Financial market infrastructures law one step closer to reality

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On 1 August the Reserve Bank of New Zealand released an exposure draft of the Financial Market Infrastructures Bill.

In an article in May 2017, we tracked a consultation process that began in 2013 and aims to reform New Zealand's regulation of financial market infrastructures (FMIs). That process culminated on 1 August in the release by the Reserve Bank of New Zealand (the RBNZ) of an exposure draft of the Financial Market Infrastructures Bill (the FMI Bill).

What will the FMI Bill do?

For the most part, the FMI Bill is faithful to the final policy proposals announced by the RBNZ in December 2015 and August 2016, as endorsed by Cabinet. That means a significant change to the (relatively light-handed) regulation of FMIs that exists currently. In particular:

  • The new regime will apply to a broader range of entities than the current one. At present, the framework in Part 5C of the Reserve Bank of New Zealand Act 1989 applies only to payment and securities settlement systems. By contrast, the new regime will extend its scope to cover other types of FMI, such as trade repositories.
  • The opt-in nature of the current designation regime will be bolstered by a power for the regulators (the RBNZ and the Financial Markets Authority) to 'call in' FMIs that are considered to be systemically important (SIFMIs). In other words, what began as a voluntary regime principally designed to confer certain statutory protections on those that choose to be designated is set to compel SIFMIs to be designated and so to become subject to the new oversight rules.
  • The regulators will have the power to issue standards to which designated FMIs will be subject. Importantly for offshore FMIs, in setting those standards, the regulators are required to have regard to equivalent overseas standards – in recognition of the subordinate role the regulators should play in that case.
  • Designated FMIs will be required to have contingency plans for how they will deal with operational or financial failure.
  • In what is no doubt the most significant change from the current regime, the regulators will be given sweeping crisis management powers over designated SIFMIs. Many of these powers mirror those that the RBNZ has in respect of registered banks.