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The Financial Markets Infrastructure Act (the Act) came into force on 10 May 2021 and will be phased in over 18 months, during which time key implementation elements will be decided.
As part of that process, the Financial Markets Authority (FMA) and the Reserve Bank of New Zealand (RBNZ) are now seeking feedback on two issues central to their implementation plan:
- the framework for identifying systemically important financial market infrastructures (FMIs), and
- the regulatory requirements which should be applied to them.
Submissions are due by 20 September 2021.
Framework for identifying systemically important FMIs
Financial market infrastructures (FMIs) include payment and securities settlement systems, central securities depositories, central counterparties, and trade repositories. The Act will govern those FMIs which, if disrupted, could undermine the stability of, or confidence in, the whole or a significant part of the financial system.
Section 24 sets out the matters the regulators must take into account in deciding whether an FMI is “systemically important”. These are aligned with international practice and cover five criteria.
| Criterion | Proposed approach |
| Size | Number and value of transactions processed, and number of participants. |
| Type of participants | The importance of direct and indirect participants to the financial system – i.e., if they include central banks. |
| Nature and scope of activities | The markets supported by the FMI, the nature of the FMI’s functions within those markets, and the degree to which the FMI is connected with or dependent on other FMIs. |
| Concentration of financial risk | The FMI’s market share and credit and liquidity exposure, and the proportion of transactions by the two largest participants. |
| Substitutability | Whether the FMI’s services can be substituted adequately by another FMI, the cost of switching and the notice required to effect the switch. |
The regulators’ view is that each factor requires both a quantitative and a qualitative assessment. They do not consider that it would be feasible to specify particular thresholds or ranges for the prescribed matters. Their objective is to be “adaptable” to the possible range of FMIs that they will be required to assess.
FMIs the RBNZ has previously assessed as likely to meet the threshold for “systemic importance” are:
- the Exchange Settlement Account System – used for real time high value inter-bank payments
- the CLS System – the global high value inter-bank payment system used to settle foreign exchange payments
- NZClear – the securities settlement system used to settle fixed interest and equity transactions
- New Zealand Clearing and Depository Corporation – includes a securities settlement system, securities depository and central counterparty for the NZX market, and
- the Settlement Before Interchange system used by New Zealand banks to exchange retail payments.
This list may be added to as a result of the consultation.
Approach to developing standards for designated FMIs
Section 31 of the Act gives the FMA and RBNZ the power to issue standards for designated FMIs and Section 34 sets out a range of matters to be covered. Their intention is to develop a complete set of binding standards by the end of the transition period, rather than issuing standards piecemeal, the objective being clarity.
They propose to develop standards in accordance with three “pillars”.
- Treatment of regulatory requirements for FMIs under the RBNZ Act. “Designated settlement systems” under the Reserve Bank of New Zealand Act are automatically designated FMIs under the FMI Act. The “conditions of designation” under the RBNZ Act will be superseded by the FMI Act.
- Reflecting international criteria for regulation in the standards. The Committee on Payments and Market Infrastructures and the International Organisation of Securities Commissions maintain “Principles for Financial Markets Infrastructures” (PFMI). The PFMI comprise 24 standards reflecting international best practice in managing FMIs.
- Matters not covered by the PFMI. This pillar encompasses additional matters that the regulators consider require “elaboration” beyond the PFMI. They are:
- Contingency plans. The regulators propose that the standards prescribe the content of contingency plans, the way they interact with the FMI rules, the persons responsible for implementing them, how the implementation will be funded, and the provisions for review.
- Breach and outage reporting. The regulators propose that “outages or material incidents” must be reported immediately and breaches as soon as possible.
- Management of cyber risk. The regulators propose to base their approach on the RBNZ’s “Cyber Resilience Guidance” and to introduce “baseline” and “enhanced” level standards.
- Treatment of critical service providers. The regulators propose developing standards which manage outsourcing risk and which define “critical service providers” and regulate the relationship between those providers and designated FMIs.
- Treatment of overseas FMIs. A “substitute compliance” system is envisaged under which an overseas FMI can comply with the standard by demonstrating compliance with an equivalent standard in their home jurisdiction.
- Disclosure of information. The regulators propose replacing the current disclosure obligation (three yearly self-assessments) with an obligation to meet the disclosure framework developed by the Committee on Payments and Market Infrastructures and the International Organisation of Securities Commissions.
Next steps
We have provided links to the relevant documents below. If you would like more information on what is proposed or assistance with a submission please get in touch with one of our experts.
Quick links
Consultation document – Approach to developing standards for financial market infrastructures
