Assessing the Sufficient Equivalence of an Overseas Regulatory Regime

Issued: July 2009 – Last updated: 21 June 2019

An Australian clearing and settlement (CS) facility licence may be granted to an overseas CS facility under the Corporations Act 2001 (the Act) at the Minister's discretion, and only where, among other things, the Minister is satisfied[1] that the applicant is subject to requirements and supervision in the foreign country in which its principal place of business is located (its ‘home jurisdiction’) that are sufficiently equivalent to those in Australia ‘in relation to the degree of protection from systemic risk and the level of effectiveness and fairness of services they achieve’.[2] The Minister must also have regard to a range of other matters relating to the relevant entity's authorisation to operate the same facility in the home jurisdiction and supervision by the regulator(s) in the home jurisdiction.[3]

‘Sufficient equivalence’ is not defined in the Act. In considering the sufficient equivalence of an overseas regulatory regime for CS facilities in relation to ‘protection from systemic risk’[4] for the purpose of advising the Minister, the Reserve Bank of Australia (the Bank) will take the following into account:

  • the clarity and coverage of stability-related principles applied by the overseas regulator relative to the stability-related principles applied by the Bank
  • the nature and intensity of the overseas regulator's oversight process, including direct comparison with the regime applied by the Bank
  • observed outcomes relative to those in Australia, as reflected in an initial assessment of CS facilities operating under the relevant overseas regime.

Sufficient similarity to the Australian regime will need to be demonstrated in relation to all three aspects if the overseas regulatory regime is to be judged sufficiently equivalent in relation to protection from systemic risk.[5]

The approach articulated below is broadly consistent with the ‘equivalence principles’ in a set of Principles for Cross-border Financial Regulation developed by ASIC in its Regulatory Guide 54, updated in June 2012.[6] Each element of the Bank's assessment approach is considered in further detail below.

Clarity and Coverage

In accordance with section 827D(1) of the Act, the Bank has determined financial stability standards for licensed CS facilities (Standards). The Financial Stability Standards for Central Counterparties (CCP Standards) and Financial Stability Standards for Securities Settlement Facilities (SSF Standards) apply to both domestic and overseas CS facilities of the relevant type.[7]

Each of the CCP Standards and SSF Standards comprises a list of requirements that, through the operation of section 821A of the Act, are binding on a CS facility licensee that operates a central counterparty or securities settlement facility, respectively. To comply with a Standard, a CS facility licensee must comply with the headline standard (in bold type) and each of the ‘sub’-standards listed under the headline standard. The Standards are to be interpreted in accordance with their respective objectives and by looking beyond form to substance.

Each set of Standards is accompanied by detailed guidance to assist CS facilities in the interpretation and application of the Standards, and to elaborate on matters that the Bank considers relevant in meeting the Standards.

Given this approach, in assessing sufficient equivalence in respect of clarity and coverage, the overseas regime would be expected to exhibit:

  • a clearly articulated and easily understood approach to assessing a licensee in relation to matters affecting stability, in the form of a set of principles or standards that reflect relevant international standards and is binding on licensees
  • a high degree of overlap in the broad coverage of such principles or standards and the relevant Standards. Where there are gaps, the Bank would expect to be able to assess equivalence by objective reference to rules and procedures
  • a legal system that is independent and has a well-founded reputation for integrity.

Oversight Process

Under section 823CA(1) of the Act, the Bank may do an assessment of how well a CS facility licensee is complying with the relevant Standards and whether each licensee is doing all other things necessary to reduce systemic risk. Regulation may prescribe that such an assessment be carried out annually. Whether, and how frequently, to assess non-prescribed CS facility licensees is at the Bank's discretion, as is the nature and scope of an assessment and whether to publish it. The Bank's assessments of CS facility licensees are reported to the Minister and ASIC, in accordance with section 823CA(2), and may be published on the Bank's website.

The Bank also conducts regular meetings with CS facility licensees, imposes formal data and business reporting requirements (and risk management reporting requirements for central counterparties), and maintains a regular ongoing dialogue in respect of material developments.

The Bank has issued a policy statement setting out its approach to supervising and assessing CS facility licensees.[8]

Given the features of the oversight process in place in Australia, in assessing the sufficient equivalence of an overseas regulator's oversight process, the Bank would have careful regard to whether the overseas regime demonstrated the following:

  • An established framework for ongoing formal assessment against stability-related principles, with reviews undertaken at a reasonable frequency.
  • Evidence of regular dialogue with CS facility licensees on matters related to stability.
  • A well-defined process for communication of material changes and evidence of dialogue and follow up by the overseas regulator.
  • Adequate enforcement capability, perhaps underpinned by legislation, with appropriate procedures to ensure that principles and standards are reliably applied.
  • Adequate arrangements for information provision by the licensee, including clearly stated and appropriate data and business reporting requirements.
  • In the case of central counterparties, regular and appropriate monitoring of risk management processes and outcomes.

Observed Outcomes

The final element is an outcomes test. This would involve an initial assessment by the Bank of the CS facility licence applicant against the relevant Standards. It is the Bank's intention that this initial assessment would be published.

Such an exercise would draw on publicly available information, including rules and procedures, regulatory compliance reports and self-assessments, supplemented with information provided by the applicant (and its overseas regulator) in the context of its licence application. Evidence of a high level of compliance with the relevant Standards would indicate that the overseas regulatory regime was designed to achieve broadly equivalent outcomes to those of the Australian regime in relation to operations, structures and risk management approaches.

To complement the initial assessment of the licence applicant, a similar exercise may also be conducted (where applicable) for a sample of other CS facilities operating under the same overseas regime. The objective here would be to validate whether the observed outcomes for the licence applicant were illustrative of those generally achieved under the regime in question. Any such supplementary assessments would draw on all available sources of information, including, where possible, information sourced directly from the facilities and/or their regulator.

Should this exercise reveal that CS facilities operating in the relevant overseas regime typically achieve outcomes consistent with the measures underpinning the relevant Standards, the overseas regime might, other things being equal, be deemed ‘sufficiently equivalent’ to the Australian regime.

Endnotes

Section 827A of the Corporations Act 2001 specifies a number of matters that the Minister must have regard to in deciding whether to grant a CS facility licence. These matters include any relevant advice received from ASIC or the Bank. [1]

Section 824B(2)(c) of the Act. [2]

These are the criteria that the relevant entity satisfied to obtain authorisation in the home jurisdiction, the obligations it must continue to satisfy to keep the authorisation, the level of supervision to which the facility is subject in the home jurisdiction and whether adequate arrangements exist for cooperation between the Bank, ASIC and the supervisor(s) in the home jurisdiction (section 827A(3) of the Act). [3]

The Bank has responsibility for assessing equivalence in relation to ‘protection from systemic risk’ only. Equivalence in relation to ‘the level of effectiveness and fairness of services’ is assessed by ASIC. [4]

In some circumstances, the Bank could advise the Minister that licensing under the regime for overseas facilities was not appropriate irrespective of sufficient equivalence, and that the applicant should apply for a ‘domestic’ licence under section 824B(1). [5]

ASIC's Regulatory Guide 54 is available at <http://asic.gov.au/regulatory-resources/find-a-document/regulatory-guides/rg-54-principles-for-cross-border-financial-regulation/>. [6]

The Standards are available at <https://www.rba.gov.au/payments-system/clearing-settlement/standards/>. [7]

The Bank's policy statement setting out its approach to supervising and assessing CS facility licensees is available at <https://www.rba.gov.au/payments-and-infrastructure/financial-market-infrastructure/clearing-and-settlement-facilities/standards/approach-to-supervising-and-assessing-csf-licensees.html>. [8]