On 26 July, the Reserve Bank of New Zealand and the Financial Markets Authority (the Joint Regulators) began the process for providing the missing pieces of the puzzle in the reform of New Zealand's laws governing financial market infrastructures (FMIs).
When the Financial Market Infrastructures Act 2021 (the FMI Act) was passed in May, it left unaddressed three significant issues:
How will “systemically important" FMIs (which can be called in to the new regime) be identified?
How will the standards that will apply to designated FMIs be developed?
What is the timing for implementing the FMI Act?
The Joint Regulators have released three documents that address these issues. Here is what you need to know:
1. A Framework for identifying systemically important financial market infrastructures
In the first of two consultation documents, the Joint Regulators refer to the five matters they are required to take into account under the FMI Act in deciding whether an FMI is “systemically important". Those five matters are the FMI's size, the type of its participants, the nature and scope of its participants, the way in which it concentrates financial risk, and its substitutability. For each of those matters, the Joint Regulators identify specific factors they intend to have regard to when carrying out this assessment.
Where the relevant factors may differ depending on the type of FMI in question, a table in this document shows the differences. This is intended to reinforce a point repeatedly made by the Joint Regulators — that it is not feasible to have a 'one size fits all' approach to this assessment. Rather, assessments should be on a case-by-case basis.
A common theme in this document is the emphasis the Joint Regulators make on their intention to follow international best practice — in particular, the Principles for Financial Market Infrastructures (the PFMIs) published by the Committee on Payments and Market Infrastructures and the International Organisation of Securities Commissions. The difficulty, though, with this objective is that international practice differs. Some jurisdictions (including the US and Canada) have a single framework governing all FMIs, while others (including the EU and the UK) have a different framework governing payment systems, on the one hand, and other FMIs, on the other hand. New Zealand has followed the US and Canadian approach.
It is unclear what all this might mean in terms of the critical question of who will get called in to this regime as a “systemically important" FMI. That is not a question the Joint Regulators are looking to answer now. But it is interesting nonetheless to note their observation that neither retail payment systems nor trade repositories are typically identified as systemically important FMIs in other jurisdictions.
2. Developing standards for designated financial market infrastructures
In the second consultation document, the Joint Regulators set out their intended approach for developing standards for designated FMIs. Once again, the foundation of this approach is the PFMIs, which comprise 24 principles-based standards. However, not all of these principles are appropriate for each type of FMI. Accordingly, this document proposes an approach that applies the principles to FMIs depending on the functions they perform. So, for example, a trade repository would be subject to fewer standards than would a central counterparty.
The treatment of overseas FMIs is a tricky issue. There is a simplistic attraction in requiring all FMIs (local or overseas) performing the same functions to be subject to the same standards. Equally, though, the tail should not wag the dog. Overseas FMIs that are already subject to equivalent regulation in their home jurisdiction shouldn't face double jeopardy in New Zealand. That is the stated preference of the Joint Regulators, who have come down in favour of a 'substitute compliance' approach for overseas FMIs.
3. The Financial Market Infrastructures Act implementation plan
The timeline indicated by the Joint Regulators in the third document for implementation of the FMI Act is as follows:
The Joint Regulators have called for submissions on the two consultation documents, which are due by 20 September 2021.
If you would like assistance in the preparation of a submission, or more general advice on how the FMI Act might affect your business, please contact David Craig, Zac Kedgley-Foot or your usual Bell Gully advisor.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.