RESERVE BANK OF AUSTRALIA
Corporations Act 2001
EXPLANATORY STATEMENT: VARIATION OF FINANCIAL STABILITY STANDARD FOR CENTRAL COUNTERPARTIES
1. Background
In May 2003, the Reserve Bank determined the Financial Stability Standard for Central Counterparties (FSS 2003.1) and the Financial Stability Standard for Securities Settlement Facilities (FSS 2003.2). These standards were determined under Part 7.3 of the Corporations Act 2001 (“the Act”), which grants the Reserve Bank formal responsibility for ensuring that clearing and settlement facility licensees conduct their affairs in a way that is consistent with financial system stability. The Reserve Bank may also vary standards it has determined in writing under section 827D(6). The Financial Stability Standard for Securities Settlement Facilities was varied in June 2005 (FSS 2005.1) to introduce a threshold exemption.
2. Purpose and Operation
The objective of the Standards is to ensure that licensees of clearing and settlement facilities identify and properly control the risks associated with their operations. Each Standard is supplemented by a series of measures that the Reserve Bank considers are relevant for meeting the Standard. The Reserve Bank has also issued guidance notes, which provide further information on each measure.
The Reserve Bank has varied the Financial Stability Standard for Central Counterparties. The Standard, as varied, is the Financial Stability Standard for Central Counterparties (2009.1). The effect of this variation is to exempt an overseas central counterparty from assessment against the Standard, provided it is subject to sufficiently equivalent regulation overseas and able to provide documentary evidence from the regulator that it has met the requirements of that regime. This regime will ensure the robustness of central counterparties providing services to Australian markets, while placing appropriate reliance on overseas regulators so as to avoid unnecessary duplication of regulation. Such reliance is explicitly contemplated in the Corporations Act, with Section 823CA stating that ‘the Reserve Bank may take account of any information and reports that it thinks appropriate, including information and reports from an overseas regulatory authority’.
3. Consultation
On 24 October 2008 the Reserve Bank released a Consultation Document setting out a proposed variation to the Standard that would have the effect of establishing a framework for the regulation of overseas central counterparties operating in Australia. Four submissions were received in response to the Consultation Document. Bilateral consultations were held with the respondents.
In the light of the submissions and subsequent discussion the variation to the Standard incorporates a number of revisions to that originally proposed in the Consultation Document. The main features are:
- exemption from the provisions of the Standard is conditional on the receipt of acceptable documentary evidence from the overseas regulator of the licensee’s compliance with the overseas regime rather than, as initially proposed, self-certification by the central counterparty;
- clarification that, while exempt from the need to comply with the Financial Stability Standard in full, overseas central counterparties licensed in Australia will retain obligations to the Reserve Bank;
- further clarification as to the nature of these obligations; and
- explicit recognition that this framework does not preclude entering into a formal cooperative oversight arrangement with the lead regulator.
Documents
The standards, measures and associated guidance notes are available:
- on the Reserve Bank’s website at www.rba.gov.au/PaymentsSystem/PaymentsPolicy; or
- by telephoning 02 9551 9720; or
- at the office of the Reserve Bank at 65 Martin Place, Sydney NSW 2000 (reference: Senior Manager, Payments System Stability, Payments Policy Department).
Reserve Bank of Australia
SYDNEY
24 February 2009
Overview
The Corporations Act 2001 was enacted to provide a comprehensive legal framework for the operation of corporations in Australia. In 2009, the Reserve Bank of Australia introduced a variation to the Financial Stability Standard for Central Counterparties as part of this Act. This variation was aimed at addressing the need to ensure the robustness of central counterparties providing services to Australian markets while allowing for reliance on sufficiently equivalent overseas regulatory regimes to avoid unnecessary duplication. The policy objective, as stated, is to maintain financial system stability by ensuring that the risks associated with the operations of clearing and settlement facilities are properly identified and controlled, with appropriate reliance on overseas regulatory authorities where equivalent standards are met.
The variation introduced by the Reserve Bank, as outlined in the explanatory statement, establishes a framework for the regulation of overseas central counterparties operating in Australia. This framework includes an exemption for overseas central counterparties from full compliance with the Financial Stability Standard, provided they are subject to equivalent regulation overseas and can provide documentary evidence from their regulator. This approach not only facilitates smoother cross-border operations but also aligns with the broader policy of the Corporations Act to promote financial system stability through effective oversight and cooperation with international regulators.
Scope and Application
The Reserve Bank of Australia Corporations Act 2001 Explanatory Statement pertains to the variation of the Financial Stability Standard for Central Counterparties, aiming to ensure that clearing and settlement facility licensees conduct their operations in a manner that maintains financial system stability. The variation applies to central counterparties that are licensed to operate in Australia, but introduces an exemption for those that are subject to sufficiently equivalent regulation overseas. This exemption is contingent upon the overseas central counterparty providing documentary evidence of compliance from its regulator. The variation does not apply to domestic central counterparties. This legislation extends to the Commonwealth and operates under the authority granted to the Reserve Bank by section 827D(6) of the Corporations Act 2001. The variation is intended to foster the robustness of central counterparties operating in Australia while reducing regulatory duplication by recognising equivalent overseas regulation. The scope of the Act is extended through subordinate instruments such as guidance notes, which provide further detail on the measures and compliance requirements.
Key Provisions
The main operative sections of this legislation, F2009L00714, pertain to the variation of the Financial Stability Standard for Central Counterparties (FSS) as set out in the Corporations Act 2001. Section 827D(6) of the Act grants the Reserve Bank the authority to vary the standards it has determined in writing, and this legislative instrument details a specific variation of the Financial Stability Standard for Central Counterparties (2009.1) (section 2). This variation introduces an exemption for overseas central counterparties provided they are subject to sufficiently equivalent regulation overseas and can provide documentary evidence from the relevant regulator (section 2). The aim of this variation is to ensure that the operations of central counterparties are robust while avoiding unnecessary duplication of regulatory requirements (section 2).
The Act imposes several obligations on parties governed by it. Firstly, it requires that central counterparties identify and control risks associated with their operations (section 2). Furthermore, it mandates that overseas central counterparties seeking exemption from full compliance with the Standard must provide acceptable documentary evidence of their compliance with the equivalent overseas regime (section 2). Additionally, overseas central counterparties remain obligated to the Reserve Bank even if they are exempt from full compliance with the Financial Stability Standard (section 2). Lastly, the Act clarifies that this framework does not preclude formal cooperative oversight arrangements with lead overseas regulators (section 3).
Breach of the obligations set out in the Financial Stability Standard for Central Counterparties could result in various consequences. Although specific penalties are not detailed in this explanatory statement, general provisions in the Corporations Act may apply. For instance, non-compliance with financial services obligations can lead to civil penalties, including fines and potential disqualification from managing corporations. Additionally, serious breaches could result in criminal charges, leading to imprisonment. The exact penalties depend on the nature and severity of the breach, as well as the specific provisions of the Corporations Act that are contravened. It is important for entities to adhere strictly to the requirements to avoid these potential legal repercussions.