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Implementation

This section outlines further work that the Regulators expect to undertake later this year to incorporate this framework within their supervisory approach. Separately, it also proposes some additional changes to legislation which Treasury may consider in its own review. Table 1 outlines, on the basis of a preliminary assessment, potential vehicles for implementation of the various measures articulated in the framework.

4.1 Revisions to Financial Stability Standards

The proposed revision to the FSSs to incorporate the Principles provides an opportunity for the RBA to clarify and consult on how it would be able to provide adequate influence over the cross-border activity of a CS facility. This would be achieved by incorporating some of the requirements described in this paper explicitly within the proposed revisions to the FSSs.

An overseas CCP is currently exempt from the relevant FSS for such time as the RBA receives annual documentary evidence from the licensee’s home regulator that the licensee has complied in all material respects with the requirements of the home regulator relating to matters affecting financial stability. One possibility in varying the FSS might be to hold overseas CCPs (and SSFs) to the same standard as domestic entities, but to place conditional reliance on a sufficiently equivalent overseas regulator. The conditions might include that a ‘materially equivalent’ standard is explicitly applied in the overseas regulatory regime, and that the Reserve Bank receive, as under the current exemption, annual documentary evidence from the overseas regulator that the licensee has complied with relevant regulatory requirements. Where these conditions were not met, the Reserve Bank would carry out a direct assessment against the relevant FSS.

Implementation via the FSS would require no additional powers for the RBA; existing powers under the Act would be sufficient.

4.2 Revisions to RG 211

Further to publication of the Principles, ASIC is reviewing RG 211 and proposes to consult on changes to that document later in 2012 both in light of the Principles and in order to incorporate relevant aspects of the framework into its regulatory guidance.

4.3 Legislation

Most of the requirements considered in this paper could be implemented without the need for legislation. Additional legislative powers may nevertheless be useful in some cases. Possible changes to legislation stemming from the Council’s review of FMI regulation are being considered by Treasury. Subject to any decision by the government to proceed with any reforms, legislative amendments may be expected to be enacted in several stages.

Specific legislation could underpin the requirement for a systemically important facility with a strong domestic connection to apply for a domestic licence, including through a locally incorporated entity. Similarly, legislation might be used to strengthen the requirements for adequate information sharing and cooperative oversight arrangements, as well as overall compliance with the FSS. These are currently considerations for Regulators in advising the Minister about granting, suspending or revoking an overseas licence (and decisions relating to licence conditions), but they are not more general ongoing requirements.

4.4 Expectations

As a complement to measures implemented via any of the above channels, the Regulators would propose to communicate directly to any licence applicant their expectations as to the circumstances in which additional requirements might be imposed under this framework. Similarly, expectations would be communicated to any existing licensee that might contemplate outsourcing certain functions offshore. Further legislative amendments might be considered to give legal force to such expectations.

On an ongoing basis, as part of their annual assessment of the facility, the Regulators would review changes to the facility’s Australian-based participation and its services in Australian-related products, as well as its systemic importance and domestic connection. In accordance with the published framework and the Regulators’ stated expectations, the review would determine any need for additional measures. In the event that further action was necessary, the Regulators would establish an implementation plan with the facility. Should the facility fail to take the required action, the Regulators could rely on directions and sanctions, which as part of the broader reform of FMI regulation the Council has recommended be enhanced.

Table 1: Potential Vehicles for Implementation of the Framework

Requirement Summary Instrument for implementation
Foundational requirements
(i) For all CS facilities licensed in Australia
Legal compatibility of rules with Australian regulatory requirements Facilities to provide up-to-date legal opinions dealing with conflict of laws and enforceability of rules. FSSs relating to legal basis.
Channels to demonstrate compliance with Australian regulatory requirements The Regulators to enter into cooperative arrangements and share information with overseas regulators. Corporations Act 2001 requirements for information sharing in respect of overseas licensees; advice to Minister on type of licence granted; scope of exemption granted from direct assessment against FSSs; possible legislative strengthening.
Direct oversight of domestic licensees; vetting of outsourcing arrangements. Direct assessment against FSS relating to operational risk; ASIC regulatory guidance.
Foundational requirements
(ii) For all CS facilities licensed in Australia that have material Australian-based participation and/or provide services in Australian-related products
Governance and operational arrangements that promote stability in the Australian financial system Facilities to demonstrate that governance arrangements give appropriate consideration to Australian interests, including default obligations proportionate to the scale and scope of participants’ activities.
Facilities to provide for operational support during Australian market hours and, to the extent reasonably practicable, accommodate local market practices.
FSSs relating to:

  • governance
  • participant-default rules
  • operational risk
  • risk-management framework
  • collateral
  • margin.
Requirements for systemically important facilities
Holding an ESA with the RBA Systemically important CCPs to hold an ESA and comply with ancillary requirements (operational, financial and legal). FSSs relating to liquidity and money settlements. Potential strengthening through licence conditions.
RBA’s role as operator of RITS.
Strengthened influence for Australian regulators Adequate participation in supervisory college for systemically important facilities including any crisis management arrangements. Corporations Act 2001 requirements for cooperative arrangements in respect of overseas licensees; advice to Minister on licence application; possible legislative strengthening.
Requirements for systemically important facilities with a strong domestic connection
Holding a domestic CS facility licence Periodic and/or activity-based review of the need for a domestic licence and a domestic legal presence. Possible legislative changes; advice to the Minister; potential strengthenin
g through licence conditions/expectations.
Overseeing the outsourcing of critical functions Facilities to maintain operational arrangements such that an appointed manager would have control over critical functions in a step-in scenario. FSS on operational risk; ASIC regulatory guidance; possible legislative changes regarding FMI resolution.