Enhanced oversight framework for financial market infrastructures
Cabinet has agreed to a new legislative framework that will improve regulation of payment systems and other Financial Market Infrastructures (FMIs).
The new framework comes after a detailed review by the Reserve Bank of FMI regulation. The review included three public consultations in the last four years.
Deputy Governor Grant Spencer said: “FMIs play an essential role as the 'plumbing' of the financial system. All participants in the financial system rely on FMIs to some extent and they play a key role in supporting the smooth functioning of the economy. However, FMIs can also be a source of systemic risk. The increasing interconnectedness and complexity of FMIs could result in shocks being rapidly transmitted through the financial system and adversely affecting economic activity.”
“The new framework will help support the oversight and supervision of the FMI sector, and the soundness and efficiency of the financial system,” he said.
The new framework builds upon the existing regulation of payment and settlement systems under Parts 5B and 5C of the Reserve Bank of New Zealand Act 1989, and will be jointly administered by the Reserve Bank and Financial Markets Authority in most respects. It also aims to ensure that regulation of FMIs is proportionate to the risks they pose.
“The focus of the new regime is on systemically important FMIs, reflecting their importance to the broader financial system. At the same time, the regime avoids significant regulatory costs and barriers to new entrants,” said Mr Spencer.
“The framework fills important gaps in existing regulation by broadening its scope beyond payment and settlement systems to cover other types of FMIs, and establishing crisis management powers.”
An exposure draft of proposed legislation will be open for public consultation before it is introduced into Parliament.
FMIs provide the “plumbing” of the financial system.. They provide trading, clearing, settlement and reporting services for financial transactions involving payments, securities, derivatives, and other financial products.
Well managed and operated FMIs contribute to an efficient financial system. Individual FMIs can also become systemically important, in that their failure could have significant adverse consequences for the financial system as a whole.
The new oversight framework is divided into two parts.
- A set of regulatory powers that apply to designated FMIs - i.e. those that are systemically important, or who opt-in to designation in order to access the legal protections available under Part 5C of the Reserve Bank Act. The regulatory powers include the ability to set regulatory standards for designated FMIs, powers to oversee their rules, investigative and enforcement powers, and crisis management powers.
- Information gathering powers that would apply to all FMIs (including those which are not designated). This information gathering power will allow the broader functioning of the FMI sector to be monitored so that any FMIs that become systemically important in the future can be identified, as well as monitoring the build-up of systemic risks.
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