Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)8 Licensing of clearing and settlement facilities
Preliminary
8.1 As indicated previously, the objects of the Chapter are outlined in proposed section 760A. They should be read with ASIC's charter which is to be found in section 1 of the ASIC Act.
8.2 The purpose of proposed Part 7.3 is to provide a more flexible and comprehensive regime for the regulation of clearing and settlement facilities. Instead of the two routes to authorisation provided in the existing Corporations Law, there will be one.
8.3 Proposed Part 7.3 should be read in conjunction with proposed Division 4 of Part 7.11. Together these provisions omit the special position which the ASXs Securities Clearing House (SCH) currently holds in the Corporations Law and will permit access to the relevant transfer provisions by a wider range of facilities. The proposed provisions will permit (but not require) more than one clearing and settlement facility to handle the clearing and settlement of transactions executed on the one financial market. As a consequence of this, problems may arise about consistent treatment of the same issue by different facilities - this will need to be addressed but does not present a reason to retain provisions with an anti-competitive effect.
8.4 While the provisions in proposed Part 7.3 differ from those found in the current Parts 7.2A and 8.2, there is no intention to increase the regulatory burden on those clearing and settlement facilities currently regulated under those provisions.
8.5 A number of the new provisions reflect the new, more complete framework (for example, suspension of a licence) which are not addressed in the current provisions, rather than imposing additional obligations.
8.6 As to the comparability of the licensing regimes in proposed Parts 7.2 and 7.3, readers will notice that:
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- the framework of the regulatory regime - such provisions as the application procedure, the manner in which conditions can be imposed and the power to suspend or cancel a licence - closely follows the market licensing regime in proposed Part 7.2;
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- but the obligations which hang on that framework are designed to address the different services which a clearing and settlement facility provides.
8.7 As indicated in connection with Part 7.2, the approach has been taken of including only high level objectives in the Law. This reflects the view of the Financial Sector Advisory Council.
8.8 In brief, proposed Part 7.3:
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- allocates different responsibilities to the Minister, ASIC and the clearing and settlement facility licensees respectively in pursuing the functions which they each have under the regulatory regime;
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- in particular, the clearing and settlement facility licensee has the primary responsibility for determining how to ensure that the rules and procedures of the facility and their enforcement by the licensee are consistent with the provision of fair and effective service and reduce systemic risk;
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- ASIC has primary responsibility for ensuring that participants on a facility comply with the Corporations Law and Regulations and exercises oversight of the licensee to ensure that it complies with its ongoing obligations;
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- the Minister, with the advice and assistance of ASIC, has primary responsibility for the licensing of clearing and settlement facilities, as well as such associated matters as the suspension and cancellation of the licence, and determining whether the facility's operating rules are consistent with the licensee's obligations.
8.9 Proposed Part 7.3 will replace the following Parts of the Corporations Law:
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- Part 7.2A (The Securities Clearing House);
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- Part 8.2, Divisions 2 (clearing houses for futures exchanges) and 4 (to the extent it applies to clearing houses).
8.10 A number of the relevant definitions are to be found in proposed Part 7.1 - for example, the definitions of 'clearing and settlement facility' and 'operating rules'.
8.11 A person must not operate a clearing and settlement facility, as defined, unless they have an Australian clearing and settlement facility licence to operate the facility or the facility is exempt (proposed subsection 820A(1)).
8.12 The prohibition extends to holding out that the person has such a licence, operates a facility which is authorised, or that the facility is exempt (proposed section 820B).
8.13 Proposed section 820A will replace sections 779B and 1131 of the Corporations Law. However, it is noted that, in contrast to section 779B, the effect of the proposed provision is to require clearing and settlement facilities (as defined) to be licensed (or exempt).
8.14 Assisting in the operation of a financial market in contravention of proposed section 820A is covered by the Criminal Code and is therefore not explicitly mentioned in these provisions.
8.15 Strict liability will be applied to proposed paragraph 820A(1)(b) which provides that a person does not need a license to operate an exempt facility. The application of strict liability in this situation means that for an offence of operating a facility that is not exempt without a licence there is no burden on the prosecution to show that a defendant knew or was reckless as to whether the facility was not exempt, a matter that it might otherwise be difficult to show that a defendant had considered. Strict liability has not been applied in relation to paragraph (a) as the prosecution would not have the same difficulty in showing that a person knew or was reckless as to the fact that they did not have a license.
8.16 For an offence under proposed section 820A and some other offences related to proposed Part 7.3, there are higher pecuniary penalties (up to 500 penalty units) than for equivalent offences in other parts of the Bill, this reflects the nature and size of bodies that are likely to be operating clearing and settlement facilities.
What is a clearing and settlement facility?
Proposed section 768A - What is a clearing and settlement facility?
8.17 The definition of clearing and settlement facility focuses on what may loosely be called the settlement aspect of the process - that is, the provision of mechanisms by which the parties to financial product transactions meet their obligations arising from entering into the transaction.
8.18 In brief, a clearing and settlement facility is defined as a facility which provides a regular mechanism for the parties to transactions relating to financial products to meet obligations to each other which arise from entering into the transaction and are of a kind prescribed (proposed subsection 768A(1)).
8.19 Certain conduct is explicitly excluded from the definition (proposed subsection 768A(2)).
8.20 This definition thus includes, as the trigger for the obligations in Part 7.3, the one aspect of their functions which all clearing and settlement facilities which are to be regulated under these provisions perform, rather than attempting to refer to all the varied services performed by some clearing and settlement facilities.
8.21 Since the provisions may have application in connection with the settlement of a variety of financial products, it was considered inappropriate to specify in the proposed Corporations Act the obligations to be satisfied. This will be done by regulations.
8.22 To complement this approach, examples of the types of services which it is envisaged will satisfy this definition are now included in examples under proposed subsection 768A(1);
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- the examples provided are just that - they give a general description in plain English of a facility which will meet the definition and do not address the finer points, for example whether the payment and delivery obligations are net or gross; whether the fulfilment of the payment and delivery obligations may or may not be simultaneous; whether or not novation is involved.
8.23 The word facility is not defined. However, it is clearly not the intention to regulate as the operator of a financial market a person who merely operates an electronic means of communication or is just an Internet service provider. The operator of the means of communication would not itself be operating the market.
8.24 The mechanisms which are referred to include technical infrastructure, regulations and procedures.
8.25 In the case of, for example, an association which co-ordinates the making of rules and procedures (relating to the clearing and settlement of transactions in relation to financial products) which are then adopted by its members, but which does not provide technical infrastructure or oversee compliance with the regulations, then the association would not be operating a clearing and settlement facility in the relevant sense.
8.26 The definition requires a regular mechanism. This is consistent with the use of regularly in the definition of 'financial market' in proposed section 767A.
'To meet obligations to each other'
8.27 It is not the intention or effect of the phrase to meet obligations to each other to exclude from the definition clearing and settlement facilities which use novation - the obligations are initially between two parties and novation is a mechanism used by the clearing and settlement facility in dealing with those initial obligations.
8.28 Similarly, it is not the intention that proposed paragraph 768A(2)(b) take out of the definition clearing and settlement facilities which use novation.
8.29 The definition of 'clearing and settlement facility' will exclude:
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- an ADI acting in the ordinary course of its banking business (proposed paragraph 768A(2)(a));
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- a person acting on their own behalf, or on behalf of one party to a transaction and a broker dealing with its client's accounts in the ordinary course of its business activities (proposed paragraphs 768A(2)(b) and (c));
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- clearing members (proposed paragraph 768A(2)(d));
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- conducting treasury operations between related bodies corporate (proposed paragraph 768A(2)(e));
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- the real time gross settlement system (proposed paragraphs 768A(f) to (h)) - this exclusion is in the same terms as in paragraph 765A(1)(i) to (k) from the definition of 'financial product'.
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- other conduct prescribed by the regulations (proposed paragraph 768A(2)(i)).
8.30 Activities of a licensee which are outside the scope of the conduct which the legislation regulates are the legitimate concern of the regulator to the extent that they are relevant to the core area of regulation (for example, where resources are diverted from the regulated conduct to the other businesses, or where the commercial imperative of those other businesses may conflict with the obligations imposed in relation to the regulated activity).
When is a clearing and settlement facility operating in this jurisdiction?
8.31 A clearing and settlement facility which operates in Australia will be caught by the new regime. The phrase operates in this jurisdiction is not defined but is affected by proposed section 820D, which provides that the licensing regime will apply where the operator of the facility is incorporated in Australia, even if it only operates a clearing and settlement facility overseas (proposed subsection 820D(1)). The reason for this extension is to ensure and safeguard Australias reputation as a well-regulated jurisdiction.
8.32 This, however, will not limit the circumstances in which a clearing and settlement facility is operated in 'this jurisdiction' (that is, in Australia) for the purposes of Chapter 7 (proposed subsection 820D(2)). The provisions will thus cover facilities operated in Australia which process international transactions.
8.33 It is expected that mere accessibility by one or a few persons in Australia to a clearing and settlement facility based overseas would not be enough to constitute operating in Australia.
8.34 The Minister will be empowered to declare in writing:
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- a particular clearing and settlement facility; or
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- a particular type of clearing and settlement facility;
to be exempt from the requirement to be licensed. The exemption may be subject to conditions (proposed subsection 820C(1)).
8.35 In addition, after the exemption has been declared, the Minister will be empowered to impose conditions, or additional conditions, vary or revoke conditions and revoke an exemption (proposed subsection 820C(2)).
8.36 The provision requires notice and an opportunity to make submissions before the Minister may take such action in relation to an existing exemption (proposed subsection 820C(3)).
8.37 The exemption power has been included as a precautionary measure. It will only be used where it is proved that a facility is within the definition but there is no satisfactory policy reason for regulating it as a clearing and settlement facility.
How to apply for an Australian clearing and settlement facility licence
8.38 The first step in applying for a clearing and settlement facility licence will be to lodge an application, which addresses the prescribed matters and is accompanied by the prescribed documents and fee, with ASIC (proposed subsection 824A(1)).
8.39 ASIC will then be required, within a reasonable time, to give the application to the Minister with its advice (proposed subsection 824A(2)).
When a clearing and settlement facility licence may be granted
8.40 Before the Minister may grant a licence under proposed section 824B(1), he or she must be satisfied that:
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- the applicant has made an application, as required (proposed paragraph 824B(1)(a));
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- the applicant can meet the obligations that will apply (these are described below) (proposed paragraph 824B(1)(b));
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- the applicant has adequate rules and procedures (see proposed section 822A which is described below) for the facility to ensure, as far as is reasonably practicable, that systemic risk is reduced and the facility is operated in a fair and effective way (proposed paragraph 824B(1)(c));
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- the applicant has adequate supervisory arrangements (this is discussed further below) (proposed paragraph 824B(1)(d) - see Part 7.4);
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- no unacceptable control situation is likely to result (proposed paragraph 824B(1)(e) - see Part 7.4);
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- no disqualified individual appears to be involved in the applicant (proposed paragraph 824B(1)(f)).
General obligations on a clearing and settlement facility licensee
8.41 The general obligations on a clearing and settlement facility licensee are described in proposed section 821A and build on the initial criteria.
8.42 The general obligations, however, address the need to, for example, take action under the rules and procedures and keep them under review.
8.43 The general obligations are:
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- to the extent that it is reasonably practicable to do so, do all things necessary to reduce systemic risk and to ensure the facility's services are provided in a fair and effective manner (proposed paragraph 821A(a));
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- in using the phrase 'reduce systemic risk', it is not the intention of the legislation to prohibit the expansion of services a clearing and settlement facility may provide or the size of its clearing and settlement business, but that the provision imposes an obligation to do all that is necessary to reduce the systemic risk inherent in the service it provides at any one time, and address this when it does change its business;
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- to comply with the conditions on the licence (proposed paragraph 821A(b));
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- to have adequate supervisory arrangements (proposed paragraph 821A(c));
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- to have sufficient resources to properly operate the facility and carry out supervisory arrangements (proposed paragraph 821A(d));
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- in the case of a foreign body corporate, to be registered as such under Part 5B.2 (proposed paragraph 821A(e));
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- if prescribed for the purpose of Division 1 of Part 7.4, to take all reasonable steps to ensure that an unacceptable control situation does not exist (proposed paragraph 821A(g)); and
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- to take all reasonable steps to ensure that no disqualified individual becomes, or remains, involved in the licensee (proposed paragraph 821A(h) - see Part 7.4).
8.44 The criteria relating specifically to foreign operators of clearing and settlement facilities are summarised separately below.
8.45 At the time the licence is granted, conditions will be imposed on the licence.
8.46 These conditions must address (proposed subsection 825A(4)):
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- the particular facility that the licensee is authorised to operate;
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- the class or classes of financial products in respect of which the facility can provide services.
8.47 The paragraphs of this Explanatory Memorandum which discuss the concept of class of financial product in connection with financial markets apply equally in this context.
8.48 Other matters may also be addressed in conditions.
8.49 The procedure for imposing conditions, and varying or revoking existing conditions is also described (proposed subsections 825A(1) to (3)).
8.50 The Minister may only impose conditions, or vary conditions on his or her own initiative if, among other things, the licensee has been given written notice of the proposed action and an opportunity to make a submission (proposed subsection 825A(3)).
8.51 Conditions on a licence relating to the class or classes of financial product for which services may be provided bring a flexibility which is impossible under the current regime.
8.52 The clearing and settlement facility licensee is required to have arrangements for enforcing compliance with its operating rules and handling conflicts of interests.
8.53 The new provision (proposed paragraphs 821A(c) and 824(1)(d)) will include the possibility of a self-regulatory structure or oversight by an independent or related supervisor.
8.54 This does not mean that the regulatory scheme requires a clearing and settlement to take the same role in monitoring participants conduct as an exchange does. What it does require is a mechanism by which participants compliance with the operating rules and procedures is monitored and enforced. This requirement is thus linked to proposed paragraph 821A(a).
8.55 The criteria which independent supervisors would have to satisfy will not be included in the law because of the varieties of arrangements which are possible.
8.56 There will be no separate licensing process for the clearing and settlement facility supervisor but the arrangement would need to be considered as part of the initial licence (and the ongoing obligations). This will include an assessment of the skills, resources (including human resources and computer systems) and experience which will be necessary to carry out the task.
8.57 The aim is not to require duplication, but to facilitate efficiency. Thus it may be appropriate in certain situations for the supervision of a market and for the monitoring of clearing and settlement facility participants for compliance with the latter's rules to be undertaken by the one entity, for example, the market licensee.
8.58 There must also be adequate arrangements for handling conflicts between the commercial interests of the licensee and the need for the licensee to ensure that the facility's services are provided in a fair and effective way and that address systemic risk.
8.59 The clearing and settlement facility licensee must also have sufficient resources to operate the facility in accordance with the legislative obligations and provide for the supervisory functions (proposed paragraph 821A(d)).
8.60 This requirement refers to financial, technical and human resources.
8.61 Again, it needs to be pointed out that, in referring to supervisory functions, this requirement does not assume that the facility is undertaking the same monitoring role as an exchange. Instead, the phrase supervisory functions is referring to the monitoring and enforcement role envisaged in proposed paragraph 821A(c).
The facility's operating rules and procedure
8.62 The term operating rules is defined in proposed section 761A in terms of activities or conduct relating to the facility. To the extent that the rules cover other subject-matter, they will not be considered to be operating rules of the clearing and settlement facility for the purpose of this Chapter.
8.63 The subjects which a facility must address in its procedures and operating rules will be prescribed by the regulations (proposed subsections 822A(1) and (2)).
8.64 This approach has been adopted to complement the high level criteria included in proposed sections 821A and 824B, and to delineate the issues which must be addressed in rules or procedures.
8.65 It is expected that the following will be amongst those included in the regulations as being required to be addressed in the operating rules:
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- the regulated services provided and the procedure participants must follow to obtain them;
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- measures to address risk including access, expulsion, suspension and disciplining and procedures which participants must follow to address the risks of relevance to the facility;
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- if the clearing and settlement facility is prescribed under proposed Division 4 of Part 7.11, rules which make satisfactory provision for the financial products to be transferred under those provisions.
8.66 It is expected that certain aspects of risk management will also be required by the regulations to be addressed in procedures. These are likely to include:
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- mechanisms to ensure clearing and settlement facility system integrity and security;
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- identifying and monitoring risks of relevance to the facility, and developing rules (see above) and procedures to address them;
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- procedures for the appropriate sharing with markets, other clearing and settlement facilities and ASIC of information about participants and their relevant activities;
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- making available general information about the procedures of the facility, including the rights, obligations and exposures associated with the system.
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- procedures for resolving complaints by facility participants about the services provided.
8.67 The systems and controls used will need to be appropriate for the scale and nature of the clearing and settlement facility's business.
8.68 Draft regulations are being prepared for public comment.
8.69 Proposed section 822A and the relevant regulations will therefore undertake the role of subsections 779B(2) and 1131(2) of the Corporations Law.
8.70 While the regulations will provide the basic list of matters to be included in rules and procedures, it is possible that additional rules, procedures or measures will be required in particular circumstances to meet the test in proposed paragraphs 824B(1)(c) and 821A(c). Thus contract protection procedures and mechanisms will not be specified in the regulations, but it is expected that they will be of relevance in the assessment of measures taken to reduce risks.
8.71 The phrase contract protection procedures and mechanisms in this context includes, for example, margining, guarantee arrangements (that is, clearing house support, not the compensation arrangements described in proposed Part 7.5), netting, position limits and capital requirements.
8.72 As indicated in relation to Part 7.2, in the case of a market which provides an anonymous trading environment, some form of contract protection (satisfactory for the classes of product concerned) such as novation clearing or credit capping is likely to be necessary before its clearing and settlement arrangements will be considered adequate.
8.73 The facility would also be expected to have links with participants, the trading system, the payment system, other clearing and settlement facilities (if, for example, there is more than one clearing and settlement facility operating for a given market), depositories and registries as appropriate to provide the regulated services offered.
8.74 The public interest is required to be taken into account by the Minister in making certain specified decisions, including granting a clearing and settlement facility licence (proposed paragraph 827A(2)(g)).
8.75 The provisions relating to operating rules have been collected. They relate to:
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- the effect of the operating rules (proposed section 822B);
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- the enforcement of the rules (proposed section 822C); and
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- the requirement to lodge and power to disallow them (proposed section 822D and 822E).
8.76 These provisions are comparable to sections 779C, 779F, 779G, 1136 and 1140 of the Corporations Law.
8.77 While the grounds on which a Minister may disallow rule changes are currently not specified, the new provisions require the Minister to have regard to the consistency of the changes with the licensee's obligations under proposed Part 7.3, including the obligation to reduce systemic risk and to ensure the facility's services are provided in a fair and effective manner.
Other obligations on clearing and settlement facility licensees
Notification about obligations on the licensee
8.78 The clearing and settlement facility licensee must notify ASIC:
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- if it becomes aware that it may no longer be able to meet or has breached one of the general obligations or has breached a condition of the licence (proposed subsection 821B(1));
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- when it provides a new class of financial service incidental to the operation of the facility (proposed paragraph 821B(2)(a)).
8.79 There are no comparable provisions in the existing Corporations Law.
Notification about disciplinary action
8.80 The clearing and settlement facility licensee must also notify ASIC when the licensee takes disciplinary action against a participant (proposed paragraph 821B(2)(b)).
8.81 This provisions reflects the current requirements in section 779E and subsection 1139(2).
8.82 In addition, the licensee must notify ASIC if, for example, the licensee has reason to suspect that a person has committed a significant contravention of the facility's operating rules or the proposed Corporations Act (proposed paragraph 821B(2)(c)).
Notification about persons involved in the operator
8.83 In addition, the licensee must provide ASIC with details about persons involved in the operator (proposed subsection 821B(4)). This will support the provisions in proposed Part 7.4.
Overseas clearing and settlement facilities
8.84 The provisions of relevance to overseas clearing and settlement facilities which are licensed under proposed subsection 824B(2) are addressed separately below.
8.85 Clearing and settlement facility licensees will be required to:
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- give such assistance to ASIC, or a person authorised by ASIC, as ASIC reasonably requires to perform its functions (proposed section 821C).
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- this provision reflects subsections 779D and 1139(1) of the Corporations Law.
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- give a person authorised by ASIC reasonable access to the facility for the purposes of Chapter 7 (proposed section 821D).
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- this provision is comparable to subsections 776(3) and (5), and 1139(4) of the Corporations Law (which apply to securities and futures exchanges).
8.86 Each clearing and settlement facility licensee will be required to provide ASIC with an annual report on the extent to which it has complied with its obligations under Part 7.3 (proposed subsection 821E).
8.87 The requirement and ancillary provisions permitting the Minister to require an audit report reflect section 769C of the Corporations Law, which currently applies only to securities exchanges.
8.88 If the one entity holds both a market licence and a clearing and settlement facility licence, then the annual reports required under both licences could be provided in the one document.
When an overseas clearing and settlement facility operator seeks an Australian clearing and settlement facility licence
8.89 The operator of a clearing and settlement facility which is authorised in the foreign country in which its head office is located may:
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- seek an Australian clearing and settlement facility licence under the criteria referred to above (proposed subsection 824B(1)); or
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- seek an Australian clearing and settlement facility licence under proposed subsection 824B(2).
8.90 The purpose of proposed subsection 824B(2) is to facilitate competition and avoid duplicated regulation, while paying due regard to such issues as systemic risk and the provision of services in a fair and effective way.
8.91 Whichever course is chosen, the operator will be required to appoint a local agent (proposed subsection 824B(3)). The provisions relating to the appointment and liability of local agents are found in Part 5B.2 of the Corporations Law.
8.92 If the application is under proposed subsection 824B(2), the Minister may grant an Australian clearing and settlement facility licence authorising the applicant to operate the same facility as is operated overseas if the Minister is satisfied that:
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- the applicant has made an application, as required (proposed paragraph 824B(2)(a));
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- the applicant can meet the obligations which will apply if the licence is granted (proposed paragraph 824B(2)(b));
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- the operation of the facility is subject to legislative requirements and supervision in the country in which it is authorised which are sufficiently equivalent, in relation to the degree of protection from systemic risk and the level of effectiveness and fairness of services they achieve, to the Australian requirements (proposed paragraph 824B(2)(c));
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- the applicant undertakes to co-operate with ASIC by sharing information and in other appropriate ways (proposed paragraph 824B(2)(d));
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- no unacceptable control situation is likely to result and no disqualified individual appears to be involved in the applicant (proposed paragraphs 824B(2)(e) and (f) - see Part 7.4); and
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- any other requirements which are prescribed by the regulations for the purpose of this subsection are satisfied (proposed paragraph 824B(2)(g)).
8.93 There will be no requirement for reciprocal recognition of Australian facilities in the country of origin of such applicants.
8.94 While most of the provisions of proposed Part 7.3 will apply to such facilities, there are a number of provisions specific to clearing and settlement facilities covered by subsection 824B(2) licences:
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- in the case of an overseas clearing and settlement facility licensed under proposed subsection 824B(2), it is a continuing obligation that the facility remain authorised in the relevant foreign country and to obtain the Minister's approval before moving its principal place of business to another country (proposed paragraph 821A(f));
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- the provisions relating to contents of operating rules and procedures do not apply (subsection 822A(3));
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- this is on the basis that the total regulatory requirements, including the vetting of procedures and rules, has been considered to be at least equivalent at the time the licence is granted, and on a continuing basis.
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- amendments to the operating rules of such a facility are not disallowable, but must be lodged with ASIC, so that the Australian regulator is in a position to assess the facility's continuing compliance with the foreign regulatory scheme's substantial equivalence (proposed paragraph 822D(3));
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- such a clearing and settlement facility licensee must also give written notice to ASIC if the licensee ceases to be authorised to operate in the overseas jurisdiction (proposed paragraph 821B(3)(a));
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- the clearing and settlement facility licensee must notify ASIC of significant changes to the overseas regulatory regime to which it is subject (proposed paragraph 821B(3)(b));
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- ceasing to be authorised to operate in the facility in the jurisdiction of the operator's principal place of business and the Minister deciding that the overseas regime is no longer equivalent are grounds for the Minister to decide to suspend or cancel the Australian market licence (proposed paragraph 826B(d)).
8.95 If a market operator with a subsection 824B(2) licence wishes to move its principal place of business to another country, it must obtain the Minister's approval (proposed section 821F).
8.96 If the principal place of business is moved to Australia, then the subsection 824B(2) licence is no longer appropriate and a licence under subsection 824B(1) would be required (proposed subsection 821F(2)). However, it is anticipated that the process would be streamlined to the extent that relevant matters had already been proved.
8.97 The factors to be taken into account in relation to relevant decisions in relation to such a licence include the arrangements for co-operation between ASIC and the overseas regulator (see proposed subsection 827A(3)).
8.98 The purpose of the avenue provided in proposed subsection 824B(2) is to facilitate competition and avoid duplicated regulation while paying due regard to investor protection and integrity of the system.
Further powers of the Minister
The Minister's power to give directions
8.99 If the Minister considers that a clearing and settlement facility licensee is not complying with its obligations under Part 7.3, the Minister may give to the licensee a written direction to do specified things that the Minister believes will promote compliance by the licensee with those obligations (proposed subsection 823A(1)).
8.100 The clearing and settlement facility licensee is required to comply with the directions, which may be enforced by Court order (proposed subsection 823A(2) to (3)).
8.101 The provision is comparable to section 769B in the Corporations Law, which currently applies to securities exchanges.
The Minister's power to require a special report
8.102 The Minister is empowered to require a clearing and settlement facility licensee to give ASIC a special report on specified matters (proposed section 823B).
8.103 The Minister may also require the licensee to provide an audit report on the special report.
8.104 The licensee is required to give the special report, and the audit report (if any) to ASIC within the time specified. ASIC then provides it to the Minister with advice.
8.105 This provision generally follows section 769D of the Corporations Law, which currently applies only to securities exchanges.
8.106 ASIC's role in relation to the regulation of exchanges and clearing and settlement facilities is currently reflected to only a limited extent in the Corporations Law.
8.107 The proposed provisions will recognise the role of ASIC in assessing applications and amendments to operating rules and otherwise providing advice to the Minister.
8.108 Proposed section 827B states that ASIC may give advice to the Minister in relation to any matter in respect of which the Minister has a discretion under Part 7.3, or any other matter concerning clearing and settlement facilities.
8.109 In addition, proposed paragraph 827A(2)(h) requires the Minister to have regard to any relevant advice received from ASIC in his or her assessment of applications and when considering, for example, the imposition of conditions on a licence and whether to disallow a change to the operating rules.
8.110 The Minister will be empowered to delegate his or her powers under this Chapter to ASIC (proposed section 1101J).
ASIC assessments of compliance
8.111 ASIC will be empowered to undertake an assessment of how well a clearing and settlement facility licensee is complying with its obligations under Chapter 7 (proposed section 823C). It will be required to undertake an assessment in relation to the obligations included in proposed paragraph 821A(c) annually.
8.112 The legislation will not spell out the way the assessment is to be undertaken but indicates that any information and reports received from an overseas regulatory authority.
8.113 Proposed section 823D provides ASIC with a power to give directions to a clearing and settlement facility:
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- the triggers are that ASIC considers that it is necessary, or in the public interest, to protect people dealing in a financial product or a class of financial products, or the failure of the licensee to do all things reasonably practicable to ensure the facility's services are provided in a fair and efficient manner (proposed subsection 823D(1));
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- the direction power is limited to transactions of which the licensee receives notice after the direction takes effect;
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- the provision includes a requirement for notice of the opinion and an 'appeal' mechanism to the Minister (proposed subsection 823D(7)).
8.114 A second directions power, which is limited to situations where the facility has not done all things reasonably practicable to reduce systemic risk in the provision of the facility's services is also included - see proposed section 823E.
8.115 An example of a direction under these provisions follows:
ASIC may direct a clearing and settlement facility to close out of all positions, or otherwise deal with, outstanding positions held by participant A so that the financial position of other participants in the markets in which A participated is not jeopardised by A's failure to meet his obligations.
Matters to be taken into account by the Minister
8.116 The legislation requires that the Minister have regard to a number of factors when considering whether, for example, to grant an application, impose, vary or revoke conditions on a licence or disallow a change to the operating rules (proposed section 827A).
8.117 The factors include:
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- the nature of the products for which services are provided; and
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- the technology used.
8.118 The factors listed in the proposed section provide assistance to facilities (as well as the Minister) in working out how to satisfy the initial criteria and various obligations imposed.
What services can be provided by a clearing and settlement facility licensee?
8.119 Nothing in these amendments should be read as limiting the services, which a clearing and settlement facility licensee can provide. To the extent that such services fall outside this regulatory regime, they will not be regulated and are only relevant to the regulator to the extent that their provision may detract from the facility fulfilling its obligations in relation to regulated services.
When the clearing and settlement facility licensee also provides financial services
8.120 A clearing and settlement facility licensee will not need any additional approval or licence to provide financial services that are incidental to its facilitys activities (proposed paragraph 911A(2)(d)). This is currently addressed in paragraph 779J(1)(a) of the Corporations Law.
8.121 However, in these circumstances, the licensee must notify ASIC when it provides a new class of financial services (proposed paragraph 821B(2)(a)).
8.122 On the other hand, if the financial services cannot be characterised as incidental to the facility's activities, then an Australian financial services licence will be required.
When a clearing and settlement facility licensee also operates a market
8.123 A clearing and settlement facility licensee will need to obtain an Australian market licence before it operates a financial market. The two licences may be included in the one document (proposed section 824D).
More than one facility in the same licence
8.124 A licence may cover more than one clearing and settlement facility (proposed section 824E). Special provisions apply in relation to varying the conditions on such a licence to add another facility, and in relation to suspending or cancelling such a licence.
Variation, suspension and cancellation
8.125 The proposed provisions empower the Minister:
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- to vary the licence to reflect a change of name (proposed section 826A);
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- to immediately suspend or cancel if the licensee ceases to carry on the business of operating the facility, or becomes externally-administered, or asks the Minister to do so (proposed section 826B);
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- to suspend or cancel the licence following a hearing and report, in other circumstances (proposed section 826C); and
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- to vary or revoke a suspension (proposed section 826E).
8.126 The effect of suspension is addressed in proposed section 826D. It is likely that the suspended licensee will remain subject to certain obligations, such as to give access to its facility to ASIC. This will be achieved by empowering the Minister to specify in the notice the provisions, which will continue to apply.
8.127 An Australian clearing and settlement facility licence cannot be varied, suspended or cancelled otherwise than under these provisions (proposed section 826G).
8.128 The following must be gazetted, but may take effect at an earlier date:
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- the grant of an Australian clearing and settlement facility licence (proposed section 824C);
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- the imposition of conditions, or additional conditions (or variation or revocation of conditions) on an Australian clearing and settlement facility licence (proposed subsection 825A(1));
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- suspension, variation or revocation of suspension and cancellation of an Australian clearing and settlement facility licence (proposed section 826F).
8.129 The following take effect on gazettal:
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- an exemption under proposed subsection 820C(1);
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- the imposition of a condition, or variation or revocation of conditions, or the revocation of an exemption under proposed subsection 820C(2).
Relevant matters in proposed Part 7.12
8.130 The following are addressed in proposed Part 7.12:
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- the effect on transactions of contravention of this Chapter (proposed section 1101H);
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- qualified privilege and protection from actions for breach of confidence in various situations (proposed Division 1 of Part 7.12).
8.131 Appeals from decisions of the Minister and ASIC may be made to the Administrative Appeals Tribunal (see Part 9.4A of the Corporations Law).