- based participation and / or provide services in australian - related products, they must have governance and operational arrangements that promote stability in the australian financial system ; • where a ccp is deemed to be systemically important by the reserve bank, it must hold an exchange settlement account ( esa ) at the bank to better manage liquidity and settlement risks around australian dollar obligations. the australian regulators are also closely engaged with ongoing international work on the recovery and resolution of financial market infrastructure. this work will be a key input into the development of a fully articulated recovery and resolution regime for financial market infrastructure in australia. it will also establish a benchmark for assessment of the recovery and resolution regimes applicable to overseas - based facilities seeking to operate in australia. 3. establish a licensing regime for trade repositories the council recommended that a licensing regime for trade repositories be established, largely modelled on the existing licensing regimes for market operators and clearing and settlement facilities under the corporations act. asic will have primary responsibility for administering this regime and overseeing any trade repositories licensed under the regime. these elements have since been reflected in draft legislation issued by treasury for consultation in july and introduced to parliament in september. it is anticipated that the framework will be in place by year - end. under the proposed framework, the minister for financial services and superannuation will have the power to prescribe certain classes of derivatives as subject to mandatory reporting to a trade repository, mandatory clearing by a central counterparty, or mandatory execution on a trading platform. to give effect to any mandate, asic will be tasked with developing “ derivative transaction rules ”. these rules will clarify matters such as the institutional and product scope of the obligation. among the regulators, therefore, asic will have the primary role in implementing the new framework and in doing so will work closely with the bank and apra. the bank, in particular, will have three main functions in the new regime : • a market - monitoring function. in carrying out its market operations and in its financial stability role, the bank will need to understand the implications of market developments in response to the new rules ; and in particular the evolution of participant behaviour and the participation structure of the market. this will include the analysis of data sourced from trade repositories, monitoring the interaction between the centrally cleared and non - centrally cleared segments of the market, and observing changes in collateral demand and usage. • an advisory function. before prescribing a class of derivatives under

a more competitive environment in the financial sector through reform measures such as relaxation of entry and exit norms, reduction in public ownership in the banking industry and letting banks access the capital market in order to meet their funding requirements. the objective is to bring out the best result in terms of pricing and quality of banking services over a period of time. the third important direction of reform has been the strengthening of market institutions and allowing greater freedom to financial intermediaries. these reforms have taken the form of gradual liberalisation of interest rates, development of money, capital and debt markets and giving operational flexibility to banks in the management of their assets and liabilities subject, of course, to prudential guidelines. in simple terms, these changes imply a greater degree of exposure of individual financial institutions to the domestic and international economic environment. in this connection, a distinction needs to be made between two types of market developments, which have implications for the financial system. one is developments in respect of macroeconomic fundamentals of the economy which impact on the interest rate, exchange rate and other asset prices. this is a normal phenomenon in any economy and has implications for the balance sheets of the financial intermediaries. institutions which do not have an organised approach in anticipating events, undertaking pre - emptive actions and designing a suitable response to unanticipated developments can find themselves in a difficult situation, particularly in times of a large degree of fluctuations in macroeconomic variables. the dangers posed by market and credit risks arising out of macroeconomic shocks need to be given special attention in a liberalised financial system. our reform initiatives in this area are still in the formative stage. the second type of market developments which have implications for the financial sector relates to asset price bubbles, which may be related to a high concentration of bank lending to one or two sectors which have a boom and bust cycle of their own. this form of market exposure can be unhealthy and lead to irreparable shocks. although the impact of such cycles on our banking system is quite limited, international experience suggests that, unless prudential measures are in place, banks can be potentially vulnerable to asset price pressures that can generate systemic risks for the financial system. the fourth important element of reform concerns the “ safety ” aspects of the financial system. this is the core of the challenges facing the financial system at present. when the reform process was started in 1992, there was a massive problem of cleaning the balance sheets of banks which had deteriorated over the years