EXPLANATORY STATEMENT
Statutory Rules 2004 No. 402
Issued by the Parliamentary Secretary to the Treasurer
Payment Systems and Netting Act 1998
Payment Systems and Netting Amendment Regulations 2004 (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 by the Act to be prescribed by regulations or necessary or convenient to be prescribed by such regulations for carrying out or giving effect to the Act.
The Act makes provision in relation to aspects of payment and settlement systems and netting contracts. Systems exist for the settlement of payment obligations, including between banks and between participants in clearing and settlement (CS) facilities. With legal protection, netting is an effective strategy for reducing risk in the payment system – by allowing institutions to pay only their net daily obligations to one another (rather than meeting each obligation) the liquidity required to enable the financial system to operate is significantly minimised. This also enhances the stability of the system.
Subsection 16(2) of the Act affords protection to licensed CS facilities in the event that a party to a transaction goes into external administration. In short, a CS facility which is a central counterparty could only be called on by an administrator to settle any net obligation to the party, rather than settling each outstanding transaction in full. In order to attract this protection, it is necessary for the CS facility concerned to be declared a netting market for the purposes of the Act. The Payment Systems and Netting Regulations 2001 (the Principal Regulations) declared SFE Clearing Pty Limited (SFE Clearing) and CLS Bank International as netting markets.
The purpose of the Regulations is to omit the declaration of SFE Clearing from the Principal Regulations as a consequence of the variation of the Australian CS Facility licence held by SFE Clearing. The Regulations also omit all definitions other than ‘the Act’, since those definitions relate only to the declaration of SFE Clearing.
The definition of ‘netting market’ in section 5 of the Act provides for two ways for an arrangement to be made a netting market, and thus attract the protection afforded by section 16 of the Act:
• an arrangement that is a licensed market or CS facility and is approved by the Minister (paragraph (a) of the definition); or
• an arrangement that is declared by the Principal Regulations to be a netting market (paragraph (b) of the definition).
Paragraph 4(a) of the Regulations declared two aspects of the conduct of SFE Clearing to be a netting market, pursuant to paragraph (b) of the definition of ‘netting market’ in the Act. The Australian CS Facility licence held by SFE Clearing has now been varied to include all aspects of its conduct, and that licensed conduct has now been declared by the Minister to be a netting market, under paragraph (a) of the definition of ‘netting market’ in section 5 of the Act. Paragraph 4(a), and the definitions relating to it, are therefore redundant and are now omitted from the Principal Regulations.
The declaration of CLS Bank International is retained in a new regulation 4.
The Regulations commenced on the date of their notification in the Gazette.
Overview
The Payment Systems and Netting Amendment Regulations 2004 (No. 1) were enacted to amend the Payment Systems and Netting Regulations 2001, reflecting changes in the regulatory status of SFE Clearing Pty Limited. This legislation was introduced by the Parliament of Australia to address the need for updated regulatory declarations in response to modifications in the licensing conditions of clearing and settlement (CS) facilities. The primary objective of these regulations is to ensure that the protections provided by the Payment Systems and Netting Act 1998 remain applicable to relevant financial entities, while also ensuring that the regulatory framework is current and aligned with the operational changes of the CS facilities. The Act aims to maintain the stability and efficiency of the financial system by providing legal protection to netting contracts and ensuring that only net obligations are settled in the event of a party's external administration.
Scope and Application
The Payment Systems and Netting Act 1998 applies to entities that are involved in payment and settlement systems, particularly focusing on the operation and regulation of clearing and settlement (CS) facilities, and the use of netting contracts to manage payment obligations. The Act provides legal protection for these systems, ensuring that in the event of a party going into external administration, a licensed CS facility that is a central counterparty can only be called upon to settle net obligations rather than each outstanding transaction in full. This protection is contingent on the CS facility being declared a netting market under the Act. The Act's jurisdictional reach is at the Commonwealth level, applying across Australia. The Payment Systems and Netting Amendment Regulations 2004 (No. 1) serve to modify the Principal Regulations by removing the declaration of SFE Clearing as a netting market, following the variation of its Australian CS Facility licence to include all aspects of its conduct, which is now approved by the Minister as a netting market. The definition of 'netting market' remains unchanged, allowing for arrangements to be made netting markets either through ministerial approval or by declaration in the regulations. These Regulations commenced on the date of their notification in the Gazette.
Key Provisions
The Payment Systems and Netting Amendment Regulations 2004 (No. 1) primarily concern the amendment of existing regulations under the Payment Systems and Netting Act 1998. Specifically, section 4(a) of these Regulations omits the declaration of SFE Clearing Pty Limited (SFE Clearing) as a netting market, as its Australian Clearing Services Facility (CSF) licence now encompasses all its conduct, which has been approved by the Minister as a netting market (subsection 5(a) of the Act). This change aligns the regulations with the current licensing status of SFE Clearing. Additionally, the Regulations retain the declaration of CLS Bank International as a netting market, as per a new regulation 4 (subsection 5(b) of the Act).
The Regulations impose certain obligations on the parties they govern, primarily concerning the declaration and recognition of netting markets. For SFE Clearing, the key obligation is to ensure that its conduct complies with the updated licensing conditions and ministerial approval as a netting market. For CLS Bank International, the obligation remains to continue operating under the declaration as a netting market, as per the regulations. These obligations are essential for maintaining the legal protections afforded by the Act, particularly in relation to the settlement of payment obligations in the event of external administration of a party to a transaction (subsection 16(2) of the Act).
The Regulations do not explicitly outline specific offences, penalties, or consequences for breach. However, any failure to comply with the Act’s requirements for netting markets, such as not adhering to the ministerial approval or the licensing conditions, could potentially lead to legal consequences. These could include the revocation of the netting market status, which in turn could affect the institution’s ability to operate under the protections afforded by the Act. While the Regulations themselves do not specify penalties, breaches of the Act may be subject to the penalties outlined in the Act, which could include fines or other sanctions as prescribed by the relevant authorities.