The government plans to introduce legislation establishing a “crisis management regime” that will allow the Reserve Bank to manage a failure at a domestic clearing and settlement facility.
This new power will be backed up by a A$5 billion appropriation to provide temporary funding to a clearing and settlement facility to ensure continuity of service.
The crisis management regime, which is essentially a resolution regime for licensed clearing and settlement facilities, is one of a number of changes the government plans to make to strengthen Australia’s financial markets infrastructure.
The changes were first announced in last month’s Australian Government Budget and are based on recommendations of the Council of Financial Regulators in a review handed to government last year.
Yesterday, Treasurer Josh Frydenberg provided some details of the proposed changes. In addition to the crisis management regime, ASIC’s supervisory and licensing powers will be enhanced in respect of financial markets operators.
The Treasurer did not say how many of the CFR’s 16 recommendations would be included in the legislation.
Financial market infrastructures to be covered by the changes include: clearing and settlement facilities; benchmark administrators; derivative trade repositories; and financial market operators.
In its advice to government, the Council of Financial Regulators said the options currently available to regulators to address the potential insolvency of an FMI or other severe threats to its continued operation “are very limited”.
The CFR said: “The proposed reforms are needed to improve the ability of the regulators to manage risks ahead of any potential crises, by enhancing the day-to-day regulatory regime and introducing powers to prepare for the orderly resolution of a clearing and settlement facility.”
It said that since the financial crisis, G20 mandates to clear and report certain types of trades have led to a greater proportion of financial transactions flowing through financial markets, clearing and settlement facilities and derivative trade repositories.
It said the change in ownership of FMIs, from mutually owned to for-profit entities, has exposed them to commercial pressures.
“During COVID-19, FMIs had to rapidly transition to remote working at the same time as managing record transaction volumes and responding to highly volatile markets; the mismanagement of any one of these steps could have had catastrophic consequences in a highly stressed market.
“In addition, the increasing complexity and interconnectedness of systems is also increasing operational risk and FMIs’ exposure to growing cyber security threats.”
“Regulators need strong powers to promote financial stability and financial markets that are stable, fair, orderly and transparent. As the number of financial products and transactions increase each year, financial benchmarks and derivative trade repositories grow in importance which means regulators must be able to safeguard their quality, reliability and integrity.”
The CFR review highlighted a number of shortcomings in the current regulatory system. Regulators do not have power to resolve a distressed clearing and settlement facility.
The distribution of powers between the minister, ASIC and the RBA does not always correspond to their legislative mandates or international best practice.
And the regulators do not have sufficient powers to effectively monitor and manage the risks posed by FMIs to the orderly