Power Simon: Settlement Systems Futures and Emissions Units Bill — First Reading 
Power Simon: Settlement Systems Futures and Emissions Units Bill — First Reading 
[Volume:650;Page:19253] 
SIMON POWER (National—Rangitikei) 
: 
 Well it would be nice to have a piece of legislation to speak on during urgency that was straightforward like maybe a bill on aquaculture or something of that nature—something that was not as complicated as specific and as regulatory in nature as the Settlement Systems Futures and Emissions Units Bill. I put it on record now that the Minister has given an undertaking to the House that this matter relates only to emissions units in the general sense rather than creating specific links to the legislation that has recently passed through the House. 
The Settlement Systems Futures and Emissions Units Bill is designed to create a voluntary designated settlement system regime similar to that currently operating in the Reserve Bank of New Zealand Act for cash payment systems. Operators of settlement systems will be able to elect but will not be required to seek designated status. It is worth just spending a bit of time on that issue because to the untrained eye it is somewhat complex—and I include my own eyes in that actually. The rules of the system to the extent that they relate to the calculation and discharge of obligations and to remedies on default are enforceable regardless of any enactment or rule of law to the contrary. So it ensures that net settlements and default close-outs can be completed notwithstanding legal uncertainties surrounding netting and set-offs. 
I met with a representative—a regulatory guy—from NZX today to get a briefing on the issue of netting. I found out actually that the individual concerned had been a partner in a law firm I had previously been employed by. He asked me whether I could remember the work I had done on netting while I had been at that particular law firm and no I could not. But in any event I will move on. 
Settlements are irreversible and that ensures that completed settlements cannot be unwound on the subsequent insolvency of a participant. I will come back to that because to my mind with the creation of the clearance process and the centralisation of risk at the hub of that process it is probably the most important aspect of this bill. I will come back to that. The operator of the settlement system receives personal property free of security interests under the Personal Property Securities Act and that enables the settlement system operator to complete settlements free of claims from secured creditors of participants. The security interest held by the system operator and the collateral provided by participants have priority over all other claims on that collateral. 
Hon Lianne Dalziel 
: Did they give you a speech as well? 
SIMON POWER 
: No no; they did not I tell the Minister. These are my notes. It is also worth summarising the position in this way: if when an equity is sold and purchased a broker falls over that transaction can be managed individually and isolated and the clearance house takes the risk. In other words there is no ripple effect for any potential systemic failure in the same way that the Reserve Bank carries the risk in the banking sector. That is something we need to ensure for the sake of the way these particular trades occur. 
The idea behind that has been described to me as having the risk centralised to the clearing system so that all obligations flow from that central part of the wheel of trade and obligations surrounding it—that is they are owed to that clearing system. I am advised that that will allow more people into the trading space because they can go to the wholesale clearing house instead of doing it themselves—which is exactly the same way that the Reserve Bank operates in the banking sector. I guess that in the bigger scheme of things the idea behind the legislation is that it will create more confidence in investing in the capital markets because potential investors will know that the clearing house systems are in place and are at the middle of that proposal. 
The establishment of a central counterpart clearing and settlement system in which the system operator assumes the settlement risk of each participant and guarantees the performance of all obligations occurs regardless of the performance by other parties to the transaction. As I said in order to enable the central counterpart clearing and settlement system to do that the operator manages its risk by applying minimum capital and other prudential standards to its participants and by holding collateral from each participant to secure the performance of its obligations. The important thing about this particular proposal is that the system proposed complies fully with the recommendations of the Bank for International Settlements and the International Organization of Securities Commissions for settlement systems. It is intended to comply with the requirements of those standards in relation to being both insolvency remote for want of a better phrase and a true delivery. 
The passage of the bill which National will be supporting at this first reading is a key element in addressing any systemic risk in the NZX’s capital markets. The passing of the bill will also enable the NZX or in fact any other settlement system provider to introduce an internationally compliant clearing and settlement system which will align New Zealand with global best practice. I was fortunate enough to have a discussion with the chair of the Securities Commission 3 or 4 weeks ago I think—maybe it was a bit longer ago—when Ms Diplock explained to me that this was useful legislation in that it provided for an international best-practice model and that it was something we should look at carefully. I am grateful for that advice. 
I do not intend to add any more at this stage other than to note that in  
Business Day 
 on Wednesday 24 September the head of Australia’s sharemarket warned that his country could go the way of New Zealand and become “internationally irrelevant” if its market is fragmented too much by new competitors. It is worth members who have an interest in this area reading that particular article in order to ensure that we cross off some of those more serious issues. I do not intend to quote from the release but because it is interesting in nature I would recommend to members who have an interest in this area that they make sure they are aware of what the Australian Stock Exchange chairman Maurice Newman is saying about global market relevancy and also about the importance of scale. 
Hon Lianne Dalziel 
: Setting aside all vested interests as I am sure he was. 
SIMON POWER 
: I am sure that is right I say to the Minister. On that basis when we are dealing with scale and investment in capital markets it would be National’s view that this particular bill can only aid that increase in scale and size. Of course we hope the task force that is looking into the capital markets will also be able to give us as a Parliament some guidance on how to achieve that goal outside the reasonably narrow confines of the legislation that is currently before the House.