The Reserve Bank of Australia (RBA) and the Australian Securities and Investments Commission (ASIC) stand to receive new and enhanced powers under draft legislation to strengthen regulatory arrangements for Australia’s financial market infrastructure (FMI).
Treasurer Jim Chalmers said that the draft legislation released by the government on Friday represents the next step in modernising the country’s financial system and implements longstanding recommendations made by the Council of Financial Regulators (CFR).
“A series of reviews by the CFR have identified failings in the current regulatory framework for financial market infrastructure. These reviews found there was no regime to ensure continuity of clearing and settlement services in the face of a crisis,” Dr Chalmers said.
Under the draft legislation, the RBA will be given powers to step in and resolve a crisis at a domestic clearing and settlement (CS) facility to ensure the continuity of critical clearing functions and to protect Australia’s financial stability.
ASIC and the RBA’s licensing, supervisory and enforcement powers over FMI will be strengthened and streamlined to reduce the likelihood of a crisis occurring and to enhance supervisory oversight.
Additionally, certain ministerial powers will be transferred to the regulators to streamline existing financial market regulation and to reflect their respective responsibilities.
According to explanatory materials accompanying the draft legislation, ”significant events such as the global financial crisis and COVID-19 have highlighted not only the importance of CS facilities, but also the heightened risk they pose as they can concentrate and transmit financial risk with the potential to adversely impact the Australian economy”.
The explanatory materials warned that the failure of an FMI may also result in “fundamental and systemic disruption to financial markets”.
The CFR, of which ASIC and the RBA are members alongside Treasury and the Australian Prudential Regulation Authority (APRA), originally provided advice to the government in 2020 on measures to mitigate and address risks related to Australia’s FMI.
“The advice to government highlighted deficiencies in the current regulatory framework for Australia’s FMI,” the explanatory materials said.
“The report identified the need for stronger powers to enable regulators to monitor and manage certain risks, before they materialise, and highlighted the lack of an appropriate regime to ensure the continuity and stability of CS facilities in the event of a crisis.”
Sixteen recommendations for reform were made by the CFR. The government pledged to deliver a reform package consistent with these recommendations in December last year.
Dr Chalmers said that the latest draft legislation builds on the government’s reforms to facilitate competition in CS services, which passed Parliament in September.
“These next reforms will allow the RBA to step in and quickly resolve crises impacting critical financial market infrastructure, and strengthen the RBA and ASIC’s regulatory powers,” he said.
“Together, the reforms will provide certainty to industry, and ensure Australia’s financial markets continue to operate in a manner that is fair, orderly and efficient.”
Consultation on the draft legislation will remain open until 9 February 2024.
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.