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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.

• The policy document “The Designation and Oversight of Designated Settlement Systems” (DSS1) (PDF 128KB) explains the roles and policies of the Reserve Bank and the Securities Commission. This document was finalised in March 2010.

• Designation under Part 5C of the Act is an opt-in regime, with settlement systems needing to apply for designation. The application process and information that should be submitted with an application for designation are set out in this document: Application Guidelines for Designation under Part 5C of the Reserve Bank of New Zealand Act 1989 (DSS2) (PDF 53KB).

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?

• A list of designated settlement systems and the operators of those systems can be found on the Reserve Bank’s website: http://www.rbnz.govt.nz/finstab/payment/

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.