Assessing the Sufficient Equivalence of an Overseas Regulatory Regime
In February 2009, the Reserve Bank announced a variation to the Financial Stability Standard for Central Counterparties to give effect to an oversight regime for overseas central counterparties. Under this regime, any overseas central counterparty licensed under the alternate licensing regime for overseas facilities will be exempt from full assessment against the Standard, so long as it is able to provide documentary evidence from the overseas regulator that it meets all relevant requirements. A licence may be granted under this alternate regime at the Minister’s discretion, and only where the applicant is deemed to be subject to a regulatory regime in its principal place of business that is sufficiently equivalent to that in Australia ‘in relation to the degree of protection from systemic risk and the level of effectiveness and fairness of services they achieve’.1
‘Sufficient equivalence’ is not defined in the legislation. In considering the sufficient equivalence of an overseas regulatory regime for clearing and settlement facilities in relation to ‘protection from systemic risk’, the Reserve Bank would take the following into account:
- The clarity and coverage of stability-related principles applied by the overseas regulator relative to the Standards;
- The nature and intensity of the overseas regulator’s oversight process, including direct comparison with the regime applied by the Reserve Bank; and
- Observed outcomes relative to those in Australia, as reflected in an initial assessment of clearing and settlement facilities operating under the relevant overseas regime.
All three aspects will need to demonstrate sufficient similarity to the Australian regime if the overseas regulatory regime is to be judged sufficiently equivalent in relation to protection from systemic risk. The approach articulated below builds on a set of Principles for cross border financial services regulation developed by ASIC in its Regulatory Guide 54.2 Each element of the assessment approach is considered in further detail below.
Clarity and Coverage
The scope and coverage of the Reserve Bank’s regime is clearly set out in the Financial Stability Standard for Central Counterparties and the Financial Stability Standard for Securities Settlement Facilities. In each case the Standard sets out a licensee’s obligations, as follows: ‘a CS facility licensee must conduct its affairs in a prudent manner, in accordance with the standards of a reasonable CS facility licensee in contributing to the overall stability of the Australian financial system, to the extent that it is reasonably practicable to do so.’
Each Standard is supported by a set of minimum measures which the Reserve Bank considers are relevant in determining whether a CS facility licensee has met the Standard. The measures are principles based, but supported by detailed guidance to assist both the licensee and the Reserve Bank in assessing compliance.
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, perhaps in the form of a set of principles or standards; and
- A high degree of overlap in the broad coverage of such principles and the measures underpinning the relevant Standard. Where there are gaps, the Bank would expect to be able to assess equivalence by objective reference to rules and procedures.
Oversight Process
The Reserve Bank is required by the Corporations Act 2001 to report to the Minister each year on how each CS facility licensee that it oversees complies with the Standards and whether it is doing all other things necessary to reduce systemic risk. To that end, the Reserve Bank carries out a formal annual assessment of each CS facility licensee against the relevant Standard, publishing its findings. It also conducts formal operational and executive liaison meetings with CS facility licensees, imposes formal quarterly data and business reporting requirements (and risk-management reporting for central counterparties), and maintains a regular ongoing dialogue in respect of material developments.
Given the features of the oversight process in place in Australia, in assessing the sufficient equivalence of an overseas regulator’s oversight process, the Reserve Bank would give 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; and
- 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 Reserve Bank of the CS facility licence applicant against the measures underpinning the relevant Financial Stability Standard. It is the Reserve 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 measures underpinning the 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 would 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. These supplementary assessments would draw on all available sources of information, including where possible information sourced directly from the facilities 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 Financial Stability Standard, 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 consider in deciding whether to grant a licence. These include any relevant advice received from ASIC or the Reserve Bank. In some circumstances, the Reserve Bank could advise the Minister that licensing under the alternate regime for overseas facilities was not appropriate – irrespective of sufficient equivalence – and that the applicant should apply for a licence under Section 824B(1). For instance, it is our expectation that this would be the case where an overseas applicant was seeking a licence under Section 824B(2) to operate a facility to serve a particularly large or systemically important market in Australia. Under such circumstances, the exemption under the varied Financial Stability Standard for Central Counterparties would not apply and the licensee would be assessed in full against the Standard.
- Available at <http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/principles.pdf/$file/principles.pdf>
