NZX rule consultation for new clearing and settlement systems

Over the last 18 months, NZX has been working on implementing new clearing and settlement systems and infrastructure for its core trading markets and it has now released six consultation memoranda on changes required to implement the new system. NZX is also taking the opportunity to bring its corporate action entitlement processing in line with international best practice.

Overview

For NZX's new clearing and settlement system to become operational, and also to become a designated settlement system under the Reserve Bank of New Zealand Act 1989, among other things, the settlement system is required to have rules which govern the basis on which settlement instructions are given or received, settlement obligations are determined, calculated and effected, as well as rules which govern the action of those responsible for these functions.

The rules for the designated settlement system will be constituted by the Clearing and Settlement Rules, the New Zealand Depository Limited Operating Rules and (in part) the New Zealand Markets and Disciplinary Rules. However, changes are also required to the NZX Participant Rules, NZSX/ NZDX and NZAX Listing Rules and the NZ Markets Disciplinary Tribunal Rules and Procedures to reflect the new clearing and settlement arrangements.

The six consultation memoranda on the new clearing and settlement system provide:

• an overview of the new settlement system and the relevant rules governing the entities interacting with NZX's markets and the inter-relationship between those rules;

• a more detailed description of two new rule sets relating to the clearing and settlement system, the Clearing and Settlement Rules and Procedures and the Depository Operating Rules and Procedures; and

• the amendments required to the existing NZSX/NZDX and NZAX Listing Rules, NZX Participant Rules and the NZ Markets Disciplinary Tribunal Rules and Procedures.

NZX has also released the relevant rules and procedures to which the memoranda relate.

A brief overview of the proposed amendments to the existing NZX Participant Rules and NZSX/NZDX and NZAX Listing Rules is outlined below:

NZX Participant Rules

The NZX Participant Rules require amendment as a result of the implementation of the clearing and settlement system, both to reflect the removal of current provisions relating to clearing and settlement and to align the NZX Participant Rules with the proposed Clearing and Settlement Rules and Depository Rules. NZX also proposes amendments in four further areas:

• to permit, but not require, NZX to maintain a Fidelity Guarantee Fund;

• the Rules relating to bringing orders to market, crossings and off-market trading by NZX Participants which are designed to increase the volume of price discovery activity on the trading platform making the "onscreen" price and volume most representative of the value of a security at a given time;

• the Rules relating to error trade reporting and cancellation of trades (both on market and off market). The main difference between the current Rules and the proposed Rules is the recognition that with anonymous trading, NZX intervention will be necessary to cancel on-market trades. The proposed Rules also clarify the circumstances when a trade or crossing may be cancelled due to error; and

• the Rules relating to capital adequacy requirements for NZX Participants which are consistent with the capital adequacy requirements for Clearing Participants under the Clearing and Settlement Rules (although the minimum amount of capital required is less).

NZSX/NZDX and NZAX Listing Rules

The NZSX/NZDX and NZAX Listing Rules also require amendment to remove references to the current Clearing and Settlement System. Additionally, NZX wishes to take the opportunity to bring NZX's corporate action entitlement processing in line with international best practice and proposes the following:

• New Ex Date and rights issues: Amending the Ex Date for all entitlements for Quoted Securities to be the second business day before the Record Date for that entitlement (i.e. three full trading days) rather than NZX's current practice of the Ex Date being the first business day after the Record Date which is considered by the NZX to be administratively unwieldy for market participants and out of alignment with international practice.

This amendment will also affect the number of trading days between the announcement of a benefit and the Ex Date for that benefit. In the case of a rights issue, the change means there would only be two Business Days (instead of the current five Business Days) on which to trade on the announcement (given that, an Appendix 7 must be released to NZX at least five Business Days before the Record Date). As NZX believes that two Business Days is not sufficient time for trading to occur between the announcement of a rights issue and the Ex Date for that rights issue, NZX proposes to amend the Rules relating to the release of information about rights issues to require the release of the details of a rights issue no later than five Business Days before the Ex Date for the rights issue.

• Corporate action announcements: To require issuers notifying the market of a dividend to include in that notification the amount of foreign dividend payment credits attaching to the dividend per share. Listed PIEs will also be required to state the amount of dividend that is excluded income per share. These amendments are being made as a result of feedback received by NZX.

Next steps

Submissions on the memoranda and rules closed on 2 September 2009. The Clearing and Settlement Rules, the New Zealand Depository Limited Operating Rules and the New Zealand Markets and Disciplinary Rules will be approved in the course of the designation process and NZX has indicated that it will send the changes to the Conduct Rules to the Minister of Commerce on 1 October 2009 (which would mean a likely implementation date in late November 2009).

Enquiries and information

For more information on any of the cases, articles and features in Commercial Quarterly, please email Diane Graham or call her on 64 9 916 8849.