The FMI Act substantially rewrites the law in New Zealand governing payment systems, securities settlement systems, central counterparties, trade repositories, and other financial market infrastructures. It will replace the more narrowly-focused Parts 5B and 5C of the Reserve Bank of New Zealand Act 1989 (the RBNZ Act), which currently regulate payment and settlement systems.
The journey has featured many rounds of consultation with industry participants, beginning in March 2013. However, with most of the major policy decisions made before the Bill was introduced into Parliament in December 2019, the substance of what is now the FMI Act is largely unchanged from the Bill as introduced. In previous articles, we commented on both the introduction of the Bill and the Select Committee report that followed submissions on the Bill.
Now that the FMI Act has been enacted, the next step is for the Reserve Bank and the FMA to identify which FMIs are “systemically important". The significance of this is that systemically important FMIs can be 'called in' to what is otherwise an 'opt in' designation regime. While there are a number of benefits that accompany designation as an FMI, those benefits come with strings attached. For example, designated FMIs must comply with yet-to-be-issued standards, must have contingency plans that are available for regulator review, and may be subject to a bespoke statutory management regime if they become “distressed". Designation is, therefore, very much a double-edged sword.
It is expected that the list of “systemically important" FMIs will include all five of the settlement systems currently designated under the RBNZ Act:
- the Exchange Settlement Account System operated by the Reserve Bank, which provides central bank accounts to registered banks and others
- the CLS System operated by CLS Bank International, which settles US$5.5 trillion of FX transactions (including those with an NZD leg) globally every day
- the NZCDC settlement system operated by New Zealand Clearing and Depository Corporation Limited, which is NZX's settlement system
- the NZClear settlement system operated by the Reserve Bank, which settles wholesale securities trades in New Zealand
- the ASXCF settlement system operated by ASXClear (Futures) Pty Limited, which clears futures and options traded on the ASX market
For the currently designated settlement systems, their transition across to the new regime will be automatic. For any other FMIs that choose, or are required, to be designated, the process is more elaborate — requiring, in the case of an FMI opting in, the submission of a detailed application.
Other FMIs that have been identified by the Reserve Bank as being potentially “systemically important" include:
- the Settlement Before Interchange (SBI) arrangements for retail payments operated by Payments NZ
- LCH Clearnet, the world's largest central counterparty for interest rate swaps
- DTCC, a trade repository
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.