New Financial Stability Standards:
Final Standards and Regulation Impact Statement – December 2012
2. Background and Recent Developments

2.1 The Current Financial Stability Standards

The Bank has the power, under section 827D(1) of the Act, to determine FSSs for the purpose of ensuring that licensed CS facilities conduct their affairs in a way that causes or promotes overall stability in the Australian financial system. In accordance with this power, the Bank determined FSSs for licensed CS facilities on 30 May 2003. The Financial Stability Standard for Securities Settlement Facilities (FSS for SSFs) was varied in June 2005 to introduce a threshold exemption to exclude facilities that settle securities transactions with a total value of $100 million or less per year. A measure to the current FSS for SSFs was varied in February 2009 to give effect to disclosure of equities securities lending data. The Financial Stability Standard for Central Counterparties (FSS for CCPs) was also varied in February 2009 to clarify oversight arrangements for overseas CCPs licensed under section 824B(2) of the Act.

The current FSSs apply to four licensed CS facilities: the FSS for CCPs to ASX Clear Pty Limited (ASX Clear) and ASX Clear (Futures) Pty Limited (ASX Clear (Futures)); and the FSS for SSFs to ASX Settlement Pty Limited (ASX Settlement) and Austraclear Limited (Austraclear).

The current FSS for CCPs is as follows:

A CS facility licensee must conduct its affairs in a prudent manner, in accordance with the standards of a reasonable facility in contributing to the overall stability of the Australian financial system, to the extent that it is reasonably practicable to do so. This standard applies to all CS facility licensees that operate a central counterparty with the exception of those CS facility licensees granted a licence under Section 824B(2) of the Corporations Act 2001. This exception applies only for such time as the Reserve Bank receives annual documentary evidence from the licensee's overseas regulator that the licensee has complied in all material respects with the requirements of the overseas regulator related to matters affecting stability. Such evidence must be provided in a form and at a time agreed with the Reserve Bank.[1]

The current FSS for SSFs is 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. This standard only applies to CS facility licensees that provide a facility where the value of financial obligations settled in a financial year exceeds a threshold value of $100 million. When this threshold is exceeded for the first time, the provider of the facility must meet the standard by the beginning of the next financial year.

The current FSSs are supplemented by details of the minimum measures that the Bank considers relevant in determining whether the applicable FSS has been met. The full text of the minimum measures applicable to the current FSSs, and accompanying guidance, is available on the Bank's website.[2] Neither the minimum measures nor the guidance create directly binding obligations for CS facility licensees. It is only at the level of the FSSs themselves that legally enforceable obligations are placed on licensees, although the minimum measures and guidance may be relevant considerations in determining whether a CS facility licensee has met its obligations.

In addition to these minimum measures, the Bank has also applied or considered a number of additional specific requirements in its oversight of currently licensed CS facilities. In part these requirements reflect the Bank's further interpretation of what a CS facility must do in order to reduce systemic risk in complying with the applicable current FSS, and the other requirements of the Act.

The Bank assesses each CS facility licensee against the FSS relevant to its facility type, and its broader obligation to reduce systemic risk under the Act on an ongoing basis, reporting its findings annually to the Minister with portfolio responsibility for financial markets, and to ASIC. These assessments are also released publicly.

2.2 Changes to International Standards

In April 2012, CPSS and IOSCO released the Principles – a unified and strengthened set of international standards for payment systems, CCPs, securities settlement systems (also known as SSFs), central securities depositories, and trade repositories (a new class of FMI that records and maintains financial transaction data). The Principles update, replace and synthesise three previous sets of recommendations and principles published by CPSS and IOSCO with respect to particular types of FMI – payments systems, CCPs and securities settlement systems.[3] The current FSSs are broadly aligned with the previous CPSS-IOSCO recommendations for CCPs and securities settlement systems.

The Principles outline a comprehensive set of minimum standards for FMIs, covering:

  • General organisation: the legal basis, governance arrangements and risk management framework of an FMI.
  • Credit and liquidity risk management: controls to ensure an FMI has sufficient resources, rules and procedures in place to manage credit and liquidity exposures created by the FMI's activities, including standards for acceptable collateral and, for CCPs, margin arrangements.
  • Settlement: low-risk, timely, certain and reliable settlement of securities, payments, physical instruments and commodities.
  • Central securities depositories and exchange-of-value settlement systems: low-risk and reliable transfer and issuance of securities, and elimination of principal risk from settlement systems.
  • Default management: effective and clear rules to manage a participant default, including segregation and portability of positions held by customers of a defaulting participant.[4]
  • General business and operational risk management: sufficient resources to cover business losses, employment of a prudent investment strategy, and secure and reliable systems to ensure continuous operation.
  • Access: fair and open access for prospective participants, balanced against controls to manage risks arising from direct or indirect participation, or links to other FMIs.
  • Efficiency and transparency: efficient provision of services, clear and comprehensive disclosure of risks, costs and obligations arising from participation, and provision of data by trade repositories.

The Principles strengthen previous international standards in a number of areas, including in the coverage of credit risk, the management of liquidity risks and governance. Several principles are not contained in previous CPSS0-IOSCO recommendations, including those on: segregation and portability of participants' customers' positions and collateral; interdependencies between FMIs; general business risk; tiered participation; and disclosure of rules, procedures and data. In these areas, the Principles also enhance or establish more specific requirements for FMIs than those explicitly contemplated under the existing FSS measures, which are largely aligned with the previous international standards.

The 24 headline Principles are each supported by a set of key considerations, which further elaborate on the requirements for FMIs set out in each principle, and explanatory notes which offer additional guidance as to how an FMI might meet the requirements of each principle and key consideration in practice.

The Principles also set out five key responsibilities of central banks, securities regulators or other authorities responsible for oversight of FMIs:

  • exercise of appropriate and effective regulation, supervision and oversight of FMIs
  • sufficient powers and resources for authorities in carrying out their oversight responsibilities
  • clearly defined regulatory, supervisory and oversight policies with respect to FMIs
  • adoption and consistent application of the Principles in oversight
  • cooperation with other authorities, both domestically and internationally.

In Australia, ASIC and the Bank share responsibility for the oversight of FMIs. Consistent with the five key responsibilities set out in the Principles, ASIC has consulted on a proposal to revise its regulatory guidance in order to adopt the Principles in its oversight of CS facilities.[5] The Bank's response to the Principles is set out later in this paper.

Authorities in other jurisdictions have also taken steps to adopt the Principles in their oversight of FMIs, and in some cases have incorporated additional requirements that go beyond the minimum international standards set out in the Principles. For example, the European Securities and Markets Authority's (ESMA's) Draft Technical Standards incorporate additional measures, including governance measures addressing management compensation, requirements for internal audit and external review of operations, processes and controls, and intragroup conflict-of-interest arrangements.[6]

2.3 Reforms to Financial Market Infrastructure Regulation

In April 2011, the Deputy Prime Minister and Treasurer commissioned the Council to conduct a review of the Australian regulatory framework for FMIs. The need to undertake this review was highlighted in the course of Council agencies' consideration of the proposed takeover of ASX Limited (ASX) by Singapore Exchange Limited (SGX). The review identified a number of areas in which regulation of FMIs could be strengthened, including additional means of exerting regulatory influence over cross-border clearing and settlement facilities, and the development of a resolution regime for FMIs.[7] Possible changes to legislation addressing these and other issues identified in the Council's review are being considered by Treasury.

Regulatory influence over cross-border clearing and settlement facilities

While each current CS facility licensee is incorporated and based in Australia, recent developments have raised the prospect of licensed CS facilities operating with a cross-border element – either because they are based overseas or have established or are contemplating cross-border outsourcing arrangements. Greater use of cross-border financial market infrastructures may arise from measures to control risks associated with over-the-counter (OTC) derivatives. The Council is also conducting a consultation into the potential for competition – including from infrastructure based overseas – in the clearing of cash equities.[8] Domestic CS facilities could also, in the future, wish to move aspects of their operations offshore in seeking opportunities to reduce costs, or become subject to a takeover proposal that would see them governed by a holding company based overseas, as was envisioned in the proposed SGX takeover of ASX.

In response to these developments, the Council, in its recommendations for reform of FMI regulation, proposed that the Bank and ASIC be granted explicit powers to impose graduated and proportional ‘location requirements’ on CS facilities. The Council, on advice from the Bank and ASIC, has subsequently articulated a graduated framework of measures designed to ensure that the Bank and ASIC have adequate regulatory influence over CS facilities that have a cross-border element.[9]

Under the framework articulated by the Council, the specific measures applied to a facility would reflect the nature and scope of its activities, and in particular its systemic importance in Australia and the strength of its connection to the Australian financial system and real economy. It was proposed by the Council that the FSSs be the principal means for implementing the stability relevant measures within the framework. These measures are designed to ensure that cross-border CS facilities have a financial, legal, governance, operational and regulatory basis in Australia appropriate to their activities, and that their operations provide adequate channels for Australian regulators to exercise their oversight responsibilities, including in stressed circumstances.

Financial market infrastructure resolution

The Council's consideration of the proposed SGX takeover of ASX highlighted the difficulties that might be faced by Australian regulators in ensuring the continuity of systemically important FMI services in a crisis or circumstances of FMI distress, if these services were operated or controlled overseas. The Council also identified broader concerns regarding how continuity of systemically important FMI services could be assured in a crisis, or in the event that an FMI suffered financial or operational distress, irrespective of the location of the FMI or its operations. These issues have also been considered in international work on the recovery and resolution of distressed FMIs currently being undertaken by CPSS and IOSCO.[10]

The Council identified a range of powers that could assist regulators in managing a situation of FMI distress. These include enhanced powers for regulators to direct FMIs to take actions to remedy or mitigate the source of distress. Where directions or other crisis-management tools proved insufficient, the Council also recommended a legislative power for regulators to ‘step in’ to operate a distressed FMI, by appointing a statutory manager to the FMI. The Council has identified the FSSs as potential means of imposing requirements that would support the use of such a power and enhance its effectiveness.


The current FSS for CCPs is accompanied by guidance that clarifies the nature and scope of the exemption for CS facilities licensed under section 824B(2) of the Act and the conditions under which it would apply. [1]

Details of the existing FSSs are available at <>. [2]

CPSS (2001), Core Principles for Systemically Important Payment Systems, CPSS Publications No 43, Bank for International Settlements, January, available at <> CPSS-IOSCO (2004), Recommendations for Central Counterparties, CPSS Publications No 64, Bank for International Settlements, November, available at <>; and CPSS-IOSCO (2001), Recommendations for Securities Settlement Systems, CPSS Publications No 46, Bank for International Settlements, November, available at <>. [3]

Customers of clearing participants can also be referred to as clients. [4]

ASIC's consultation paper on revising Regulatory Guide 211 is available at <$file/cp186-published-11-September-2012.pdf>. [5]

See European Securities and Markets Authority (2012), Draft Technical Standards under the Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC Derivatives, CCPs and Trade Repositories, Final Report, ESMA/2012/600, September, available at <>. [6]

The Council's recommendations from its review of the regulatory framework for FMIs are set out in a letter to the Deputy Prime Minister and Treasurer, available at <>. [7]

The Council's consultation paper on competition in the clearing and settlement of the Australian cash equity market is available at <>. [8]

See Council of Financial Regulators (2012), Ensuring Appropriate Influence for Australian Regulators over Cross-border Clearing and Settlement Facilities, Supplementary Paper to the Review of Financial Market Infrastructure Regulation, July, available at <>. [9]

See CPSS-IOSCO (2012), Recovery and Resolution of Financial Market Infrastructures: Consultative Report, CPSS Publications No 103, Bank for International Settlements, July, available at <>. [10]