## cr17115

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### INTRODUCTION AND CONTEXT
- The regulatory and oversight framework for Financial Market Infrastructures (FMIs) in New Zealand is undergoing a major reform.
- RBNZ and FMA currently lack sufficient legal powers to identify and address risks building up in FMIs; the regime is voluntary and authorities lack an appropriate toolkit.
- New legislation is proposed following consultations since 2013 and a consultation on crisis management in early 2016; expected to come into effect sometime in 2018.
- Note objective: analyze the proposed regulation and oversight regime for FMIs from a systemic risk perspective, focusing on:
  - Regulation and oversight of FMIs (framework, powers, practices, resources, transparency, adoption of international standards, coordination and cooperation).
  - Crisis management for individual FMIs and system-wide interdependencies, including recovery and resolution arrangements and monitoring of interdependencies.

### FINDINGS ON PROPOSED REGIME AND ALIGNMENT WITH INTERNATIONAL STANDARDS
- Proposed reforms will bring New Zealand broadly on par with international standards.
- Proposed regime will provide:
  - Legal basis for the oversight of all systemically important FMIs.
  - A graduated range of enforcement powers to induce change.
  - Crisis management and regulatory powers enabling assessment against the CPSS-IOSCO Principles for Financial Market Infrastructures (PFMI).
- Planned oversight resources are very limited, which may hamper the use of the new regime to its full potential.

### SUPERVISION PRACTICES AND RESOURCES
- Current oversight staffing and capacity:
  - RBNZ: 2 FTE overseeing FMIs, plus 1 FTE dedicated to policy development for FMIs.
  - FMA: 0.5 FTE.
  - Proposed provisioning: RBNZ indicated possible need to increase staff from 2 to 3–4 FTE from late-2017/early-2018; FMA indicated possible increase from 0.5 FTE to 1 or 1.5 FTE.
- Observed supervisory practice issues:
  - High staff quality but low number of staff results in an ‘ad hoc’ approach; staff do not conduct supervisory standard assessments.
  - Reliance on FMI self-assessments which may not reflect all relevant information.
  - Limited time for analysis of broader themes relevant for financial stability, including cyber resilience, crisis management arrangements, and risks from use of overseas FMIs.
- Comparative resource examples:
  - Norway: Norges Bank staffed with eight staff members; Norwegian FSA employs five FTE on FMI supervision.
  - Reserve Bank of South Africa: FMI oversight department has a staff of at least 8 staff members with additional staff in the securities regulator.
- Recommendation:
  - Significantly step up resources; practices in other central banks may serve as a guideline.
  - Increase number of staff assigned to FMIs in line with increased responsibilities under the new regime to allow for more comprehensive supervisory practices.

### ADOPTION OF PFMI AND TRANSPARENCY
- Recommendation:
  - Adopt the PFMI in secondary legislation to provide a transparent set of detailed requirements to support FMIs, owners, and operators in understanding oversight expectations and to guide drafting of public self-assessments.
  - Adopt the principles of the PFMI explicitly in the legal framework, with high level principles in the new Act and detailed requirements in secondary legislation.
- Transparency observations:
  - RBNZ website includes FMI mandate, oversight responsibilities, policies, speeches, consultation documents, and relevant acts.
  - FMA: No information about FMA’s policies and activities in relation to FMIs is currently available on the FMA’s website.
- Recommendation:
  - FMA publicly disclose on its website its role and responsibilities in relation to oversight of domestic and foreign FMIs.
  - Change the proposed frequency for publication of FMI self-assessments from three to two years.

### ROLE AND COOPERATION OF RBNZ AND FMA
- Allocation of responsibilities:
  - RBNZ is responsible regulator for designated payment systems (ESAS) and monitors smaller payment systems as part of day-to-day oversight.
  - RBNZ and FMA jointly oversee securities systems that are not pure payment systems (NZClear and NZCDC).
  - FMA holds an indirect oversight over ASX Clear (Futures) via the ASX market operator license requirements.
- Cooperation findings:
  - Cooperation between RBNZ and FMA is effective; authorities manage to ‘speak with one voice.’
  - How the FMA brings the market conduct perspective into FMI oversight is not clearly disclosed.
- Recommendation:
  - Further translate authorities’ mandates into day-to-day oversight and increase transparency and accountability by describing, per PFMI principle, which authority is involved and which takes the lead; reflect responsibilities in the MOU.

### CRISIS MANAGEMENT AND INTERDEPENDENCIES
- Proposed crisis management features:
  - RBNZ will be the resolution authority for payment systems; RBNZ and FMA jointly will be resolution authorities for other systemically important FMIs.
  - Framework includes resolution powers, subject to conditions (insolvency, fraud, breach of obligations, or operations threatening financial stability).
  - Powers apply where business continuity plans, recovery and winding down plans are not implemented, fail, or are inadequate.
  - Powers include issuing directions to operators (with joint Ministers’ consent), appointing/replacing/removing directors (with consent), and recommending statutory management by Order in Council.
- Statutory management regime:
  - Combines tools proposed in the FSB Key Attributes for resolution of FMIs.
  - Statutory manager has capacities similar to a bank statutory manager under Part 5 of the RBNZA 1989, including power to place a moratorium on payments to general creditors and to sell or transfer part or all of the business of the FMI in statutory management.
  - Statutory manager expected to respect FMI rules (e.g., loss sharing arrangements) except in very exceptional circumstances.
- Legislative recommendations:
  - Future legislation should include the specific objective of ensuring the continuation of critical operations of the FMI.
  - Do not limit powers to situations where business continuity planning and recovery and winding down plans have not been implemented; apply powers more generally in case of any breach of law or regulations that may pose a threat to the stability of the FMI.
  - A moratorium on payments should not apply to the ordinary flow of payments and settlements processed by a FMI.
  - Ensure continued application of laws and contracts to protect finality of transactions, DVP arrangements, and other legal protections.
- Crisis management operational recommendations:
  - Establish an operational communication platform between New Zealand authorities and the industry; test as part of contingency tests (e.g., Trans-Tasman Council on Banking Supervision) with scenarios that include FMIs.
  - RBNZ to analyze exposure of New Zealand banks to global derivatives markets and foreign FMIs and take action to promote financial system stability if needed.
  - Analyze potential impact of recovery and resolution planning for foreign FMIs on New Zealand’s banks.
  - RBNZ can act through cross-border cooperative arrangements (e.g., oversight committees for CLS and LCH.Clearnet Ltd) and cooperation with Australian authorities regarding ASX Clear (Futures).
  - Establish and test an operational crisis management framework; suggested inclusion of FMIs in industry-wide contingency tests.

### KEY STATISTICS AND SYSTEMIC INDICATORS FOR SELECTED NEW ZEALAND FMIs
- ESAS:
  - Average daily value of payments settled in 2015: 30 billion NZD (12 percent of GDP).
  - ESAS had 19 members by end-2015.
  - ESAS is an RTGS system operated by the RBNZ; settles each payment irrevocably and with finality; hosts reserve accounts and provides mechanism for RBNZ liquidity provision and monetary policy operations.
- NZClear:
  - Average daily settlement value in 2015: 7 billion NZD (3 percent of GDP).
  - NZClear had 128 members by end-2015; settles nearly 1,800 transactions daily on average.
- NZCDC:
  - Average daily value of securities transactions in 2015: 85 million NZD.
  - Average daily value of derivatives transactions in 2015: 900,000 NZD (<0.5 percent).
  - NZCDC had 20 members, of which 15 were clearing members.
  - For 2015: average size of initial margin collected was 25 million NZD equivalent; size of default fund was 20 million NZD (consists fully of NZX capital).
- SBI:
  - Average daily transaction value in 2015: 3.6 billion NZD (more than 2 million transactions).
  - SBI had 8 participants at end-2015; operated by Payments New Zealand (PNZ); net values settled in ESAS.
- HVCS:
  - Average daily transaction value in 2015: 3.6 billion NZD (more than 2 million transactions).
  - HVCS had 13 participants at end-2015; operated by PNZ; a system to clear high value transactions between banks and customers with settlement via ESAS.
- Additional operational figures (Appendix II):
  - ESAS: Number of transactions 2014: 2,734,136; 2015: 2,958,700; Value of transactions (NZD billion) 2014: 7,060; 2015: 7,355; Number of participants End of 2015: 19.
  - HVCS: Number of transactions 2014: 2,291,000; 2015: 2,439,200; Value of transactions (NZD billion) 2014: 5,016; 2015: 5,262; Number of participants End of 2015: 13.
  - SBI: Number of transactions 2014: 460 million; 2015: 478 million; Value of transactions (NZD billion) 2014: 749; 2015: 787; Number of participants End of 2015: 8.
  - NZClear: Number of transactions 2014: 339,488; 2015: 385,219; Value of transactions (NZD billion) 2014: 1,841; 2015: 1,832; Number of participants End of 2015: 128.
  - NZCDC securities transactions cleared and settled: Number 2014: 194,952; 2015: 200,821; Value (NZD billion) 2014: 15.4; 2015: 18.7.
  - NZCDC derivatives transactions cleared and settled: Number 2014: 48,648; 2015: 65,486; Value (NZD billion) 2014: 0.2; 2015: 0.2.
- Concentration:
  - Four largest banks represent nearly 80 percent of total settlement volumes of domestic FMIs (measured in NZD).

### MAJOR FMI PARTICIPANTS, FUNCTIONS, AND INTERCONNECTEDNESS
- Key monetary and market infrastructure figures:
  - 3.6 billion NZD (1.4 percent)
  - 24 billion NZD (9.8 percent)
- Interconnectedness and membership counts (phrasing preserved):
  - 19 direct members, indirectly serving most financial and nonfinancial institutions
  - 128 direct members, indirectly serving other financial and nonfinancial institutions
  - 5–8 direct members (depends on service) and indirectly serving other financial and nonfinancial institutions
  - 8 direct members, indirectly serving households, corporates and financial institutions
  - 13 direct members, indirectly serving households, corporates and financial institutions
- Substitutability / critical linkages:
  - Critical to other FMIs
  - Critical to NZClear, SBI, HVCS, CLS
  - CCP depends
  - CSD within NZX Group
  - Substitutability: Commercial banks
- FMI operators and systems mentioned:
  - NZCDC
  - NZClear
  - HVCS
  - SBI
- Types of markets and functions served:
  - All interbank transactions
  - Bond and equity markets
  - Equity and derivatives markets
  - Interbank settlement retail trades
  - Interbank settlements
  - Other critical functions: Critical for monetary policy operations; Critical for monetary policy operations and collateral management; Relevant for collateral management
  - Settlements for housing market

### PAYMENTS INDUSTRY ORGANIZATION: PNZ
- Structure and role:
  - PNZ is a legal entity established in 2010.
  - Jointly owned by eight banks: ANZ, Westpac, BNZ, ASB, Kiwibank, TSB, HSBC, and Citibank.
  - Operates with a staff of 15.
  - Acts as an industry association and payment system operator.
  - Sets standards and manages membership of the SBI and HVCS.
  - Standard-setting role includes Consumer Electronic Clearing System (CECS) and Paper Clearing System (PCS).
  - Leads the Payments Direction project to develop objectives for future development of the New Zealand payment system.

### FOREIGN FMIs RELEVANT TO NEW ZEALAND
- Overview:
  - New Zealand’s exposure to FMIs operated abroad has increased due to the G20 mandate to clear standardized OTC derivatives through CCPs and report derivatives to trade repositories.
  - New Zealand has not mandated central clearing but large NZ banks are impacted by overseas legislation.
- Relevant foreign FMIs and key figures:
  - CLS:
    - Global multi-currency settlement system to eliminate FX settlement risk due to time-zone differences.
    - Settles transactions in 18 currencies, including the NZD.
  - LCH.Clearnet Ltd:
    - CCP based in the United Kingdom operating Swapclear for OTC interest rate swaps (IRS).
    - Swapclear’s total notional outstanding amount in NZD derivatives was 2.8 trillion NZD, as of 30 June 2015, representing about 63 percent of the NZD IRS market and 93 percent of NZD forward rate agreements.
  - ASX Clear (Futures):
    - Australia-based CCP providing clearing services in NZD interest rate futures and New Zealand energy futures and options traded on the ASX24 market.
  - DTCC Singapore:
    - Trade repository where major New Zealand banks report OTC derivative transactions under Australian reporting rules.
- Recommended RBNZ actions regarding foreign CCPs:
  - (i) Collect information about trading activity of New Zealand banks in OTC derivatives and their exposures in bilaterally and centrally cleared markets.
  - (ii) Analyze the risk waterfall, recovery plans and resolution plans for the foreign CCPs to understand how New Zealand banks may face loss-sharing.
  - (iii) Estimate size of potential losses for New Zealand banks and impact on New Zealand’s financial system.
  - (iv) Participate in fire drills of the supervisory college of LCH.Clearnet Ltd, and if possible of the Crisis Management Group (CMG).
  - Efforts should be made to obtain data from DTCC Singapore (or other trade repositories if needed).
  - Consider providing foreign CCPs with a central bank account in ESAS for settlement in NZD, subject to cooperation agreements and assurances on CCP soundness and supervision.

### DEPENDENCY OF DOMESTIC FMIs ON FOUR MAIN BANKS
- Structure and concentration:
  - FMIs are heavily dependent on the four largest banks in New Zealand, all subsidiaries of Australian parents.
  - Settlement volumes are highly concentrated within the four largest banks representing nearly 80 percent of total settlement volumes of domestic FMIs (measured in NZD).
  - Three out of the four banks are members of the main domestic FMIs (ESAS, NZClear, NZCDC, SBI, and HVCS).
- Risks from bank failure:
  - Liquidation of one of the main banks would put severe stress on all FMIs and the market as a whole.
  - Consequences include exclusion of failed bank from membership, clients needing substitutes to clear and settle, NZCDC potentially losing access to collateral or settlement bank for U.S. dollar settlements, and PNZ governance issues.

### MEASURES, OPERATIONAL ARRANGEMENTS, AND RECOMMENDATIONS
- Open Bank Resolution (OBR) and separation:
  - OBR keeps a distressed bank open for business while placing the cost of failure on shareholders and creditors rather than the taxpayer; the bank reopens under statutory management and customers can access part of their deposits which are government guaranteed.
  - For a New Zealand subsidiary, continuation of operations (even if the parent fails) depends on full separation of businesses, including FMI operations.
- Access to FMI assets and statutory manager discretions:
  - Under current OBR arrangements, statutory manager has discretionary power to decide case by case whether to exempt FMI assets from a haircut.
  - Recommendation: RBNZ may develop ex ante provisions for FMI assets to be excluded from haircutting.
- Use of RBNZ accounts and liquidity facilities:
  - FMIs may hold NZD accounts at the RBNZ; CLS and NZCDC have NZD accounts at the RBNZ.
  - FMIs can access the RBNZ’s standing facility for cash using the overnight reverse repo facility if they hold repo-eligible securities.
  - In practice, NZCDC does not use the RBNZ account to deposit collateral because return on commercial accounts is higher.
  - Recommendation: RBNZ should request NZCDC to apply a more prudent investment policy, e.g., deposit cash collateral at their ESAS account.
- Crisis management and contingency testing:
  - Recommend establishing an operational crisis management framework (the existing Council of Financial Regulators is not a crisis management body).
  - Suggested inclusion of FMIs in industry-wide contingency tests (e.g., Trans-Tasman Council of Banking Supervision scenarios) with assumed communication flows between authorities and FMIs.

### DESIGNATION REGIME, POWERS, AND ENFORCEMENT
- Designation regime:
  - FMIs meeting systemic criteria would be required to be designated; non-systemic FMIs could opt in to obtain legal protection for finality and netting.
- Information powers:
  - RBNZ can require information from operators or participants of a payment system and may require audited information (Reserve Bank Act 5B).
  - For designated systems, failure to supply information is an offence (RBNZA 5C 156ZL).
  - The RBNZ and FMA would have power to obtain information from operators, participants and infrastructure providers of FMIs, including from non-designated FMIs, where believed necessary or desirable.
- Powers related to FMI rules:
  - Designated FMIs must notify RBNZ and FMA of proposed rule amendments (RBNZA 5C 156ZB); joint regulators may disallow changes to system rules (RBNZA 5C 156ZC).
  - Failure to notify is not an offence.
  - Regulators could request or, in limited circumstances, direct rule changes to prevent potential adverse impacts.
- Investigative and enforcement powers:
  - RBNZ and FMA currently have no investigative powers; proposed powers include requiring independent reports, and entering and searching places with a warrant subject to constraints.
  - Regulators can issue public warnings and enter into enforceable undertakings.
  - Failure of designated systems to supply information is an offence with penalties (RBNZA 5C 156ZQ).
  - Non-compliance with designation conditions is not itself an offence; revocation of designation is available (RBNZA 5C 156ZE) but “softer” remedial powers are limited.
  - Administrative, criminal and civil remedies under FMCA 2013 would also apply.

### SUPERVISORY THEMES FOR FURTHER ANALYSIS
- Cyber resilience of FMIs:
  - Cyber security measures could be explicitly addressed within supervisory approach; RBNZ has developed an approach towards banks and supports industry-led solutions and coordination under the Government’s National Cyber Security Strategy.
- Implementation of a crisis management regime for FMIs:
  - Implement through preparation of resolution strategies and operational plans.
- Fine tuning approach to CCPs:
  - Explicitly address CCP-specific issues in standard assessments (e.g., model validations by independent experts; monthly reporting).
  - Analyze potential impact of failure of a foreign CCP using transaction data from TRs.
- Critical Service Providers (CSPs):
  - PFMI expectations for CSPs are in Annex F; CPMI-IOSCO assessment methodology published December 2014.
  - SBI and HVCS highly dependent on SWIFT; ESAS plans to implement a new settlement system from an external technology provider.
  - RBNZ’s final proposal: designated FMIs required to be reasonably satisfied that core infrastructure providers meet principles-based requirements based upon Annex F.
  - Recommendation: RBNZ and FMA should include assessment of CSPs explicitly in regular standards assessments of designated FMIs.

### SUMMARY OF RECOMMENDATIONS (selected, with timing and authorities as stated)
- Pursue adoption and implementation of proposed legislation to improve FMI regulation and oversight. Timing: ST. Authorities: RBNZ, FMA, Treasury.
- Adopt the PFMI through detailed requirements in secondary legislation (paragraph 14). Timing: MT. Authorities: RBNZ, FMA.
- Formalize supervisory practices, conduct standard assessments, and regular monitoring of the FMI landscape (paragraph 17). Timing: MT. Authorities: RBNZ, FMA.
- Increase resources significantly (paragraphs 21, 22). Timing: MT. Authorities: RBNZ, FMA.
- Adapt MOU between RBNZ and Treasury to include FMIs and clarify roles (paragraph 15). Timing: ST. Authorities: RBNZ, Treasury.
- Change frequency of FMI self-assessments from three to two years (paragraph 18). Timing: ST. Authorities: RBNZ, FMA.
- Publicly disclose oversight responsibilities and policies (paragraph 24). Timing: ST. Authority: FMA.
- Enhance compliance of designated FMIs with PFMI requirements (paragraph 26). Timing: MT. Authorities: RBNZ, FMA.
- Translate mandates into day-to-day oversight responsibilities (paragraph 29). Timing: ST. Authorities: RBNZ, FMA.
- Streamline cooperation arrangements with Australian authorities (paragraph 31). Timing: ST. Authorities: RBNZ, FMA.
- Develop and publish formal policy for oversight of foreign FMIs (paragraph 32). Timing: ST. Authorities: RBNZ, FMA.
- Broaden use of crisis management powers beyond failures of business continuity/recovery plans (paragraph 36). Timing: ST. Authorities: RBNZ, FMA.
- Reflect specific features of FMI resolution in proposed legislation (paragraph 37). Timing: ST. Authorities: RBNZ, FMA.
- Pursue protection for assets of FMIs in bank accounts during crisis (paragraphs 41, 42). Timing: MT. Authority: RBNZ.
- Establish and test an operational crisis management framework (paragraphs 43, 44). Timing: MT. Authorities: RBNZ, FMA.
- Analyze exposures to OTC derivatives market and foreign CCPs (paragraph 47). Timing: ST. Authorities: RBNZ, FMA.

*Source: IMF staff technical note — Executive Summary of FMI oversight and crisis management in New Zealand.*

### EXECUTIVE SUMMARY ________________________________________________________________________________  5

### EXECUTIVE SUMMARY

### INTRODUCTION AND CONTEXT
- The regulatory and oversight framework for Financial Market Infrastructures (FMIs) in New Zealand is undergoing a major reform.
- The Reserve Bank of New Zealand (RBNZ) and the Financial Markets Authority (FMA) currently lack sufficient legal powers to identify and address risks building up in FMIs, partly because the regime is voluntary and the authorities do not have the appropriate toolkit to pursue their oversight objectives.
- The authorities are proposing a new regime, following industry consultations since 2013 and a consultation paper on crisis management issued early 2016. It is expected that the new legislation would come into effect sometime in 2018.
- The main objective of the note is to analyze the proposed regulation and oversight regime for FMIs in New Zealand from a systemic risk perspective, using international standards and good practices, focusing on:
  - Regulation and oversight of FMIs (framework, powers, practices, resources, transparency, adoption of international standards, coordination and cooperation).
  - Crisis management arrangements for individual FMIs and system wide interdependencies, including recovery and resolution arrangements and monitoring of interdependencies.

### FINDINGS ON PROPOSED REGIME AND ALIGNMENT WITH INTERNATIONAL STANDARDS
- The proposed reforms will bring New Zealand broadly on par with international standards.
- The proposed regime will provide:
  - Legal basis for the oversight of all systemically important FMIs.
  - A graduated range of enforcement powers to induce change.
  - Crisis management and regulatory powers enabling assessment against the CPSS-IOSCO Principles for Financial Market Infrastructures (PFMI).
- Planned oversight resources are very limited, which may hamper the use of the new regime to its full potential.

### SUPERVISION PRACTICES AND RESOURCES
- Current oversight staff quality is high but the low number of staff results in an ‘ad hoc’ approach.
- Unlike practices abroad, staff do not conduct supervisory standard assessments.
- Disclosure of self-assessments by FMIs may not necessarily reflect all relevant information for members to assess risks.
- Staff have limited time for analysis of broader themes relevant for financial stability, including:
  - Cyber resilience of FMIs.
  - Crisis management arrangements.
  - Risks related to the use of overseas FMIs.
- Recommendation: Significantly step up resources; practices in other central banks may serve as a guideline.

### ADOPTION OF PFMI AND TRANSPARENCY
- Recommendation: Adopt the PFMI in secondary legislation to provide a transparent set of detailed requirements to:
  - Support FMIs, owners, and operators in understanding oversight expectations.
  - Guide the drafting of public self-assessments.
  - Provide transparency to the industry and allow consistent implementation among all systemically important FMIs.

### ROLE OF THE FMA
- Cooperation between the RBNZ and FMA is effective and the authorities manage to ‘speak with one voice.’
- How the FMA brings the market conduct perspective into FMI oversight is not clearly disclosed.
- Recommendation: Further translate authorities’ mandates into day-to-day oversight and increase transparency and accountability.
- Recommendation: FMA publicly disclose on its website its role and responsibilities in relation to the oversight of domestic and foreign FMIs.

### CRISIS MANAGEMENT AND INTERDEPENDENCIES
- The proposed crisis management regime is broadly in line with the Key Attributes of the Financial Stability Board (FSB) and the statutory management regime combines various tools for FMI resolution.
- Future legislation should include the specific objective of ensuring the continuation of critical operations of the FMI.
- Specific matters to include in legislation:
  - A moratorium on payments should not apply to the ordinary flow of payments and settlements processed by a FMI.
  - The need for continued application of the laws and contracts to ensure finality of transactions, risk management arrangements, and other legal protections.
- The RBNZ could pursue ways to protect assets of a FMI kept in bank accounts during a crisis.
- Crisis management arrangements should also cover broader system wide risks due to FMIs’ interdependencies with members and the broader financial system.
- Recommendations:
  - Establish an operational communication platform between New Zealand authorities and the industry; test as part of contingency tests (e.g., Trans-Tasman Council on Banking Supervision) with scenarios that include FMIs.
  - RBNZ to analyze exposure of New Zealand banks to global derivatives markets and foreign FMIs and take action to promote financial system stability if needed.
  - Analyze the potential impact of recovery and resolution planning for foreign FMIs on New Zealand’s banks.
  - RBNZ can act through cross-border cooperative arrangements (e.g., oversight committees for CLS and LCH.Clearnet Ltd) and cooperation with Australian authorities regarding ASX Clear (Futures).

### KEY STATISTICS AND SYSTEMIC INDICATORS FOR SELECTED NEW ZEALAND FMIs
- ESAS:
  - Average daily value of payments settled in 2015: 30 billion NZD (12 percent of GDP).
  - ESAS had 19 members by end-2015.
  - ESAS is an RTGS system operated by the RBNZ; settles each payment irrevocably and with finality; backbone of the New Zealand financial system; hosts reserve accounts and provides mechanism for RBNZ liquidity provision and monetary policy operations.
- NZClear:
  - Average daily settlement value in 2015: 7 billion NZD (3 percent of GDP).
  - NZClear supports DVP settlement with cash settlement in ESAS.
  - NZClear had 128 members by end-2015; settles nearly 1,800 transactions daily on average.
- NZCDC:
  - Average daily value of securities transactions in 2015: 85 million NZD.
  - Average daily value of derivatives transactions in 2015: 900,000 NZD (<0.5 percent).
  - NZCDC had 20 members, of which 15 were clearing members.
  - For 2015: average size of initial margin collected was 25 million NZD equivalent; size of default fund was 20 million NZD (consists fully of NZX capital).
- SBI:
  - Average daily transaction value in 2015: 3.6 billion NZD (more than 2 million transactions).
  - SBI had 8 participants at end-2015; operated by Payments New Zealand (PNZ); net values settled in ESAS.
- HVCS:
  - Average daily transaction value in 2015: 3.6 billion NZD (more than 2 million transactions).
  - HVCS had 13 participants at end-2015; operated by PNZ; a system to clear high value transactions between banks and customers with settlement via ESAS.

### RECOMMENDATIONS FOR FMI SUPERVISION AND CRISIS MANAGEMENT (FROM TABLE 1)
- Recommendations for the oversight of FMIs:
  - Pursue the adoption and implementation of the proposed legislation to improve the regulation and oversight of FMIs in New Zealand. Timing: ST. Authorities: RBNZ, FMA, Treasury.
  - Adopt the PFMI through detailed requirements in secondary legislation (paragraph 14). Timing: MT. Authorities: RBNZ, FMA.
  - Formalize supervisory practices, in particular by conducting standard assessments, and regular monitoring of the FMI landscape (paragraph 17). Timing: MT. Authorities: RBNZ, FMA.
  - Increase resources significantly (paragraphs 21, 22). Timing: MT. Authorities: RBNZ, FMA.
  - Adapt the existing memorandum of understanding (MOU) between the RBNZ and Treasury by including FMIs, clearly stating the roles of each organization, and harmonizing cooperation between the authorities for the different types of supervised entities (paragraph 15). Timing: ST. Authorities: RBNZ, Treasury.
  - Change, in the proposed regime, the frequency of FMI self-assessments from three to two years (paragraph 18). Timing: ST. Authorities: RBNZ, FMA.
  - Publicly disclose oversight responsibilities and policies (paragraph 24). Timing: ST. Authority: FMA.
  - Enhance compliance of designated FMIs with PFMI requirements (paragraph 26). Timing: MT. Authorities: RBNZ, FMA.
  - Translate mandates into day to day oversight responsibilities (paragraph 29). Timing: ST. Authorities: RBNZ, FMA.
  - Streamline cooperation arrangements with Australian authorities (paragraph 31). Timing: ST. Authorities: RBNZ, FMA.
  - Develop and publish formal policy for oversight of foreign FMIs (paragraph 32). Timing: ST. Authorities: RBNZ, FMA.
- Recommendations for crisis management and interdependencies:
  - Broaden the use of crisis management powers beyond a failure in business continuity plans / recovery and orderly winding down plans (paragraph 36). Timing: ST. Authorities: RBNZ, FMA.
  - Reflect specific features of FMI resolution in the proposed legislation for FMI crisis management (paragraph 37). Timing: ST. Authorities: RBNZ, FMA.
  - Pursue protection for assets of FMIs in bank accounts during crisis (paragraphs 41, 42). Timing: MT. Authority: RBNZ.
  - Establish and test an operational crisis management framework (paragraphs 43, 44). Timing: MT. Authorities: RBNZ, FMA.
  - Analyze exposures to OTC derivatives market and foreign CCPs (paragraph 47). Timing: ST. Authorities: RBNZ, FMA.

*Source: IMF staff technical note — Executive Summary of FMI oversight and crisis management in New Zealand.*

### 3.6 billion

### 3.6 billion

### Major FMI participants, functions, and interconnectedness
- Key monetary and market infrastructure figures:
  - 3.6 billion NZD (1.4 percent)
  - 24 billion NZD (9.8 percent)
- Interconnectedness and membership counts (preserve phrasing):
  - 19 direct members, indirectly serving most financial and nonfinancial institutions
  - 128 direct members, indirectly serving other financial and nonfinancial institutions
  - 5–8 direct members (depends on service) and indirectly serving other financial and nonfinancial institutions
  - 8 direct members, indirectly serving households, corporates and financial institutions
  - 13 direct members, indirectly serving households, corporates and financial institutions
- Substitutability / critical linkages:
  - Critical to other FMIs
  - Critical to NZClear, SBI, HVCS, CLS
  - CCP depends
  - CSD within NZX Group
  - Substitutability: Commercial banks
- FMI operators and systems mentioned:
  - NZCDC
  - NZClear
  - HVCS
  - SBI
- Types of markets and functions served:
  - All interbank transactions
  - Bond and equity markets
  - Equity and derivatives markets
  - Interbank settlement retail trades
  - Interbank settlements
  - Other critical functions: Critical for monetary policy operations; Critical for monetary policy operations and collateral management; Relevant for collateral management
  - Settlements for housing market

### Payments industry organization: PNZ
- Structure and role:
  - PNZ is a legal entity established in 2010
  - Jointly owned by eight banks: ANZ, Westpac, BNZ, ASB, Kiwibank, TSB, HSBC, and Citibank
  - Operates with a staff of 15
  - Acts as an industry association and payment system operator
  - Sets standards and manages membership of the SBI and HVCS
  - Standard-setting role includes Consumer Electronic Clearing System (CECS) and Paper Clearing System (PCS)
  - Leads the Payments Direction project to develop objectives for future development of the New Zealand payment system

### Foreign FMIs relevant to New Zealand
- Overview: New Zealand’s exposure to FMIs operated abroad has increased, largely due to the G20 mandate to clear standardized OTC derivatives through CCPs and report derivatives to trade repositories. New Zealand has not mandated central clearing but large NZ banks are impacted by overseas legislation.
- Relevant foreign FMIs:
  - CLS:
    - Global multi-currency settlement system to eliminate FX settlement risk due to time-zone differences
    - Settlement service provided by CLS Bank settles both legs of an FX trade simultaneously and guarantees finality
    - Settles transactions in 18 currencies, including the NZD
  - LCH.Clearnet Ltd:
    - CCP based in the United Kingdom operating Swapclear for OTC interest rate swaps (IRS)
    - The largest four New Zealand banks are increasingly using LCH.Clearnet Ltd for clearing NZD IRS, currently as indirect members but some potentially as direct members
    - Swapclear’s total notional outstanding amount in NZD derivatives was 2.8 trillion NZD, as of 30 June 2015, representing about 63 percent of the NZD IRS market and 93 percent of NZD forward rate agreements
  - ASX Clear (Futures):
    - Australia-based CCP providing clearing services in NZD interest rate futures, including 90-day bank bill futures, 3-year and 10-year Government Bonds, and New Zealand energy futures and options traded on the ASX24 market
    - Contracts are both exchange-traded as well as OTC
    - Several New Zealand banks are indirect participants and access ASX Clear Futures through international investment banks to clear NZD futures
  - DTCC Singapore:
    - Trade repository where major New Zealand banks report OTC derivative transactions under Australian reporting rules and in line with G20 requirements

### Overview of supervisory and oversight framework
- Responsible authorities:
  - RBNZ and FMA are the authorities responsible for regulation and oversight of FMIs
  - RBNZ is currently the responsible regulator for designated payment systems, i.e., ESAS, and other payment systems
  - RBNZ and FMA jointly oversee securities systems that are not pure payment systems, i.e., NZClear and NZCDC
  - RBNZ monitors smaller payment systems as part of day-to-day oversight
- Legislative and policy framework:
  - Reserve Bank of New Zealand Act 1989 (RBNZA) assigns RBNZ responsibility for promoting the maintenance of a sound and efficient financial system and contains provisions on oversight of payments and settlement systems
  - Financial Market Conduct Act (FMCA) contains the main objective of the FMA: to promote and facilitate the development of fair, efficient, and transparent financial markets
  - Part 5B ‘Oversight of Payment Systems’ specifies oversight powers of the RBNZ on payment systems and requirements for payment systems
  - Part 5C ‘Designation Regime’ governs oversight powers of the RBNZ and FMA on designated settlement systems and specifies requirements for these systems
  - Two policy documents issued in March 2015: “Oversight of Financial Market Infrastructures in New Zealand” (FMI1) and “Designation and Oversight of Designated Settlement Systems” (DSS1)
  - The proposed regime will replace Part 5B and 5C of the RBNZA and require modifications to FMI1 and DSS1
- Table summary of responsible authority per FMI (preserve categorization):
  - RBNZ: Designated settlement systems (RBNZA Part 5C): ESAS, CLS; Non-designated systems (RBNZA Part 5B): SBI, HVCS, other payment system operators and payment service providers
  - RBNZ and FMA: NZClear, NZCDC
  - FMA: ASX Clear (Futures) (license ASX24) *
  - Note: *The FMA has an indirect oversight over ASX Clear (Futures) Limited due to the requirements in the ASX market operator license issued by the FMA; the license states that the ASX must maintain existing clearing and settlement facilities and notify the FMA of any proposed amendments to rules and procedures.

### Analysis of selected issues: Oversight of FMIs (findings)
- High-level assessment objective:
  - To analyze alignment of current and proposed supervisory frameworks with the five responsibilities of the PFMI and assess plans to revamp the supervisory framework, identify gaps that enable systemic risk buildup, and make recommendations
- Findings on regulation, oversight, powers, and resources (Responsibilities A and B):
  - Current regime limitations:
    - Section 1A of the RBNZA gives RBNZ an interest in all FMIs but current legislation provides only limited powers relating to FMIs
    - No explicit powers relating to oversight of CCPs that are not part of a designated settlement system and of trade repositories
    - Authorities have limited legal backing to engage formally in oversight of foreign CCPs
  - Non-mandatory regime consequences:
    - The regime is not mandatory; important FMIs such as SBI and HVCS have chosen not to be designated
    - Authorities lack legal backing to induce change where necessary to mitigate systemic risks
  - Enforcement power deficiencies:
    - Authorities can require information but induce change for non-designated systems mostly through moral suasion
    - Enforcement powers for designated systems are stronger but lack a graduated range of oversight powers and crisis management powers
    - Non-compliance with designation conditions is not itself an offence; revocation of designation is ultimately available but “softer” powers are limited
  - Regulatory powers absence:
    - Authorities do not have regulatory powers to impose detailed technical requirements on FMIs beyond general RBNZA and designation conditions
    - Adoption of the PFMI cannot be effectively imposed or consistently implemented across all systemically important FMIs under current law
  - Systemic risk exposures:
    - RBNZ and FMA currently lack sufficient legal backing and powers to identify and address risks building up in FMIs, creating potential negative externalities
    - Failures of privately operated FMIs (SBI, HVCS, NZCDC) could cause nationwide inability to settle payments, liquidity pressures within banks, social discomfort, closure of NZX, and credit and liquidity losses at clearing members
    - Future scenarios: NZCDC volumes may grow or NZClear may be sold to a private operator — creating potential for risk buildup if FMIs are not subject to a solid regulatory regime
  - Proposed designation regime benefits:
    - Would provide RBNZ and FMA power to identify systemically important FMIs using their information powers
    - Would allow inclusion of CCPs and Trade Repositories in oversight
    - FMIs meeting systemic criteria would be required to be designated; non-systemic payment and settlement systems could opt in for designation to obtain legal protection for finality and netting
    - Authorities would have regulatory powers to impose the PFMI on all systemically important FMIs consistently, obtain information from all FMIs, and for systemically important FMIs have powers to disallow rule changes, require rule changes, carry out investigations, enforce, and manage crises
- Resource and supervisory practice issues:
  - Quality of oversight staff is high but staff resources are limited
  - Limited resources may lead to an ‘ad hoc’ supervisory approach, reliance on self-assessments, and limited direct standard assessments by authorities
  - Authorities rely fully on home supervision of non-domestic systemically important FMIs (e.g., CLS)
  - Scarce resources limit time to analyze broader financial stability issues and identify all relevant risks within designated FMIs or system-wide

### Recommendations (policy actions and supervisory enhancements)
- Legal and regulatory changes:
  - Adopt the principles of the PFMI explicitly in the legal framework, with high level principles in the new Act and detailed requirements in secondary legislation to provide clear and consistent requirements
- Coordination and crisis arrangements:
  - Change coordination arrangements between RBNZ and Treasury regarding FMIs; extend scope of the existing MOU of 2012 to explicitly include FMIs and state responsibilities of different authorities in normal and crisis times
  - Recommended MOU roles: RBNZ, together with FMA, as overseer and resolution authority of FMIs; Treasury to provide advice to the Minister on recommendations regarding resolution of systemically important FMIs
  - In normal times, RBNZ and FMA should be independent in exercising oversight powers in relation to FMIs; in crisis times Treasury provides advice to the Minister on RBNZ/FMA recommendations regarding resolution
- Supervisory practice formalization:
  - Conduct standard assessments of FMIs (recommended frequency example: on a two-year basis)
  - Use FMI self-assessments as a starting point for thorough supervisory assessments against the PFMI covering risk management, governance arrangements, and other relevant features
  - Produce plans to implement improvements with defined timetables where gaps and issues are identified
  - Develop a ‘horizon scanning’ approach to identify FMIs that would meet designation criteria but are not yet designated
  - Develop an annual oversight plan outlining planned assessments and specific oversight themes
  - Consider drafting an annual oversight report for publication (e.g., as part of RBNZ and FMA annual reports) reflecting oversight activities, achievements, and policies
- Disclosure framework frequency:
  - Change the proposed frequency for publication of FMI self-assessments: reduce the proposed three-year publication frequency to two years to align with international requirements (see CPSS-IOSCO Disclosure Framework and Assessment Methodology, December 2012)

*Source: IMF staff report extracts on New Zealand financial market infrastructures and oversight (cr17115 - 3.6 billion).*

### 19. As part of a more formalized supervisory approach the following themes and topics

### 19. As part of a more formalized supervisory approach the following themes and topics

### Supervisory themes for further analysis
- Cyber resilience of FMIs
  - Cyber security measures could be explicitly addressed within the supervisory approach for FMIs.
  - The RBNZ has developed an approach towards banks, supporting industry-led solutions and strengthening channels for enhanced cyber engagement and coordination amongst financial sector participants in cooperation with other agencies responsible for implementing the Government’s National Cyber Security Strategy.
- Implementation of a crisis management regime for FMIs
  - Could be implemented through preparation of resolution strategies and operational plans (see also Section B on Crisis Management).
- Fine tuning of the approach to CCPs
  - Explicitly address CCP specific issues as part of a standard assessment (e.g., model validations by independent experts may be reviewed; monthly reporting requirements).
  - Analyze potential impact of the failure of a foreign CCP, for example through transaction data from TRs (see also Section B on Crisis Management).

### Critical Service Providers (CSPs)
- PFMI expectations for CSPs are included in Annex F; CPMI-IOSCO published an assessment methodology in December 2014.
- Outsourcing is a key issue for New Zealand FMIs:
  - SBI and HVCS are highly dependent on SWIFT.
  - ESAS plans to implement a new settlement system from an external technology provider.
- RBNZ’s final proposal: designated FMIs required to be reasonably satisfied that core infrastructure providers meet certain principles-based requirements closely based upon Annex F of the PFMIs.
- Recommendation:
  - RBNZ and FMA should include an assessment of CSPs explicitly in their regular standards assessments of designated FMIs.

### Oversight staffing and resourcing
- Current staff resources:
  - RBNZ: 2 FTE overseeing FMIs, plus 1 FTE dedicated to policy development for FMIs.
  - FMA: 0.5 FTE.
- Comparative examples:
  - Norway: Norges Bank staffed with eight staff members; Norwegian FSA employs five FTE on FMI supervision.
  - Reserve Bank of South Africa: FMI oversight department has a staff of at least 8 staff members with additional staff in the securities regulator.
- Proposed change in workload and resource needs:
  - Number of designated FMIs expected to increase from four (three domestic and one foreign FMI) to nine designated FMIs (five domestic and four foreign FMIs).
  - RBNZ provisionally indicated a possible need to increase staff from 2 to 3–4 FTE from late-2017/early-2018.
  - FMA provisionally indicated a possible increase from 0.5 FTE to 1 or 1.5 FTE.
- Recommendation:
  - Increase number of staff assigned to FMIs in line with increased responsibilities under the new regime to allow for more comprehensive supervisory practices.

### Transparency (Responsibility C)
- RBNZ disclosure practices:
  - RBNZ website includes information related to FMIs: mandate, oversight responsibilities, policies, speeches, consultation documents on proposed supervisory framework for FMIs, crisis management, and summary of consultation responses.
  - Relevant acts governing supervision and oversight are publicly available.
- FMA transparency gap:
  - No information about the FMA’s policies and activities in relation to FMIs is currently available on the FMA’s website (neither for domestic FMIs nor for FMIs abroad).
- Recommendation:
  - FMA should improve transparency by disclosing its responsibilities on its own website to align with Responsibility C and promote clear expectations and accountability.

### Implementation of the PFMI and Chinese Walls within the RBNZ (Responsibility D)
- Overall implementation status:
  - Authorities have publicly stated adoption of the PFMI, but current oversight framework and supervisory practices do not support full and consistent implementation because (i) not all systemically important FMIs are subject to oversight, and (ii) authorities lack sufficient resources to assess FMIs against the PFMI and address gaps in a reasonable timeframe.
  - Proposed framework should allow PFMI requirements to be adopted and applied to all systemically important FMIs, but full implementation requires resources to conduct regular standards assessments.
- General compliance view:
  - FMIs in New Zealand seem compliant with PFMI principles to a large extent. Further work needed to ensure full compliance, particularly with newer requirements.
- Specific PFMI principle gaps identified:
  - Principle 19 (tiered participation): none of the FMIs are sufficiently able to identify risks related to indirect participants; FMIs should identify types of risk from tiered participation and monitor risk concentrations.
  - Principle 3 (recovery planning): FMIs have not developed recovery plans for extreme but plausible scenarios beyond default of several clearing members and operational failures; not all FMIs have sufficiently identified risks related to commercial banks performing multiple roles (collateral agent, liquidity provider, clearing member).
  - Principles 13 and 17 (default management and business continuity testing): most FMIs do not conduct testing with their participants.
  - Principle 14: the CCP of NZCDC does not apply segregation of home and client accounts for clearing members active in the cash market.
  - Principle 2: not all FMIs have established a risk management function and/or a Board risk committee.
- RBNZ organizational arrangements to manage conflicts:
  - RBNZ separates oversight and operator functions into different departments; senior management report to different Deputy Governors with lines converging at the Governor.
  - Oversight function publishes oversight policies; FMA leads communications with NZClear while RBNZ leads with NZCDC.

### Cooperation among authorities (Responsibility E)
- Domestic cooperation:
  - Domestic cooperation between RBNZ and FMA is effective for day-to-day oversight and supervision of designated settlement systems.
  - No single lead overseer for New Zealand except for payment systems subject only to RBNZ oversight.
  - Where FMIs are overseen jointly, authorities must agree to an action before powers can be exercised.
  - RBNZ and FMA signed an MOU to formalize cooperation for joint oversight.
  - Regulators bring different statutory objectives: FMA primarily responsible for conduct; RBNZ for financial stability.
  - Frequent and constructive communication avoids inconsistencies and gaps; engagement with system operators is carried out jointly.
- Recommendation:
  - Authorities should further elaborate how different mandates translate into day-to-day oversight by describing, per PFMI principle, which authority is involved, how, and which authority takes the lead; reflect responsibilities in the MOU to increase transparency and accountability.
- International cooperation:
  - Systemically important FMIs based in other jurisdictions include CLS, ASX Clear Futures, LCH.Clearnet Ltd, and DTCC Singapore.
  - Steps taken to establish cooperative oversight arrangements: information-sharing arrangements and direct contact with home regulators.
  - RBNZ is a member of the international Oversight Committee for CLS; oversight of CLS conducted cooperatively by relevant central banks according to the Cooperative Oversight Arrangement protocol.
  - RBNZ has an MOU with the Reserve Bank of Australia to cooperate on oversight of cross-border clearing organisations (facilitates exchange of information on ASX Clear (Futures)); RBNZ and RBA meet annually to discuss CCP matters.
  - RBNZ and FMA have an MoU with the Bank of England for oversight of LCH.Clearnet Ltd, enabling RBNZ participation in the global supervisory college for LCH.Clearnet Ltd.
  - No formal agreement yet with the Monetary Authority of Singapore regarding oversight of DTCC Singapore.
- Recommendation on ASX Clear (Futures):
  - Streamline arrangements. FMA issued a license for ASX24 to provide services to New Zealand members; license includes requirements related to ASX Clear (Futures) as CCP for ASX24.
  - FMA has not concluded a dedicated MOU with ASIC for joint supervision of ASX Clear (Futures) nor developed other activities related to the license.
  - Recommendation: include the FMA and ASIC in the RBNZ/RBA MOU for CCPs located in Australia to allow both RBNZ and FMA to receive information relevant for their responsibilities.
- Recommendation on foreign FMI oversight policy:
  - Develop and publish a formal policy approach for oversight of foreign FMIs that outlines objectives of cooperation agreements and minimum activities authorities intend to undertake, limited by resource restrictions and limited powers abroad, with activities aimed at identifying risks that foreign FMIs pose to New Zealand and protecting national interests (see also Section B on Crisis Management and Interdependencies, paragraphs 46 and 47).

### Crisis management and interdependencies (beginning of Section B)
- Scope of analysis:
  - Crisis management arrangements for individual FMIs and system-wide interdependencies, including recovery and resolution arrangements aimed at sustaining critical operations while avoiding taxpayer-funded bailouts.
  - Also covers crisis measures to manage dependency of domestic FMIs on the four main banks in New Zealand (all with Australian parents) and potential impact of a crisis in a non-domestic FMI on the New Zealand financial system.
- Crisis management framework status and powers
  - New regime proposals:
    - RBNZ will be the resolution authority for payment systems.
    - RBNZ and FMA jointly will be resolution authorities for other systemically important FMIs.
    - Framework includes resolution powers for RBNZ and FMA, taking into account recent and ongoing international standard setting.
  - Use of crisis management powers is subject to conditions such as insolvency of the operator, fraudulent activities, a breach of obligations, or if operations threaten financial stability.
  - Powers apply where business continuity plans, recovery and winding down plans are not implemented, fail, or are inadequate.
  - Powers include:
    - Issuing directions to the operator(s) of a systemically important FMI, with the consent of joint Ministers.
    - Appointing, replacing or removing the directors of an operator, with the consent of joint Ministers.
    - Recommending that a systemically important FMI be placed into statutory management by an Order in Council made on the advice of joint Ministers (e.g., if the FMI fails to comply with earlier directions).
- Statutory management regime features:
  - Combines tools proposed in the FSB Key Attributes for resolution of FMIs.
  - Allows resolution authorities to appoint a person to resolve the FMI where the current operator is unwilling or unable to do so.
  - Statutory manager has capacities and powers similar to a bank statutory manager under Part 5 of the RBNZA 1989, including the power to place a moratorium on payments to general creditors and the power to sell or transfer part or all of the business of the FMI in statutory management.
  - Statutory manager expected to respect the rules of the FMI (e.g., applying loss sharing arrangements) except in very exceptional circumstances to maintain confidence and continuity of critical services.
- Recommendation to align with Key Attributes:
  - Do not limit powers to situations where business continuity planning and recovery and winding down plans have not been (sufficiently) implemented.
  - Apply powers more generally in case of any breach of law or regulations that may pose a threat to the stability of the FMI.
  - General application may include failure to implement proper business continuity plans, recovery plans, or proper risk management frameworks for credit and liquidity risks (particularly important for CCPs).
  - Direction powers and powers to change FMI management may be used in other serious situations before a crisis materializes.

*Source: IMF Financial Sector Assessment content unit "19. As part of a more formalized supervisory approach the following themes and topics" (cr17115).*

### 37. The planned legislation should clearly reflect the specific nature of FMI resolution. The

### 37. The planned legislation should clearly reflect the specific nature of FMI resolution. The

### Resolution objectives and legal principles
- Main objective of any resolution authority: maintain essential services being provided.
- Orderly winding down of FMI operations: to be applied only if there is no significant impact on financial stability.
- Moratorium on payments: applies only to payments to general creditors and not to the ordinary flow of payments, settlements and deliveries processed by the FMI in the course of its core functions.
- Recovery tools and resolution sequencing:
  - Recovery tools should generally be exhausted prior to entry into resolution of the FMI (as outlined in the FSB Key Attributes).
  - Possibility to pose temporary stays on termination of access rights.
  - Continued application of the laws and contracts to ensure the finality of transactions, DVP arrangements, and other legal protections.

### Legislative proposals should reflect
- The specific nature of FMIs and the Key Attributes’ relevant principles, including exhaustion of recovery tools, protection of transactional finality, and limited moratorium scope.

*Italicized source attribution: IMF staff, excerpt from cr17115 chapter section.*

### Dependency of domestic FMIs on four main banks

### Concentration and network structure
- FMIs are heavily dependent on the four largest banks in New Zealand, which are all subsidiaries of Australian parents.
- These banks are part of an interdependent, interconnected network (see Box 2).
- Settlement volumes are highly concentrated within the four largest banks representing nearly 80 percent of total settlement volumes of domestic FMIs (measured in NZD).
- Three out of the four banks are members of the main domestic FMIs (ESAS, NZClear, NZCDC, SBI, and HVCS).
- The largest banks are shareholders and members of PNZ.
- Some banks provide commercial banking services to NZCDC, i.e., collateral management and settlement bank services.

### Risks from bank failure
- A potential liquidation of one of the main banks would put severe stress on all FMIs and the market as a whole.
- Consequences and operational impacts:
  - FMIs must manage the default by excluding the bank from membership and/or managing implications of the bank’s resolution.
  - Clients of the failed bank must find substitutes to clear and settle payments and securities in FMIs, putting pressure on surviving members.
  - NZCDC may temporarily lose access to collateral managed by the bank or lose its settlement bank for U.S. dollar settlements.
  - PNZ may have to manage governance issues related to the default of one of its shareholders and members.

*Italicized source attribution: IMF staff, excerpt from cr17115 chapter section.*

### Measures, operational arrangements, and recommendations

### Open Bank Resolution (OBR) and separation
- The Open Bank Resolution (OBR) is a policy to keep a distressed bank open for business while placing the cost of failure on the bank’s shareholders and creditors rather than the taxpayer.
- Under OBR:
  - The bank is temporarily closed and reopens under a statutory management regime.
  - Customers can access (part of) their deposits, which are government guaranteed.
  - Part of the available (i.e., unfrozen) assets in the bank are used to resolve the bank.
  - A government guarantee, as envisaged by the OBR policy, allows the bank to re-enter the FMI.
- For a New Zealand subsidiary, continuation of operations (even if the parent fails) depends on full separation of businesses, including FMI operations.
- Operational differences across banks: some have full domestic backups (SWIFT gateway, general ledger), others share core systems with the parent.

### Access to FMI assets and statutory manager discretions
- Key Attributes expectation: a financial entity in resolution should be able to rely on services provided by FMIs as long as it promptly performs its obligations to support orderly resolution.
- Important that FMIs have continued access to their assets kept by the failing FMI (e.g., collateral).
- Under current OBR arrangements, the statutory manager has discretionary power to decide case by case whether to exempt FMI assets from a haircut.
- Recommendation: RBNZ may develop ex ante provisions for FMI assets to be excluded from haircutting, given FMIs’ systemic importance.

### Use of RBNZ accounts and liquidity facilities
- FMIs may keep assets at an account in ESAS; the RBNZ allows FMIs to hold a NZD account at the RBNZ.
- Currently, CLS and NZCDC have NZD accounts at the RBNZ, typically used for settlement of payments.
- FMIs can access the RBNZ’s standing facility for cash using the overnight reverse repo facility if they hold security from a list of repo eligible securities.
- In practice, NZCDC does not use the RBNZ account to deposit collateral because return on commercial accounts is higher.
- Recommendation: RBNZ, in oversight role, should request NZCDC to apply a more prudent investment policy, for example, by depositing cash collateral at their ESAS account.

### Crisis management and contingency testing
- Recommendation to consider establishing an operational crisis management framework (the existing Council of Financial Regulators is not a crisis management body).
- Benefits of a pre-positioned committee: predefined roles and responsibilities, coordination and cooperation mechanisms between authorities and industry, effective and timely communication, potentially reduce losses following crises.
- Suggested inclusion of FMIs in industry-wide contingency tests (e.g., Trans-Tasman Council of Banking Supervision scenario):
  - Crisis simulation could include failure of a New Zealand subsidiary of an Australian bank in different FMIs in New Zealand and Australia (including ASX Clear Futures).
  - Tests should assume communication flows between authorities and FMIs.

*Italicized source attribution: IMF staff, excerpt from cr17115 chapter section.*

### Managing spillover risk from foreign CCPs

### Trends and exposures
- Largest New Zealand banks increasingly central clearing OTC derivatives transactions in Australia and the United Kingdom.
- Historical market practice: bilateral clearing; shift driven by foreign mandatory clearing requirements.
- New Zealand banks often clear via LCH.Clearnet Ltd (London) or ASX Clearing (Futures) (Australia).
- Example: Australian regulators have central clearing requirements for IRS denominated in five currencies (not including the New Zealand dollar).
- New Zealand banks are currently indirect clearing members; some are in the process of becoming direct clearing members of LCH.Clearnet Ltd.

### Benefits and risks of CCP clearing
- Benefits:
  - Multilateral netting reduces counterparty credit risk exposures.
  - Global CCPs support orderly management of a default.
- Risks:
  - Direct clearing members are exposed to potential residual losses in extreme circumstances through loss-sharing arrangements (default fund, recovery and resolution tools).
  - Continued functioning of derivatives markets is significant for New Zealand banks’ funding and risk management.

### Recommended RBNZ actions
- Analyze exposure of New Zealand banks to global derivatives markets and foreign FMIs and take action if needed:
  - (i) Collect information about trading activity of New Zealand banks in OTC derivatives and their exposures in bilaterally and centrally cleared markets.
  - (ii) Analyze the risk waterfall, recovery plans and resolution plans for the foreign CCPs to understand in what circumstances and how New Zealand banks will be confronted with loss-sharing.
  - (iii) Estimate the size of potential losses for New Zealand banks and the impact on New Zealand’s financial system.
  - (iv) Participate in fire drills of the supervisory college of LCH.Clearnet Ltd, and if possible of the Crisis Management Group (CMG), as far as relevant for New Zealand.
- Efforts should be made to obtain data from DTCC Singapore (or other trade repositories if needed).

### Consideration for settlement access
- RBNZ may consider providing foreign CCPs with a central bank account in ESAS for settlement in NZD dollars and deposits of collateral.
- As a condition, through cooperation agreements with home authorities, RBNZ should be satisfied that the CCP is sound, well-supervised and able to comply with requirements to participate in ESAS.

*Italicized source attribution: IMF staff, excerpt from cr17115 chapter section.*

### Key statistics and operational data (selected figures from Appendices)
- Concentration:
  - Four largest banks represent nearly 80 percent of total settlement volumes of domestic FMIs (measured in NZD).
  - The four Australian Bank represent 80 percent of total settlement volume (Box 2 text).
- FMI transaction volumes and participants (Appendix II):
  - ESAS: Number of transactions 2014: 2,734,136; 2015: 2,958,700; Value of transactions (NZD billion) 2014: 7,060; 2015: 7,355; Number of participants (excludes the RBNZ) End of 2015: 19.
  - HVCS: Number of transactions 2014: 2,291,000; 2015: 2,439,200; Value of transactions (NZD billion) 2014: 5,016; 2015: 5,262; Number of participants End of 2015: 13.
  - SBI: Number of transactions 2014: 460 million; 2015: 478 million; Value of transactions (NZD billion) 2014: 749; 2015: 787; Number of participants End of 2015: 8.
  - NZClear: Number of transactions 2014: 339,488; 2015: 385,219; Value of transactions (NZD billion) 2014: 1,841; 2015: 1,832; Number of participants End of 2015: 128.
  - NZCDC securities transactions cleared and settled: Number 2014: 194,952; 2015: 200,821; Value (NZD billion) 2014: 15.4; 2015: 18.7.
  - NZCDC derivatives transactions cleared and settled: Number 2014: 48,648; 2015: 65,486; Value (NZD billion) 2014: 0.2; 2015: 0.2.
- Membership and market shares (Box 2 and figure captions):
  - Banking groups are responsible for the dominant share of New Zealand FMI transactions.
  - Nonbank financial groups and domestic government bodies have much lower shares by comparison (measured in NZD).
  - North American and European members account for a notable portion of transactions; Asian members’ settlement volumes are negligible.

*Italicized source attribution: IMF staff, excerpt from cr17115 chapter section.*

### section 156N(3)).

### section 156N(3)).

### Designation regime
- FMIs that meet the criterion of systemic importance would be required to be designated under the new Designation Regime.
- Non-systemically important FMIs would be able to be designated on a voluntary basis (to obtain legal protection for netting and settlement finality).

### Regulation and standard setting
- The RBNZ and FMA are able to recommend that conditions of designation be varied and to disallow changes to the rules of a designated system.
- The regulators do not have powers for non-designated systems.
- The RBNZ and FMA would have standard setting powers and set minimum standards, which relate to certain matters prescribed in legislation.

### Powers to obtain information
- The RBNZ can require that information be provided by operators or participants of a payment system. The RBNZ may require the information to be audited (Reserve Bank Act 5B).
- For designated systems the RBNZ and FMA can require information to be provided. Failure to supply information is an offence (RBNZA 5C 156ZL).
- The RBNZ and FMA would have the power to obtain information from the operators, participants and infrastructure providers of FMIs, including from non-designated FMIs, where they believe that this would be necessary or desirable to perform their responsibilities under the legislation.

### Powers related to FMI rules
- The RBNZ and FMA must be notified by the designated FMIs of proposed amendments to rules (RBNZA 5C 156ZB).
- The joint regulators may disallow changes to the system’s rules (RBNZA 5C 156ZC).
- Note: although s156ZB requires the joint regulators to be notified of proposed rule amendments, failure to do so is not an offence.
- The regulators would be able to disallow rule changes. Where the regulators determine that a rule change or the establishment of a new rule is necessary to prevent any potential adverse impact on the soundness and efficiency of the FMI, they would have the power to request that the rules be changed to address the particular issue.
- In limited circumstances, if the proposed change is inadequate, it would be possible to direct a rule change.

### Investigative powers
- The RBNZ and FMA have no investigative powers.
- The RBNZ and FMA would have powers to require independent reports on designated FMIs, and the power to enter and search places with a warrant, where they believe that this would be necessary or desirable to perform their responsibilities under the legislation, subject to specific constraints.

### Enforcement powers and remedies
- The RBNZ and FMA have the ability to issue a public warning. Note: This is an inherent power that regulators have under New Zealand law as a result of their supervisory role and does not require specific legal backing.
- Failure of designated systems to supply information is an offence, for which penalties can be imposed, i.e., imprisonment or fines (RBNZA 5C 156ZQ).
- Designated systems are required to comply with conditions of designation. However, non-compliance with the conditions is not itself an offence. Ultimately, the joint regulators can revoke a designation to deal with non-compliance (RBNZA 5C 156ZE), but they lack other “softer” powers to remedy the deficiencies.
- Moral suasion is applied for non-designated FMIs. In addition to the ability to issue a public warning, the RBNZ and FMA have the ability to enter into enforceable undertakings.
  - Footnote: A legally binding agreement between a regulator and regulated entity requiring the regulated entity to take certain agreed actions, which can be enforced in the courts.
- Administrative, criminal and civil remedies (based on the FMCA 2013) would also apply, including fines, terms of imprisonment and civil pecuniary penalties.

### Crisis management powers
- The RBNZ and FMA have no crisis management powers.
- In case of a failure of the FMI the RBNZ and FMA would have powers to:
  - Issue a direction to an operator (with ministerial consent);
  - Remove, replace or appoint a director of an operator (with ministerial consent);
  - Recommend the appointment of a statutory manager to Ministers.

### Resources
- RBNZ: 2 FTE oversight; 1 FTE policy
- FMA: 0.5 FTE
- RBNZ: 3–4 FTE oversight; 1 FTE policy
- FMA: 1–1.5 FTE

### Appendix V — Cooperation Agreements between New Zealand Authorities and Foreign Authorities (selected entries)
- Designated settlement systems, i.e., NZClear and NZCDC: MOU — RBNZ and FMA — NA
- Cross-border clearing organizations, i.e., ASX Clearing Futures: MOU — RBNZ — RBA
- Central Counterparties, i.e., LCH.Clearnet Ltd: MOU — RBNZ and FMA — Bank of England
- CLS: Protocol for the Cooperative Oversight arrangement — RBNZ — Members of CLS Oversight Committee, with the Federal Reserve Bank of New York as lead overseer
- DTCC Singapore (planned): MOU (planned) — RBNZ and FMA — Monetary Authority of Singapore

*Source: Reserve Bank of New Zealand*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17115.pdf_