the medium to long-term, an international best practice clearing and settlement system will likely result in overall relative cost benefits for participants due to:
- lower "use of money" costs that would otherwise be incurred by clearing participants due to the capital adequacy requirements of current NZX rules, but which will not arise due to the operation of "central counterparty" clearing house that will itself manage (and more efficiently manage) the financial risk of default; and
- increased revenue from increased trading activity.
Additionally, rationalising the existing duplicative application procedures (and associated costs) for securities exchanges under Part 2B of the Securities Markets Act Parts 2B and for futures exchanges and dealers under Part III of the Securities Markets Act will lead to lower compliance costs for both exchanges and market participants.
The Securities Commission already conducts monitoring of securities exchanges, and has an existing regulatory role in relation to futures exchanges and futures dealers. Given this, the additional costs to the Securities Commission of performing its statutory functions as regulator under the proposals outlined in this paper are expected to be minimal and can be met from the Securities Commission's existing funding.
Similarly, as the Reserve Bank has an existing oversight role in relation to New Zealand's financial system under the Reserve Bank of New Zealand Act 1989, the additional costs to the Reserve Bank under the proposals outlined in this paper are also expected to be minimal.
The preferred option will achieve a timely legislative response to the current opportunities New Zealand has to establish a regional emissions unit market, without impacting on other stakeholders in the New Zealand economy, as well as operate as a pilot to a subsequent general law review. Any costs outlined above also need to be balanced against the potential cost to New Zealand if the opportunity to establish a regional emissions unit market in New Zealand is lost. These costs are difficult to assess.
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