Robertson GrantFINANCIAL MARKET INFRASTRUCTURES BILLFirst ReadingHon GRANT ROBERTSON (Minister of Finance): I move That the Financial Market Infrastructures Bill be now read a first time. I nominate the Finance and Expenditure Committee to consider the bill.This is the moment that the House has been waiting for. The Financial Market Infrastructures Bill establishes a new framework for the regulation and supervision of financial market infrastructures—or FMIs. FMIs are sometimes described as the plumbing of the financial system. They include payment systems which are used to effect payments in the financial sector and real economy and other types of infrastructures like securities settlement systems and central counterparties which support the buying and selling of financial products in various ways.FMIs play an essential role in the sound and efficient functioning of the financial system and in the operation of the real economy. Many transactions in the financial system and all electronic payments ultimately rely on the operation of one or more FMIs. As a consequence it is not uncommon for large FMIs to handle transactions worth billions of dollars on a daily basis. FMIs also play a key role in supporting the efficient operation of the financial system by reducing transaction costs; reducing counterparty custodial and other risks; and fostering transparency.The operation of FMIs is often taken for granted Mr Tabuteau and unless the services they provide are disrupted there can be extremely serious consequences if an important FMI fails. Failure to complete payments or other transactions or even a failure to complete these on time can subject the financial system or individual market participants to severe solvency or liquidity stresses. In extreme cases this can result in contagion risks and a cascading series of defaults across the financial system. The disruption of key payment systems will often disrupt the real economy preventing businesses and consumers from being able to buy and sell goods and services. The existing regulation of FMIs is limited. Parts 5B and 5C of the Reserve Bank of New Zealand Act establish information-gathering powers in respect of payment systems and the designation regime for settlement systems. However the regime in Parts 5B and 5C is no longer fit for purpose. For example in most respects it's a voluntary opt-in regime. It lacks a full suite of supervisory enforcement and crisis management powers. More generally it's seriously out of step with international standards. The systemic importance of many FMIs and the deficiencies in the existing regulatory regime were recognised by the International Monetary Fund (IMF) when it carried out its Financial Sector Assessment Programme of New Zealand in 2016-17. In the context of that review the IMF assessed and specifically recommended the adoption of the framework that is reflected in this bill as one of its more high-profile conclusions. The regime in the bill is administered jointly by the Reserve Bank and the Financial Markets Authority except in relation to payment systems where the Reserve Bank will be the sole regulator. It also provides different treatment for the regulation of designated and non-designated FMIs. Designated FMIs are those that are identified as systemically important and brought into the regime or have opted into the regime to access the current legal protections around settlement finality netting and the enforceability of rules which are being carried across into this FMI bill. The new regime is tailored to the needs and systemic importance of individual FMIs. Designated FMIs are subject to a range of regulatory powers whereas non-designated FMIs will be subject only to certain information-gathering and investigative powers. This approach focuses regulation on the most important FMIs while minimising the barriers to entry and compliance costs which might otherwise hinder new entrants and the development of new products—for example around retail payments.Under the bill regulatory requirements for designated FMIs will be set—their standards made by the regulators. The power to set standards is designed among other things to allow standards to cover the matters in the global guidelines for FMI regulation the Committee on Payment and Settlement Systems and the International Organisation of Securities Commission's Principles for Financial Market Infrastructures. For example the bill permits standards to be made for matters such as FMIs' governance risk management and financial resources.For the purposes of day-to-day supervision of designated FMIs the bill provides the regulators with information-gathering powers and powers to oversee the rules of those FMIs. For example changes to the rules of a designated FMI must be approved by the regulators and the regulators must also require that the rules of the designated FMI be changed. Furthermore the bill requires designated FMIs to have credible contingency plans for how they will manage risks and continue to provide or promptly restore essential services in the face of operational or financial distress. Detailed requirements for contingency plans can also be set in the standards made by regulators. Under the bill standards oversight of FMI rules contingency plans and supervisory powers will all help lower the risk of a designated FMI failing and ensuring that failures that do occur can be managed with the least amount of disruption.As a backstop to these measures the bill also provides crisis management powers specifically direction powers and a tailored statutory management regime for the operators of designated FMIs. Directions may require a designated FMI to take a range of actions to address problems. For example under a contingency plan participants in a FMI may also be directed to comply with the FMI's rules in certain situations—for example to facilitate orderly resolution of a designated FMI. The statutory management regime in the bill is the crisis management power of last resort and provides an alternative to normal insolvency processes such as liquidation which are not suitable for managing the failure of a designated FMI because this will disrupt the provision of essential services that they provide. The crisis management powers are likely to be some of the most important—if rarely used—powers in the bill. The lack of crisis management powers is one of the most significant gaps in the existing regulation of FMIs. Not having these powers available makes it much harder to deal with an FMI failure and avoid disruption to the provision of essential services with potentially very serious impacts on the financial system due to the stresses that will be placed on market participants. As noted the bill provides the regulators with a much more limited set of powers in respect of non-designated FMIs and this reflects that these will not be systemic nor have access to the legal protections around settlement finality netting and the enforceability of rules that are afforded to designated FMIs. The more limited information-gathering and investigative powers that will apply to non-designated FMIs will be used mainly for the purpose of monitoring the broader sector and identifying whether an FMI has become systemic and should be further regulated under the regime.For clarity it is worth noting the connections between the FMI bill and phase two of the Reserve Bank of New Zealand Act review. While they are separate matters on different timelines there are connections in certain areas in particular crisis management. At a later point after this bill is enacted we may look to review some aspects of the regulatory regime of FMIs to take into account the detailed conclusions of phase two. In the meantime there are two or three years anticipated before all of that legislation comes into effect and this bill is an important step in its own right and should advance ahead of the phase two legislation. Finally the bill contains a graduated set of remedies for breaches. These include criminal and civil penalties enforceable undertakings and remedial notices which will require an FMI operator to take action to remedy a breach. While the operation of FMIs is often taken for granted on a day-to-day basis they are vital to the operation of the financial system and to all consumers and citizens and ensuring that they operate in a sound and efficient manner is important for people to go about their daily lives. Because most transactions in the financial system are and all electronic payments ultimately rely on FMIs their disruption or failure can have a serious adverse impact on the operation of the financial system and in the real economy and the day-to-day ability of businesses and consumers to buy and sell their products. As noted the IMF has expressed support for the approach reflected in this bill and the bill closes an important regulatory gap in New Zealand by ensuring that these vital but often little noticed infrastructures are subject to effective supervision and oversight. In doing so it marks an important step in supporting financial stability and the effective operation of financial markets aligning with international standards in a reasonable and proportionate manner and supporting confidence in the New Zealand financial system and the operation of the real economy. I commend the Financial Market Infrastructures Bill to the House.