The use of financial services in Australia, by banks, funds, insurers, fintechs, companies and people, is supported by critical market infrastructure that is usually assumed to be “just part of the fabric” of finance. However, these markets, these clearing and settlement facilities, these derivative trade repositories and these financial benchmarks are critical to the safety and stability of the Australian financial system, and those who participate in it and who use and rely on it.

With this in mind, the Council of Financial Regulators have released Financial Market Infrastructure Regulatory Reforms: A Consultation Paper by the Council of Financial Regulators, the latest package of proposed reforms designed to strengthen and streamline the existing regulatory framework for financial market infrastructure in Australia.

This “broad package of reforms” is significant, both for existing operators of market infrastructure, prospective new entrants and the market participants who use them. These entities will need to consider the implications and the impact of the proposals carefully and quickly as submissions to the paper are due on 20 December 2019.

This journey started in 2011 with the Australian financial regulators’ review of the regulatory framework for market infrastructure, and with further consultations conducted in 2015. The regulators have not stipulated what the next steps in the journey would be after this round of consultation, nor when the reforms are expected to be implemented.

The paper proposes reforms in three broad categories:

  • Licensing – acquiring a licence to operate market infrastructure;
  • Supervision and enforcement – enhancing regulators’ supervision and enforcement tools for market infrastructure; and
  • Crisis Resolution – a crisis resolution regime for Australian-incorporated clearing and settlement facility licensees.

The proposals in the first two categories apply variously to some but not all types of market infrastructure, and sometimes to Australian-incorporated entities, overseas entities or both. The third category of reform is clearly stated to be relevant to Australian-incorporated clearing and settlement licensees (and their related bodies corporate).

Fitting with the importance of its subject matter, the consultation paper is lengthy, and detailed, albeit still at a conceptual level. Set out below are some observations about some of the key proposals in the consultation paper.

Acquiring a licence to operate a market or CS facility in Australia

For operators of overseas financial markets and clearing and settlement facilities that are not yet licensed in Australia, it would be significant to note that there are changes proposed to the jurisdiction test relevant to determining whether such an operator requires a market licence or a clearing and settlement licence in Australia. The proposal is a licence would be required (unless an exemption applied) if the Australian Securities and Investments Commission (ASIC) determined that the facility had a material domestic connection to this jurisdiction. There is also a proposal to give ASIC the power to require a market or clearing and settlement licensee to transfer from an overseas licence to a domestic licence held by a domestically incorporated entity.

Enhanced regulatory powers to supervise and enforce the regulatory regime

In previous consultations, the regulators had proposed certain changes to enhance supervisory powers. The regulators have identified further enhancements in this paper. The proposals include:

  1. imposing a fit and proper standard on individuals that are ‘involved in’ a licensed market infrastructure which includes:
  2. a director, secretary or senior manager of a licensee or an applicant for a licence, or in a holding company of the licensee or applicant; or
  3. an individual who has more than 15% of the total voting power (directly or indirectly) in a licensee or an applicant for a licence, or in a holding company of the licensee or applicant; and
  4. a new power for ASIC to make rules for clearing and settlement licensees for the purpose of promoting the fair and effective provision of clearing and settlement services. The power would be consistent with ASIC’s other rule-making powers for derivative transaction rules and derivative trade repository rules;
  5. amendments to the powers to give directions to clearing and settlement licensees. In particular, the Reserve Bank of Australia (RBA) would have power to give directions to a clearing and settlement licensee in relation to its compliance with the Financial Stability Standards and the reduction of systemic risk;
  6. extending sanctions for breach of directions and licence conditions to individual directors and officers of the licensee of the market infrastructure; and
  7. raising the standard of compliance required of clearing and settlement facilities in respect of the financial stability standards that are administered by the RBA.

Crisis resolution for Australian-incorporated clearing and settlement facility licensees

Introducing a crisis resolution regime to Australia’s market infrastructure is consistent with the work being done at the international level, led and coordinated by the Financial Stability Board. The consultation paper adds to the proposals canvassed in 2015 and sets out some points which warrant attention. The crisis resolution regime is proposed to apply to clearing and settlement licensees that are incorporated in Australia only. The proposals also apply to their related bodies corporate. The proposal includes:

  • indefinite stays – the regulators have indicated that the proposed stay regime is consistent with the recommendations of the FSB’s Key Attributes of Effective Resolution Regimes for Financial Institutions. The proposed stays regime has relevance to the application of regulatory capital requirements by prudentially regulated entities;
  • powers to issue a secrecy determination or confidentiality notice – whilst the regulators note the importance of transparency around the use of resolution powers, the resolution authority is proposed to have the ability to impose confidentiality requirements on certain parties to minimise the risk of such information detrimentally affecting market confidence in the clearing and settlement facility;
  • resolution planning and resolvability – the regulators propose the inclusion of specific powers and obligations relating to enabling the resolution authority to prepare for the possible use of its resolution powers;
  • conditions for resolution – the regulators propose to give the resolution authority more flexibility so that, once a general condition is satisfied, any of the resolution powers in the resolution regime will be enlivened. This is more flexible than had been contemplated in previous consultations. Certain powers could also be used in respect of related bodies corporate of the clearing and settlement licensee;
  • transfer powers – these are proposed to be similar to the equivalent regime for authorised deposit-taking institutions (ADIs) in the Financial Sector (Transfer and Restructure) Act 1999;
  • statutory management and resolution direction powers – the regulators propose that these resolution tools be extended to be able to be used in respect of a related body corporate of the domestic clearing and settlement licensee (not just the licensee);
  • moratoria – the moratorium on enforcement proceedings is proposed to apply to a broader set of actions than had been proposed in an earlier consultation;
  • information gathering powers – these powers include requiring a domestic clearing and settlement licensee and their related bodies corporate to assist the resolution authority as it reasonably requests in relation to the performance of its functions; as well as a current or former officer of an entity under statutory management to provide information relating to the business of that entity and, during resolution, requiring any person to provide relevant information in certain circumstances; and
  • notification requirements – these requirements are proposed to be similar to requirements imposed on ADIs, and require notification to be given of certain circumstances relating to the entity’s viability.

As a final, additional point worth noting, the regulators noted that “the Government is planning to consult separately on proposals to extend the Banking Executive Accountability Regime to apply to a broader range of financial services entities. The consultation will clarify the proposed scope of the regime, including the extent to which it applies to [market infrastructure].