The Treasure today announced further consultation on a proposed resolution regime for financial markets infrastructure (FMI’s). Australia was one of sixteen jurisdictions which has no administrative authority responsible for resolution of FMIs. FMIs are defined as multilateral systems used to clear, settle and record financial transactions. They are an essential element enabling financial markets to work smoothly.
- Clearing is a post-trade and pre-settlement function performed by financial market participants to manage trades and associated exposures. Through the legal process of novation, a central counterparty (CCP) interposes itself between counterparties to transactions executed in the markets it serves, becoming principal to each transaction so as to ensure performance of obligations.
- Settlement is the point at which the counterparty exposures associated with a transaction are eliminated. In securities markets, settlement is facilitated by securities settlement facilities (SSFs).
- TRs are facilities that centrally collect and maintain records on over-the-counter (OTC) derivatives transactions and positions for the purpose of making those records available to regulators and, to an appropriate extent, the public.
Internationally, the Financial Stability Board (FSB), the Committee on Payments and Market Infrastructures (CPMI, formerly the Committee on Payment and Settlement Systems (CPSS)) and the International Organization of Securities Commissions (IOSCO) have progressed work on international guidance for FMI recovery and resolution. The FSB adopted the Key Attributes of Effective Resolution Regimes for Financial Institutions (the KAs) in October 2011, and the G20 Leaders endorsed these KAs in November 2011. The FSB subsequently added guidance for applying the KAs to FMIs (the FMI Annex to the KAs) in October 2014. Together, the KAs and the FMI Annex to the KAs identify the powers and limits of a resolution framework for financial institutions, including FMIs. CPMI and IOSCO also published guidance on the development of recovery plans for FMIs in October 2014. The guidance provided in these documents extends to CS facilities and TRs, but not financial markets. The FSB is monitoring jurisdictions’ progress in implementing the KAs, including in respect of FMIs, through a series of peer reviews. The first such review was published in April 2013 and noted that resolution regimes for FMIs were generally less developed than corresponding regimes for banks. Australia was one of sixteen jurisdictions identified in the report as having no administrative authority responsible for resolution of FMIs.
The Australian Government, acting on the advice of the Reserve Bank of Australia (RBA), the Australian Securities and Investments Commission (ASIC), the Australian Prudential Regulation Authority (APRA) (jointly, the Regulators) and the Australian Treasury — seeks stakeholder views on legislative proposals to establish a special resolution regime for clearing and settlement (CS) facilities and trade repositories (TRs), together referred to as financial market infrastructures (FMIs), consistent with international standards. Some of the legislative proposals in this paper relating to directions powers and international regulatory cooperation also extend to operators of domestically incorporated and licensed financial markets. Closing date for submissions is Friday, 27 March 2015.
Although robust risk management significantly reduces the likelihood of an FMI failure, the possibility of such failure is not entirely eliminated. With increasing dependence on centralised infrastructure, motivated in part by regulatory reforms, it is vital that the official sector clarifies how it would address a situation of FMI distress. The particular focus of this consultation paper is on resolution: actions taken by public authorities to either return an FMI to viability or facilitate its orderly wind-down. The associated concept of recovery refers to actions taken by a distressed FMI itself to return to viability. The powers proposed for the resolution authority in relation to FMIs are:
- Statutory management. The power to appoint an individual, company or the resolution authority itself to temporarily administer a distressed FMI in a manner consistent with the objectives of the resolution regime. The statutory manager would assume the powers of the FMI’s board, including carrying out recovery measures and other actions in accordance with the FMI’s rulebook. The exercise of powers by the statutory manager would be overseen by the resolution authority.
- Moratorium on payments to general creditors. The power to suspend an FMI’s payment obligations to general creditors. This would exclude payments made in relation to core FMI activities (such as margin payments and settlement of securities transactions).
- Transfer of operations to a third-party or bridge institution. The power to compulsorily transfer all or part of an FMI’s operations to a willing third-party purchaser, or a temporary bridge institution established by public authorities. A transfer to the latter would be intended as an interim step towards a return to private sector ownership under new governance arrangements.
- Temporary stay on early termination rights. The power to impose a temporary stay of up to 48 hours on termination rights (with respect to future obligations) that may be triggered solely by an FMI’s entry into resolution. It is also expected that FMIs would ensure that such termination rights were not included in their rules or contracts with critical third-party suppliers.
The powers available to the resolution authority have the potential to significantly impact participants and other stakeholders that have dealings with FMIs. The legislative proposals provide a right to compensation from the Commonwealth should participants or other stakeholders be left worse off in resolution than they would have been had the FMI entered general insolvency. The proposals also include an immunity from liability for the resolution authority, statutory manager and others acting in compliance with the directions of the resolution authority. It is envisaged that in some resolution scenarios, there could be a need to draw on public funds to provide temporary liquidity, to ensure the timely disbursement of operating expenses, or in some extreme cases to meet a small shortfall required to complete an FMI’s closeout processes. In each of these cases the Government would seek to recover any expenditure from participants and shareholders of the FMI.
