Payment Systems and Netting Amendment Regulations 2002 (No. 1) 2002 No. 181
EXPLANATORY STATEMENT
Statutory Rules 2002 No. 181
Issued by the Parliamentary Secretary to the Treasurer
Payment Systems and Netting Act 1998
Payment Systems and Netting Amendment Regulations 2002 (No. 1)
Section 18 of the Payment Systems and Netting Act 1998 (the Act) provides that the Governor-General may make regulations prescribing matters required or permitted to be prescribed by the Act or necessary or convenient to be prescribed for carrying out or giving effect to the Act.
Section 5 of the Act defines a 'netting market'. It states that an arrangement may be declared by the regulations to be a 'netting market' for the purposes of the Act.
Part 5 of the Act applies in relation to 'netting market contracts'. These are defined in section 5 of the Act as contracts entered into in accordance with the rules that govern the operation of a 'netting market' and under which obligations between parties to a contract are netted (other than a contract that is part of an 'approved netting arrangement').
Part 5 of the Act is intended to ensure the effectiveness of 'netting market contracts'. It seeks to preserve the validity of 'netting market contracts' that are governed by Australian law and within the constitutional reach of the Commonwealth Government. It also seeks preserve the validity of 'netting market contracts' on the external administration of a party to the contract where Australian law governs either the external administration or the contract. This prevents transactions on a netting market being unwound because they involve a 'voidable preference'.
CLS Bank International proposes to provide a service for the simultaneous settlement of foreign exchange transactions (which involve exchanging an amount of one currency for an amount of another currency). The main purpose of the proposed service is to eliminate the risk, which can arise when each leg of the transaction is settled separately, that one payment could be made but the corresponding payment not received. The United States Federal Reserve System, in consultation with a number of international central banks, including the Reserve Bank of Australia, will regulate CLS Bank International.
The purpose of the Regulations is to declare the arrangement consisting of the system, for the settlement by CLS Bank International, of payment instructions arising from foreign exchange transactions to be a 'netting market' for the purposes of the Act. This will preserve the validity of 'netting market contracts' entered into in accordance with the rules of CLS Bank International in the event of the external administration of an Australian participant.
A separate regulation has also been made to exempt CLS Bank International's proposed system for the settlement of payment instructions arising from foreign exchange transactions from regulation as a clearing and settlement facility under the Corporations Act 2001.
The Regulations also amend the current declaration that applies to SFE Clearing Corporation Pty Limited (SFE Clearing) in relation to futures contracts entered into on the markets operated by SFE Corporation Limited and Sydney Futures Exchange Limited.
The previous reference to an 'approved futures clearing house' has been replaced with a new reference to the clearing and settlement facilities provided by SFE Clearing under the Australian CS facility licence issued to SFE Clearing on 8 March 2002. This amendment is consistent with the new terminology introduced into the Corporations Act 2001 as a result of the commencement of the Financial Services Reform Act 2001. The Regulations commence on gazettal.
Overview
The Payment Systems and Netting Amendment Regulations 2002 (No. 1) were enacted to address gaps and ensure the effectiveness of financial arrangements involving netting markets, particularly in relation to the external administration of parties to these contracts. The Act, the Payment Systems and Netting Act 1998, was enacted to provide a legal framework for the operation of payment systems and the netting of financial obligations in Australia. The 2002 Amendment Regulations were introduced by the Governor-General under the authority vested in the Payment Systems and Netting Act 1998, aiming to declare specific arrangements as 'netting markets' and thereby ensure the preservation of the validity of netting market contracts during external administration, preventing potential issues like 'voidable preferences' from undermining these contracts. This regulatory measure was introduced in response to the need to align with international financial practices and ensure the stability of financial arrangements within Australia, particularly in light of the proposed operations of CLS Bank International, a new entity designed to manage foreign exchange transactions.
Scope and Application
The Payment Systems and Netting Amendment Regulations 2002 (No. 1) apply to arrangements and contracts involved in the settlement of financial transactions, particularly those involving foreign exchange and futures markets, as governed by the Payment Systems and Netting Act 1998. These regulations aim to preserve the validity of 'netting market contracts', which are contracts where obligations between parties are settled by netting, ensuring that such transactions are not unwound due to external administration of a party involved. The scope of the Act extends to any entity or individual participating in a 'netting market' within Australia, provided that the market's rules comply with Australian law and fall within the Commonwealth's constitutional jurisdiction. This regulation ensures that the integrity and effectiveness of financial transactions are maintained, particularly in the context of cross-border transactions that involve Australian participants. The Regulations declare the system operated by CLS Bank International for settling foreign exchange transactions as a 'netting market', thereby preserving the validity of these contracts under Australian law in the event of external administration of an Australian participant. Additionally, the Regulations amend the declaration relating to SFE Clearing Corporation Pty Limited to reflect changes in terminology under the Corporations Act 2001.
Key Provisions
The Payment Systems and Netting Amendment Regulations 2002 (No. 1) primarily concern the regulation of 'netting market' arrangements under the Payment Systems and Netting Act 1998 (the Act). Section 18 of the Act allows the Governor-General to create regulations that are necessary or convenient to carry out or give effect to the Act. This authority is exercised in these Regulations to declare the CLS Bank International system for the settlement of foreign exchange transactions as a 'netting market' (section 5). These arrangements are designed to ensure the effectiveness of 'netting market contracts', particularly in the context of external administration, ensuring that obligations are honoured and the integrity of financial transactions is maintained.
Under these Regulations, obligations are placed on entities such as CLS Bank International to ensure that their systems and operations comply with the requirements of the Act. Specifically, CLS Bank International must adhere to the rules governing the operation of the declared 'netting market' and ensure that any contracts entered into under its rules are valid and enforceable. The Regulations also require that the system facilitates the simultaneous settlement of foreign exchange transactions, thereby reducing the risk of one payment being made without the corresponding payment being received. This is crucial for maintaining the stability and reliability of financial transactions, particularly in cross-border scenarios.
Failure to comply with the Regulations can lead to several consequences. Under the Payment Systems and Netting Act 1998, breaches of the Act or its Regulations may result in civil or criminal penalties. For instance, section 17 of the Act allows for the imposition of civil penalties for breaches, which can include significant fines. While the exact penalties are not specified in the explanatory statement, they can be severe enough to deter non-compliance. Additionally, there may be other legal ramifications for failing to meet the obligations set out in the Regulations, including potential enforcement actions by relevant authorities. These consequences underscore the importance of adhering to the requirements of the Regulations to avoid legal and financial repercussions.