Regulatory developments

Exposure Draft Financial Market Infrastructures Bill

On 1 August 2019, the Reserve Bank published an exposure draft of the Financial Market Infrastructures Bill (FMI Bill), which proposes to establish an enhanced regulatory framework for FMIs. The FMI Bill covers vitally important systems for New Zealanders, including the infrastructures that support our day to day transactions and the proper functioning of financial markets.

An enhanced regulatory framework is needed because the existing regime for FMIs (contained in Parts 5B and 5C of the Reserve Bank of New Zealand Act 1989) is insufficient to guard against market failures that might result in, for example, insufficient focus on risk management or inadequate investment in underlying infrastructure. The new regulatory framework will also be consistent with international best practice.

It is anticipated that Cabinet approval to introduce the Bill into Parliament will be sought later this year.

The deadline for submissions on the exposure draft is 5pm on 26 September 2019.

Supplementary decisions on the new oversight framework for Financial Market Infrastructures

In December 2018 Cabinet made a number of supplementary decisions on aspects of the proposed new oversight regime for Financial Market Infrastructures. These decisions included:

  • That the joint regulators should set regulatory requirements for designated FMIs using standards rather than conditions of designation;
  • That the Bill should include a stay on the exercise of contractual termination rights against the operator of a designated FMI, when those rights may be exercised solely because the operator is subject to statutory management; and
  • That certain aspects of the Bill (including the requirement for Ministerial consent before directions may be issued, and the statutory management regime) be retained on an interim basis and reviewed following the completion of phase 2 of the Review of the Reserve Bank of New Zealand Act 1989

Cabinet decisions on an Enhanced Oversight Framework for Financial Market Infrastructures

In April 2017 Cabinet agreed to adopt an enhanced legislative framework for the regulation of Financial Market Infrastructures (FMIs). The new legislative framework arises out of a detailed review of FMI regulation that has been undertaken by the Reserve Bank since 2013.

The new framework is divided into two parts. Firstly, 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 currently available under Part 5C of the Reserve Bank Act). These powers include the ability to set regulatory standards for designated FMIs, powers to oversee their rules, investigative and enforcement powers, and crisis management powers. Secondly, information gathering powers that would apply to all FMIs (including those which are not designated) in order to monitor the broader sector. In most cases powers under the new framework will be jointly exercised by the Reserve Bank and Financial Markets Authority.

Further public consultation is likely to occur on an exposure draft of legislation establishing the new framework.

Summary of submissions to crisis management for systemically important FMIs

In August 2016, the Reserve Bank published a summary of, and its response to, submissions received following its public consultation on the crisis management framework for systemically important financial market infrastructures (SIFMIs).  The Reserve Bank has now finalised its overall proposal for enhanced oversight framework for financial market infrastructures.  

Crisis management powers for systemically important FMIs

In March 2016, the Reserve Bank issued a consultation paper on proposed crisis management powers for systemically important financial market infrastructures (SIFMIs). Submissions close on 20 May 2016.

The proposed crisis management powers form the final part of proposals that the Bank announced in December 2015 for a new oversight regime for designated FMIs.

The proposed crisis management regime has two parts. First, SIFMIs would be required to maintain business continuity plans, and recovery and orderly wind-down plans. Second, the Reserve Bank and the FMA (joint regulators) could call on proposed new statutory powers when these plans are inadequate to manage a crisis.

Oversight of Designated Financial Market Infrastructures: summary of submissions and final policy proposals

In December 2015, the Reserve Bank released a summary of the submission feedback it received on its consultation on a proposed new regulatory framework for designated Financial Market Infrastructures (FMIs), its responses to the feedback and its final policy proposals. The Bank plans to conduct a limited scope consultation on the crisis management framework for FMIs in early 2016.

Changes to NZClear ownership and operation

In June 2015, the Reserve Bank called for expressions of interest for NZClear from potential buyers and operators. NZClear is a designated securities settlement and depository system. The FMA and the Reserve Bank's Prudential Supervision department (the ‘joint regulators') regulate NZClear.

The joint regulators issued a statement in June 2015 setting out their regulatory expectations concerning prospective changes to the ownership and operation of NZClear.

Consultation on oversight of designated FMIs

In April 2015, the Reserve Bank issued a consultation paper on its proposals to modify the statutory framework for the oversight of FMIs. Submissions closed 3 July 2015. The paper proposed that the designation regime be modified to better support the Reserve Bank's risk-based supervisory approach, in particular, that:

  • There be mandatory designation of FMIs that are considered systemically important;
  • The joint regulators have crisis management powers for designated FMIs;
  • The joint regulators have a more graduated set of business-as-usual oversight powers, including enforcement and investigation powers for designated FMIs.

This followed an earlier consultation in 2013 and period of re-assessment, which included ongoing stakeholder engagement and information gathering.

Summary of submissions to statutory payment oversight powers consultation

In October 2013, the Reserve Bank released a summary of, and its responses to, submissions received following its public consultation on the framework for strengthening its payment oversight powers.

Strengthening the Reserve Bank's statutory payment oversight powers

In March 2013, the Reserve Bank consulted on proposals to strengthen its statutory payment oversight powers. The Bank proposed establishing a new legislative framework for the oversight of systemically important payment and settlement systems, which included:

  • Formally recognising systems that are systemically important;
  • Giving the Reserve Bank formal powers to oversee the recognised systems, such as powers to impose conditions and to direct;
  • Setting up a tailored statutory management regime for recognised systems.

The consultation paper also proposed that the new recognition regime runs parallel to the existing designation regime under Part 5C of the Reserve Bank Act 1989, under a similar co-regulatory arrangement with the FMA.