EXPLANATORY STATEMENT
Select Legislative Instrument 2007 No. 365
Issued by authority of the Minister for Superannuation and Corporate Law
Payment Systems and Netting Act 1998
Payment Systems and Netting Amendment Regulations 2007 (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. The Payment Systems and Netting Regulations 2001 (the Principal Regulations) have been made in accordance with this authority. Section 5 of the Act defines a 'netting market' as an arrangement that may be declared by the regulations.
The purpose of the amendment is to declare payment instructions relating to derivative transactions settled by CLS Bank International (CLS) as a 'netting market' for the purposes of the Act. This amendment will allow eligible Australian currency derivative obligations to be settled in the CLS system, and allow Australian banks to settle eligible derivative obligations in the system in any CLS currency. A separate regulatory amendment, relating to CLS’s exemption from Part 7.3 of the Corporations Act 2001, is being considered concurrently by the Federal Executive Council.
CLS operates a global settlement system which allows financial institutions to settle foreign currency transactions immediately and with finality. CLS is already declared under subregulation 4 of the Principal Regulations to be a ‘netting market’ with respect to foreign exchange transactions. CLS has requested that this declaration be extended to include the settlement of derivative transactions.
The objective of this amendment is for CLS’s system for settling derivative payment instructions to be declared as a ‘netting market’ for the purposes of the Act. Subsequently, derivative transactions settled in this netting market will be defined as ‘netting market contracts’, pursuant to section 5 of the Act. Under section 16 of the Act, this will ensure that these contracts are effective, that is, cannot be unwound regardless of other Australian law. This preserves the validity of contracts settled through this system, and ensures that CLS has a well founded legal basis for operating in the Australian jurisdiction.
CLS and the Reserve Bank of Australia, as the agency responsible for payments systems, have been consulted in the drafting of this instrument and are supportive of the amendment. No further consultation is considered necessary. A preliminary assessment of the regulatory impact has indicated that this amendment has a low or no regulatory impact.
The Act specifies no conditions that need to be satisfied before the power to make the Regulations may be exercised.
The Regulations are a legislative instrument for the purposes of the Legislative Instruments Act 2003. The Regulations commenced on the day after they were registered on the Federal Register of Legislative Instruments.
Authority: Section 18 of the Payment Systems and Netting Act 1998
Overview
The Payment Systems and Netting Amendment Regulations 2007 (No. 1) were enacted to address the need for updating the regulatory framework governing netting markets in Australia. This amendment was introduced to align with the evolving landscape of financial transactions and the specific requirements of modern financial systems. The Payment Systems and Netting Act 1998, enacted by the Australian Parliament, provides the legislative basis for the regulation of payment systems and netting in Australia. The policy objective of this amendment is to enhance the efficiency and security of financial transactions by formally recognising CLS Bank International's system for settling derivative payment instructions as a 'netting market'. This recognition ensures that derivative transactions settled through this system maintain their contractual integrity and are legally protected, thereby facilitating smoother and more reliable financial operations for participating institutions. The Reserve Bank of Australia, as the overseeing agency for payment systems, has endorsed this amendment, reflecting its alignment with broader financial regulatory goals.
Scope and Application
The Payment Systems and Netting Act 1998 applies to the establishment, operation, and regulation of payment systems and netting arrangements within Australia. This Act is primarily concerned with ensuring the stability, efficiency, and integrity of payment systems that facilitate the transfer of funds between financial institutions and other entities. The legislation applies to any person or entity involved in the operation of payment systems, including financial institutions and any other participants in the payment process. The scope of the Act extends to various payment systems and netting arrangements, particularly those that affect the settlement of financial transactions. It also encompasses the conduct and transactions that occur within these systems, aiming to provide a clear legal framework for their operation. The jurisdictional reach of the Act is national, applying across the Commonwealth of Australia, and is intended to harmonise payment systems regulations across the country. While the Act broadly governs payment systems, certain exclusions and exemptions may apply based on specific circumstances or types of transactions, which are detailed in the Act and any subordinate regulations. The Act allows for the creation of subordinate legislation, such as the Payment Systems and Netting Regulations 2001, to provide further detail or extend the application of the Act to new contexts, such as the recent amendment to include CLS Bank International's system for settling derivative transactions as a 'netting market'.
Key Provisions
The Payment Systems and Netting Amendment Regulations 2007 (No. 1) amend the existing Payment Systems and Netting Regulations 2001 by adding a new subregulation that declares payment instructions relating to derivative transactions settled by CLS Bank International as a 'netting market' under section 5 of the Payment Systems and Netting Act 1998 (the Act). This amendment is intended to facilitate the settlement of eligible Australian currency derivative obligations in the CLS system, as well as the settlement of Australian banks' derivative obligations in any CLS currency (Regulation 1). By recognising CLS's system for settling derivative payment instructions as a 'netting market', the amendment ensures that derivative transactions settled in this system will be treated as 'netting market contracts', which are defined under section 16 of the Act as contracts that cannot be unwound regardless of other Australian law. This preserves the validity of these contracts and provides a solid legal foundation for CLS's operations in Australia (section 5 of the Act).
Entities involved in derivative transactions settled through the CLS system, such as financial institutions and banks, must ensure that their transactions comply with the requirements of the Act and the Regulations. This includes adhering to the rules and procedures governing the operation of the CLS netting market, as well as ensuring that the necessary declarations and registrations have been made with the relevant authorities. The amendment also places an obligation on the Reserve Bank of Australia, as the agency responsible for payments systems, to monitor and supervise the operation of the CLS netting market in accordance with the Act and the Regulations.
Breaches of the Act or the Regulations may result in civil or criminal penalties, depending on the nature and severity of the offence. For example, section 22 of the Act provides for civil penalties for non-compliance with the Act or the Regulations, while section 23 provides for criminal penalties for serious breaches of the Act. The maximum penalties for civil and criminal offences under the Act are set out in the relevant sections of the Act and may include fines and/or imprisonment. It is important for entities involved in derivative transactions settled through the CLS system to be aware of their obligations under the Act and the Regulations, and to take steps to ensure compliance to avoid potential penalties and consequences.