New Financial Stability Standards:
Final Standards and Regulation Impact Statement – December 2012 5. The Final Standards

In considering the comments of stakeholders summarised in Section 4, the Bank has amended aspects of the draft FSSs and associated guidance. The new FSSs and associated guidance incorporating these amendments are set out in Attachments 2 to 6, with a summary of these amendments outlined below. This Section also briefly addresses comments raised by stakeholders that have not been incorporated as amendments.

Assessment approach

The Bank considered that its proposed assessment approach to overseas-based CS facilities was appropriately designed to avoid regulatory overlap, while ensuring that all licensed CS facilities operating in Australia are held to the same standard of conduct. The Bank also considered that it would be inappropriate and contrary to the distinct responsibilities of both the Bank and ASIC under the Act for a ‘lead agency’ to be nominated for each of the Principles. While the Bank and ASIC intend to coordinate their interactions with CS facility licensees where possible, to reduce regulatory overlap, the Bank has a legislative responsibility to perform an independent assessment of how well licensees have complied with the FSSs and their obligation to do all other things necessary to reduce systemic risk.

Since there are no small SSFs in Australia that currently settle transactions in a systemically important market, the Bank did not see a need to adjust the proposed exemption threshold for SSFs. Should an SSF with an anticipated low volume of settlements sometime in the future seek to clear a systemically important market, the Bank may reconsider the terms of the exemption.

Recovery and resolution

The Bank accepts the concerns of stakeholders regarding the recovery and resolution related provisions of the FSSs. However, it considers that these provisions are sufficiently broad to support the type of framework for recovery and resolution that is likely to emerge from current international and domestic policy and legislative development. Given the uncertain outcome of the international policy work and potential domestic legislation, however, the Bank proposes to grant transitional relief with respect to several provisions: CCP and SSF Standard 3.5 (development of a recovery plan); CCP Standard 4.8 and SSF Standard 4.5 (loss allocation rules); CCP Standard 14.3 and SSF Standard 12.3 (sufficient equity to fund a recovery plan); and CCP Standard 16.11 and SSF Standard 14.11 (organisation of operations to facilitate crisis management actions). Relief would apply for at least the first year of operation of the new FSSs, or until international policy work and any domestic legislation have been finalised. Arrangements for transitional relief are discussed in Section 6.1.

Legal and governance

The Bank has made amendments to CCP and SSF Standard 1.1 and associated guidance to clarify that a CS facility licensee may operate a complementary service (such as an exchange or trade repository) within the same legal entity, provided that any additional risks are appropriately managed. Amendments to the guidance to CCP and SSF Standard 1.6 clarify that the legal opinion regarding conflicts of law that should be provided to the Bank need only cover potential conflicts of law relevant to Australia.

The Bank has also amended a number of sub-standards and guidance to CCP and SSF Standard 2 in order to clarify that CS facilities may utilise group-wide governance structures, provided that facilities were able to adequately demonstrate the sufficiency of arrangements to manage intragroup conflicts and ensure the adequate resourcing of the regulated entity. The Bank adopted more granular guidance regarding the independence of directors, requiring that a CS facility specify and disclose its own definition of independence, and disclose relevant interests of board members and its arrangements to manage member conflicts of interest. The Bank did not consider it necessary to prescribe minimum levels of independent board representation.

Given the distinct responsibilities of the Bank and ASIC, the Bank did not consider it appropriate to incorporate elements of the Principles relating to the efficient provision of services in CCP and SSF Standard 2. The Bank did not consider that CCP and SSF Standard 2.1 would require CS facilities to adopt objectives in their governance frameworks that would be incompatible with efficient service provision. The examples provided in the guidance clarify that the public interests contemplated in the standard include interests related to CS facilities' licence obligations and the effective operation of markets served by the CS facilities.

Finally, amendments to CCP and SSF Standard 2.7 and associated guidance allow CS facilities to utilise external reviews in a more targeted manner.

Risk controls

The Bank has amended CCP and SSF Standard 4.2 and associated guidance to clarify that CS facilities need only have the capacity to monitor exposures on a timely, rather than continuous, basis. Amendments to the guidance to CCP and SSF Standard 4.3 clarify that any action taken in response to a deterioration in a participant's credit standing should be founded in the CS facility's rules. The Bank did not consider it appropriate in such circumstances for participants to be allowed a grace period before additional risk controls are imposed, as this would limit the flexibility of CS facilities to respond to sudden changes in a participant's risk profile.

Amendments have also been made to the guidance to CCP and SSF Standard 5.1, in order to clarify how CS facilities may mitigate risks associated with broader collateral acceptance, including how bank guarantee arrangements may be made sufficiently robust. The guidance to CCP Standard 7.4 has also been amended, in order to state a clear preference for outright holdings of qualifying liquid resources and specify the instruments that may form part of such holdings.

The Bank considered that guidance paragraph 6.4.1 to the CCP Standards was sufficient to ensure that CCPs took account of the potential liquidity impact of intraday margin calls and payments.

Settlement

CCP Standards 9.3 and 9.5, SSF Standards 8.3 and 8.5 and associated guidance have been amended to ensure that the scrutiny that CS facilities are required to apply to the arrangements between participants and their commercial settlement banks is proportionate. Amendments to CCP Standard 11 and SSF Standard 10, and associated guidance, allow additional flexibility in the choice of an appropriate exchange-of-value settlement model, clarify the meaning of a ‘large’ or ‘small’ trade value, and clarify that the scope of CS facilities' responsibility for choice of settlement methods is limited to transactions where they are able to influence settlement methods.

The Bank did not consider that requirements under guidance to SSF Standard 9.1 were overly burdensome in the context of an SSF's central securities depository activities, given the responsibility of central securities depositories for the integrity of securities issues.

Default arrangements

The Bank has expanded the guidance to CCP Standard 13 to clarify the situations in which protection of customer assets may be provided by alternative means for cash markets, where this protection is equivalent to the protection afforded by effective segregation and portability arrangements. The Bank has also amended guidance to CCP Standard 12.5 and SSF Standard 11.5 to elaborate on the interests that a CS facility should take into account in designing its default management procedures.

Business and investment risks

The Bank has amended the guidance to CCP Standard 15.4 and SSF Standard 13.4 to clarify that limits to the concentration of exposures to individual investment counterparties should only be applied to the extent reasonably practicable, and to provide greater flexibility in how CS facilities control for wrong-way risk in the investment of margin monies or other cash collateral. The Bank did not see a case for greater prescription as to how CCPs collateralise their cash deposits.

Amendments to CCP Standard 14.2 and SSF Standard 12.2 clarify that CS facilities may utilise alternative arrangements for holding capital against general business risk. However, a CS facility must be able to demonstrate to the Bank that any such arrangements are legally certain.

Operational risks

CCP Standards 16.9, 16.10 and 16.11, SSF Standards 14.9, 14.10 and 14.11 and associated guidance have been amended to clarify that the scope of these requirements extend beyond traditional outsourcing arrangements, to broader dependencies on service providers. The Bank has expanded guidance to CCP Standard 16.9 and SSF Standard 14.9 to clarify that CS facilities must form their own judgement regarding the operational performance of regulated service providers. CCP Standard 16.10 and SSF Standard 14.10 have also been amended to clarify that the Bank should be given rights of access to information regarding existing outsourcing and service providers. The Bank did not consider that the draft wording of these standards implied that CS facilities would require the Bank's permission to enter into outsourcing or service provision contracts. The Bank also provided additional guidance regarding the management of cyber security risks under CCP Standard 16.3 and SSF Standard 14.3.