2.1 The Regulators’ Responsibilities
In accordance with powers granted under Part 7.3 of the Act, the Regulators work closely in the regulation of CS facilities. Each of the Regulators may advise the Minister in relation to applications for CS facility licences, and each has a role in the ongoing regulatory oversight of licensees, reporting to the Minister at least annually on licensees’ compliance with their regulatory obligations.
In particular, ASIC is responsible for assessing whether licensees comply with their general obligations under section 821A(a)–(h) of the Act, including that licensees, ‘to the extent that it is reasonably practicable to do so, do all things necessary to ensure that [their services] are provided in a fair and effective way’. The RBA has a complementary power to determine standards (i.e. FSSs) ‘for the purposes of ensuring that CS facility licensees conduct their affairs in a way that causes or promotes overall stability in the Australian financial system’. In accordance with this provision, the RBA has determined FSSs for central counterparties (CCPs) and securities settlement facilities (SSFs) and annually assesses whether each licensed CS facility has complied with the relevant FSS and done all ‘other things necessary to reduce systemic risk’. Under the Reserve Bank Act 1959, the Payments System Board has a statutory role in ensuring the RBA exercises its powers under the Act so as to best contribute to the overall stability of the financial system.
The Act provides for two classes of CS facility licence: a ‘domestic’ licence, granted under section 824B(1); and an ‘overseas’ licence, granted under section 824B(2). The Minister may grant an overseas licence where, among other conditions, an overseas facility is authorised to operate a CS facility in the foreign country in which its principal place of business is located, and the operation of the facility in that country is subject to requirements and supervision that are sufficiently equivalent to those under the Act. In this case, the Regulators would place reliance on information and reports provided by the facility’s home regulator in assessing the facility’s compliance with its licence obligations.
A number of the measures that might be considered within the framework set out in this paper are relevant to the regulatory responsibilities of both ASIC and the RBA.
2.2 Australian Context
Given the complementary responsibilities of ASIC and the RBA, the Regulators have worked collaboratively to develop the framework described in this paper. These issues have also been discussed actively among the wider group of Council agencies, given their relevance to the Council’s work on reform of FMI regulation, competition in clearing and settlement, and regulation of the over-the-counter (OTC) derivatives market.4
Through this work, the Council has further defined the objectives of a policy on cross-border provision of clearing and settlement services. In its report on a framework to implement Australia’s G-20 commitments in relation to OTC derivatives, the Council articulated these objectives in terms of:
- minimising potential disruption and loss to Australian financial institutions, financial markets and the real economy in the event of a participant’s default or other financial stress to a CS facility;
- ensuring continuity of provision of clearing and settlement services to the most systemically important Australian financial markets; and
- establishing conditions whereby Australian regulators have effective oversight of a cross-border CS facility and can exercise sufficient influence to ensure that the facility meets domestic and international standards for systemic risk management, provides its services in a fair and effective way, and offers due protection to Australian participants.5
Among its final recommendations on FMI regulatory reform, released by the Deputy Prime Minister and Treasurer on 30 March 2012, the Council proposed that the Regulators be given explicit powers to impose ‘location requirements’ in pursuit of these objectives. It was envisaged that these could encompass a broad spectrum of financial, operational, regulatory and legal measures to protect Australian interests in the functioning of an FMI licensed to operate in Australia, including ensuring continuity in the provision of services in times of stress. Importantly, however, the Council proposed that any such requirements be ‘imposed in a proportional and graduated fashion’, taking into account factors such as the systemic importance of the underlying market and the composition of the FMI’s participants. This paper elaborates on the Council’s proposal. Treasury is currently considering legislative changes that may be required to support the implementation of this and the other elements of the recommended package of reforms. The government will consider legislative reform proposals in due course.
At the same time, the Council’s proposals for the implementation of Australia’s G-20 commitments on OTC derivatives regulation raise the near-term prospect of an offshore CCP entering the Australian market to clear products such as interest rate swaps. And a recently released Council discussion paper on competition in the clearing and settlement of cash equities acknowledges that competition in the clearing of ASX securities is perhaps more likely to emerge from an offshore CCP seeking to leverage its existing operations.
2.3 International Context
The Regulators’ consideration of policy on influence over cross-border CS facilities is consistent with a broader international focus on these issues, primarily in the context of CCPs. A number of jurisdictions have articulated policy measures in this area, including the euro area, the US and Japan.6 The framework proposed in this paper shares many of the aims of other jurisdictions’ policies. However, it addresses a broader range of cross-border regulatory issues, while at the same time providing for a graduated approach to the imposition of additional requirements.
The Council’s work also reflects, in the Australian context, some of the thinking under way internationally, led by the Financial Stability Board (FSB), around ‘four safeguards’ for access to and oversight of offshore-based CCPs.7 This work recognises that in meeting the G-20 commitments on clearing of standardised OTC derivatives, market participants in some jurisdictions may seek recourse to an offshore-based CCP with international reach. Authorities and market participants alike therefore need to have confidence in such an option. The four safeguards comprise: a framework for international cooperative oversight; fair and open access criteria that promote competition; appropriate liquidity arrangements in all relevant currencies; and procedures for effective resolution. These safeguards are, in part, embedded in the recently released Principles.
This work is also informed by the FSB’s Key Attributes of Effective Resolution Regimes for Financial Institutions (the Key Attributes), which is now an international standard on crisis resolution and will be incorporated into future assessments by international financial institutions, such as the International Monetary Fund. Ongoing international work on recovery and resolution of FMIs is examining the application of the Key Attributes to FMIs. The measures set out in this paper relate to principles in the Key Attributes that speak to the need for both home and host authorities to have the necessary powers and capacity to resolve distress effectively.
4 See, for example, the Council’s recent releases on: the review of FMI regulation, avail
able on the Treasury website; a regulatory framework for OTC derivatives, available on the Treasury website; and competition in clearing and settlement, available on the Treasury website.
5 See ‘OTC Derivatives Market Reform Considerations: A Report by the Council of Financial Regulators’, March 2012, p 31. Available on the Treasury website. The precise wording of these objectives has been adapted slightly in this paper to broaden their scope to CS facilities generally, rather than CCPs specifically.
6 Japan’s focus is domestic clearing for certain types of products, whereas the Eurosystem has developed a policy stating that all CCPs clearing euro‑denominated products over a certain threshold should be incorporated in the euro area including management and operations of all core functions. Other jurisdictions, such as the US, require that CCPs hold sufficient US dollars in segregated client accounts in the US.
7 The FSB’s ‘four safeguards’ are outlined in Dudley WC (2012), ‘Reforming the OTC Derivatives Market’ , Remarks at the Harvard Law School’s Symposium on Building the Financial System of the 21st Century, Armonk, New York, 22 March. Available on the Federal Reserve Bank of New York website.