Faafoi KrisFINANCIAL MARKETS (DERIVATIVES MARGIN AND BENCHMARKING) REFORM AMENDMENT BILLFirst ReadingHon KRIS FAAFOI (Minister of Commerce and Consumer Affairs): I move That the Financial Markets (Derivatives Margin and Benchmarking) Reform Amendment Bill be now read a first time. I nominate the Finance and Expenditure Committee to consider the bill. At the appropriate time I intend to move that the bill be reported back to the House by 22 July 2019. This will allow the bill to be passed in time to meet deadlines for the relevant international reforms that are driving the amendments in this bill.This bill amends various pieces of financial markets legislation to bring New Zealand into line with international best practice. Importantly the bill will also allow New Zealand entities to continue to access important international financial markets. In recent years various reforms have been introduced internationally to address significant risks in global financial markets. These reforms are intended to reduce risk and improve the integrity of how certain financial contracts are traded and the processes by which they are set. They will help make aspects of the global financial system more resilient and more resistant to manipulation.The amendments in the bill will bring New Zealand into line with these international reforms and improve the integrity of our financial systems. The amendments in the bill are also critical to ensure New Zealand entities can continue to access important international financial markets. Without these amendments New Zealand entities would not be able to comply with the relevant requirements imposed by the new reforms and this would mean that they may not be able to enter into critical financial contracts with international counterparts—for example the big four banks in New Zealand directly through their clients are estimated to have a gross exposure of $1.1 trillion to parties of the European Union through particular types of financial contracts affected by one of the recent international reforms. If New Zealand's regulatory regime is not brought into line with the new reforms and the banks were shut out of the key international financial markets the disruption to businesses and the increase in funding costs would have a marked effect. This would not just affect the banks but also see interest rates increase for New Zealand consumers and businesses.Over the past year the Ministry of Business Innovation and Employment (MBIE) the Reserve Bank and the Financial Markets Authority have undertaken a comprehensive review of what is required to bring New Zealand into line with international reforms. The result is a robust piece of legislation—while technical it also sets out to improve the integrity of our financial system and resolve what could potentially constitute a significant risk to the New Zealand economy.The bill has two parts each of which responds to different international developments. Part 1 of the bill responds to G20 requirements related to over-the-counter derivatives. These requirements were announced in 2011 following the global financial crisis which identified risks in the market for over-the-counter derivatives and the requirements are currently being phased in across G20 nations. The global market for over-the-counter derivatives is worth trillions of dollars and the G20 identified that there were systemic risks in this market. Requirements were therefore introduced for parties to exchange collateral—also known as a margin—to prevent these risks being spread across financial institutions. The G20 rules required this margin to be available immediately in the event that a party defaults under a contract. Certain features of New Zealand's insolvency law however prevented affected entities from complying with these requirements.This bill will allow New Zealand entities to meet those requirements by making technical amendments to the Reserve Bank of New Zealand Act the Corporations (Investigation and Management) Act the Companies Act and the Personal Property Securities Act. The effect of these amendments is to allow certain qualifying parties to exercise rights over the margin that they hold immediately and to have priority over other parties with an actual or potential claim on that margin. The amendments are tightly confined to limit any potential impact on current insolvency law and non-derivative creditors. Analysis by MBIE and the Reserve Bank has shown that it is very unlikely that these changes will ever disadvantage a party which would otherwise have a priority. They have engaged with New Zealand's banks and with other interested parties such as insolvency practitioners' industry bodies to ensure that the proposed changes are proportionate and fit for purpose. Part 2 of the bill responds to a separate international development. The European Union recently introduced a new regulatory regime for financial benchmarks. These benchmarks are referenced in many financial contracts and they underpin important factors such as mortgage interest rates. The intent of the EU benchmarking regime is to avoid potential manipulation of benchmarks and other events which could destabilise national and international markets. To trade with EU parties New Zealand needs a financial benchmark regime which the EU formally recognises as equivalent and one of the ways of achieving this is to require parties that administer financial benchmarks to be licensed and subject to supervision by a regulator. To meet those new EU requirements Part 2 of this bill amends the Financial Markets Conduct Act to create a licensing regime for New Zealand benchmark administrators. This new regime allows the administrator of a financial benchmark to opt in to obtain their market services licence under the Financial Markets Conduct Act and to meet certain governance requirements. Supervision and enforcement of licence obligations will be carried out by the Financial Markets Authority and detailed licensing requirements will be set in regulations. These requirements will largely reflect what is required by the EU regulations in order for New Zealand's regulatory regime to achieve formal equivalent status. MBIE has been consulting officials in the EU to ensure that the regime is designed in a way that will meet the requisite standards. The new licensing regime for administrators of financial benchmarks will do three things. Firstly it will provide additional assurance around the accuracy integrity reliability and continuity of New Zealand's benchmarks; secondly it will ensure continued acceptance of New Zealand's benchmarks within the EU markets; and thirdly it will avoid significant costs to the New Zealand economy that could arise if our benchmarks were not able to be used in the EU. The licensing regime also provides new powers for the Financial Markets Authority to direct contributors to and administrators of benchmarks to continue to maintain a benchmark for a specific period of time. The purpose of these powers is to ensure the continued reliability and availability of financial benchmarks for a period of time in the case of a potential disruption to that benchmark. Such disruptions may occur when the licensed administrator intends to stop administering a benchmark that is important for trade with EU parties. This will promote market stability while a smooth transition of a benchmark to another administrator or an orderly cessation or generation of a benchmark is being arranged. These changes are technical. However this is a critical piece of legislation that will allow major New Zealand financial institutions to continue to transact with important overseas parties in order to manage financial risks raise capital and continue to effectively engage in international financial markets. This will bring us into line with international standards and will proactively avoid potentially substantial economic damage. I commend this bill to the House.