RBNZ's Grant Spencer says new oversight regime will give regulators crisis management powers over systemically important financial market infrastructure providers

Cabinet approval pending, the Reserve Bank is closing in on a beefed up oversight regime for financial market infrastructure providers that would give it and the Financial Markets Authority crisis management powers, Deputy Governor Grant Spencer says.

Speaking at a Payments NZ conference in Auckland, Spencer said although the Reserve Bank has had responsibility for overseeing the payments system for more than a decade, in a post Global Financial Crisis world current legislation is no longer fit for purpose. 

"The lack of crisis management powers and our limited ability to induce system improvements mean we are not able to fully meet our mandate of promoting a sound and efficient payments system," Spencer said.

Spencer's comments come after he told the same conference two years ago that the Reserve Bank's regulatory framework in the payments area was at the non-intrusive end of the spectrum in an international context, with the central bank having to "rely on suasion and industry engagement to promote its stability and efficiency objectives." Thus change was needed in the way any payments and settlements system crisis was managed, Spencer said then, with the Reserve Bank looking to establish a stronger oversight regime.

On Tuesday he said the Reserve Bank's proposals are still subject to Cabinet approval. Assuming this is gained, the next step will be preparing new legislation. The Reserve Bank would then "issue an exposure draft for consultation" around the end of the first quarter, or early in the second quarter, next year.

"We do not envisage that the new framework will significantly change how the payments industry operates or how we engage with each other. We already have a very collaborative relationship with the industry, including Payments NZ. While some current processes will be formalised over time, the nature of our open engagement means there should not be surprises. We want to continue our open dialogue with the industry, allowing mutual goals to be achieved in a low key and non-prescriptive manner," Spencer said.

The case the Reserve Bank makes for oversight is driven by potential market failures inherent in many financial market infrastructures (FMIs), Spencer said, notably "negative network externalities where operators or participants might not fully consider the wider social costs of their actions, particularly in stress situations." 

Several key features

He said the Reserve Bank had taken its time developing a new oversight framework that reflects a risk-based approach to regulation. The yet to be enacted new framework has several key features, Spencer said. These are:

• The Reserve Bank and FMA would have information gathering powers in order to better identify emerging risks
• An FMI that is assessed as being systemically important would be required to be designated under a revised Designation Regime
• The Reserve Bank and FMA would have enhanced oversight of designated FMIs, including powers to: set requirements on governance and BCP standards; influence FMI operating rules, and play a key role in crisis management
• Currently designated FMIs would continue to be able to seek legal protection for netting and settlement under the revised regime. Other new non-systemic systems would also be able to opt-in to the new regime. 

In assessing which FMIs are systemically important, the Reserve Bank is using international standard criteria, Spencer said. That is looking at the size and concentration of financial risks within the FMI, the role and the nature of the transactions it processes, the extent to which there are alternative services available, and the FMI’s interdependencies with other FMIs.

"Our initial assessment identified nine FMIs that are either systemically important or potentially of systemic importance. Four of them are already designated systems: ESAS [Exchange Settlement Account System], NZClear, CLS [Continuous Linked Settlement] and NZCDC [New Zealand Clearing and Depository Corporation]. Two of the Payments NZ systems - SBI [Settlement Before Interchange] and HVCS [High Value Clearing System] - are also likely to be designated under the new framework. There are another three offshore based FMIs that are on this list too, including LCH [formerly London Clearing House], ASX Clear (futures) and Singapore’s DTCC (trade repository)," Spencer said. 

"A key feature of the proposed new framework is crisis management. We are proposing that the Reserve Bank and FMA would have a tools to respond if a systemically important FMI fails or is about to fail. In such a situation, we want to facilitate an orderly recovery or resolution so as to minimise potential disruptions to the financial system."

"While the focus will be on systemically important FMIs, the proposed framework will help us monitor emerging risks in the broader industry. This would not be an 'all-or-nothing' oversight regime. Rather, it would give the Bank and the FMA flexibility to tailor the oversight regime in light of the risks identified. The oversight regime would continue to be less intrusive than in most other jurisdictions," said Spencer.

ESAS and NZClear are owned by the Reserve Bank, and NZCDC is owned by sharemarket operator NZX.

The Reserve Bank would "avoid prescriptive solutions if possible," Spencer added.

"Industry cooperation and rigorous self-assessment in the context of international standards is preferable to regulatory intervention."  

'Interbank retail payments should soon be settling within an hour'

Meanwhile, Spencer also noted local banks are speeding up their payments using existing technology.

"The payments pipeline project aims to address settlement risk within Settlement Before Interchange (SBI) by minimising the delays between the issuance and settlement of payment instructions. After two years of work, interbank retail payments should soon be settling within an hour. This will meet the consumer demand for faster clearing of funds and reduce settlement risk within SBI," he said.