The Reserve Bank of New Zealand (RBNZ) has laid out further information on its final proposals to manage blockages or failures in the financial system plumbing.
In a consultation document published last week, the RBNZ expanded on last year’s crisis management plans for systemically important financial market infrastructure (SIFMI).
Under the proposals, the RBNZ and the Financial Markets Authority (FMA) would take on joint regulatory powers to manage or wind down any SIFMI to prevent a catastrophic meltdown of the broader financial system.
The RBNZ paper proposes a two-tier approach to SIFMI crisis management with the first stage allowing existing operators to fix any problem following joint regulatory directions.
However, if the first approach had failed or was inadequate, the joint regulators would invoke further statutory powers, the RBNZ says.
“In summary, these statutory powers are:
- A power for joint regulators to issue directions to the operator of a SIFMI with the consent of joint Ministers;
- A power for joint regulators to appoint, replace or remove the directors of an operator with the consent of joint Ministers; and
- A power for joint regulators to recommend that a SIFMI be placed into a specially designed statutory management regime.”
While the tier one rules would apply to all SIFMIs regardless of the jurisdiction they were incorporated in, only New Zealand-domiciled entities would be subject to the phase two statutory powers.
SIFMIs provide essential services to the financial system that “generally relate to the clearing, processing, settlement and reporting of payments, securities and derivatives”, the RBNZ says.
“They are often described as the plumbing, or wiring, of the financial system,” the paper says. “They are essential because if they did not take place, or took place inefficiently, transactions between buyers and sellers may not take place.
“At worse transactions could freeze or stall before being completed, or become unable to be completed. These failures may have major downstream effect on other financial system participants (for example leading to a chain of defaulted transactions) and become a cause of transaction defaults, unnecessary losses and contagion across the financial system and economy…”
Submissions on the RBNZ paper are due by May 20.