The FMI Bill, as introduced, reflects the response of officials to submissions made on an exposure draft released by the Reserve Bank of New Zealand in August. We outlined the key parts of that exposure draft in an earlier article.
With the major policy decisions having been made over three years ago, it is no surprise the substance of the FMI Bill has changed little from the exposure draft. However, there have been a few noteworthy developments:
- A key part of the FMI Bill is clause 56, which confirms the finality of settlements made in accordance with a designated FMI's rules. However, this statutory protection is not absolute. The exposure draft provided for it to lapse 24 hours after a participant in the FMI goes into insolvency. That worried central counterparty FMIs in particular, as 24 hours is unlikely to be sufficient time to undertake their default management processes (e.g., close-out, auction, loss allocation, realisation and application of security, and porting). Those central counterparties will be happy to see this 24 hour cut-off rule no longer applies to them. Equally, overseas FMIs will be happy to see their cut-off extended to seven days.
- FMIs submitting on the exposure draft had raised another concern about the manner in which this statutory protection could be lost. The insolvency of an FMI participant outside New Zealand could trigger the loss of this protection if that (foreign) insolvency was a similar process to a local insolvency. With bank resolution regimes becoming a common feature in many overseas jurisdictions, that raises the question of whether these regimes are sufficiently 'similar' to a local insolvency to cause that to occur. Given the outcome a bank resolution is designed to achieve, such a loss of protection would not be appropriate (and, in fact, would be counter-productive).
The FMI Bill has addressed this concern by stating this protection can only be lost if an FMI participant is subject to insolvency proceedings in New Zealand.
- The FMI Bill has clarified how the rights of derivative counterparties will be affected if they have traded with a designated FMI that is put into statutory management. Having recently seen their rights extended under the Financial Markets (Derivatives Margin and Benchmarking) Reform Amendment Act 2019, counterparties now face having their wings clipped. Their rights to use statutory management as the trigger event for termination, to net amounts owing in respect of terminated transactions, and to enforce security will be subject to a 48 hour (and, potentially, longer) stay. That stay, at least to the extent it relates to termination and netting, does not apply under the current law.
Whereas the exposure draft only sought to apply this stay to central counterparty FMIs that are designated, the FMI Bill applies it to all designated FMIs, of whatever type.
FMIs that operate on both sides of the Tasman will inevitably be comparing the terms of the FMI Bill with the consultation paper on Financial Market Infrastructure Regulatory Reforms published last month by the Australian Council of Financial Regulators. No doubt, the submissions they make on the FMI Bill and that consultation paper will be aimed, in part, at ensuring there is an appropriate alignment between the equivalent laws in the two countries.
After the FMI Bill's first reading, it will be referred to a Select Committee, which will call for submissions.
Disclaimer: 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.