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Designated settlement systems – questions and answers
1. What is a settlement system?
- A settlement is the making of payment or the transfer of the title to, or an
in interest in, personal property.
- A settlement system is a system or arrangement for effecting settlements or
processing settlement instructions, and includes a payment system. A payment
system is used for transferring funds.
- While settlement arrangements can exist for a wide range of personal
property transfers, the focus of the Reserve Bank and the Securities Commission
is on securities settlement systems (including settlement systems for futures
and other derivatives) and, in the case of the Reserve Bank, payment systems as
well.
2. Why are settlement systems important?
- Payment and securities settlement systems are a key component of the
financial infrastructure. Disruptions in a payment or securities settlement
system can have repercussions not only for the market directly served by the
system, but for the wider financial system. A payment or securities settlement
system may trigger, transmit or amplify shocks across domestic and international
financial systems and markets because of:
- The size or nature of the payments or settlements that are processed through
the system.
- The aggregate value of the settlements and their importance to the
circulation of liquidity within the financial system.
- The number of individuals and institutions who directly or indirectly
participate in payment and securities settlement systems or who are otherwise
affected by or have an interest in the soundness and efficiency of payment and
securities settlement systems.
- It is therefore important for investor confidence, the soundness and
efficiency of securities markets, and the soundness and efficiency of the
financial system as a whole that payment and securities settlement systems
operate smoothly and efficiently.
3. What does designation achieve?
- Designation gives legislative backing to the finality of settlements
effected, netting done, and personal property transferred, in accordance with
the rules of the designated settlement system. In other words, it provides
certainty that trades settled will not ‘unravel’ despite any
enactment or law to the contrary. This certainty is particularly important in
the event of the insolvency of a settlement system participant.
- The Reserve Bank and the Securities Commission have an on-going role of
overseeing designated settlement systems.
4. How can a settlement system be designated?
- Applications for designation are to be made to the joint regulators (the
Reserve Bank and the Securities Commission). Joint regulators make
recommendations to the Minister of Finance and the Minister of Commerce. The
legislation sets out the matters that the joint regulators may have regard to
when assessing applications.
5. How are the Reserve Bank and the Securities Commission going to work
together?
- The joint regulators have been working closely together for some time in
developing the legislation, developing policy and in engaging with potential
designation applicants. Details of how the regulators intend to work together
are set out in the policy document.
6. If NZ Clear is designated, will the new regime involve the Reserve Bank
regulating its own system (NZ Clear)?
- Yes, but this is not new - under the earlier regime the Reserve Bank
designated ESAS and its payment oversight work also included oversight of NZ
Clear. The purpose of the Reserve Bank providing these systems is consistent
with its regulatory purpose; i.e. the promotion of a sound and efficient
financial system.
- Also, under the new regime, if NZ Clear is designated it will be regulated
by both the Reserve Bank and the Securities Commission as joint
regulators.
7. What other designated settlement systems exist?
8. How is the designation process of the NZCDC system related to the Reserve
Bank and NZX joint venture discussions?
- In December 2009, the Reserve Bank of New Zealand and
NZX initiated a project to consider the possibility of a joint venture to
provide Clearing and Settlement services in New
Zealand.
- The Bank has kept the designation and joint venture processes completely
separate.
- The Prudential Supervision Department managed the Designation process and
assessment and will undertake the ongoing regulatory oversight
- The Operations departments within the Bank are managing the business
relationship discussions with NZX. Those discussions are
ongoing.