Warm welcome for financial market infrastructure reforms

By Sean McMahon and Taylor Green

The resilience of Australian financial market infrastructure (FMI) is critical to providing stability and certainty to the economy and broader financial ecosystem. The Treasury’s proposed reforms to the regulatory framework of FMI closed 9 February 2024, with a resounding positive response from key players.

Primarily, the reform looks to install a legislated crisis management regime where the regulators can step in to exercise statutory management and order the compulsory transfer of share processes to other facilities. The proposed legislation enables the RBA to garner control of domestic clearing and settlement facilities where necessary to ensure the continuity of critical clearing functions. This includes the power to assist a foreign regulator to resolve an overseas clearing and settlement facility licensed in Australia.

In its submission to Treasury, the ASX welcomed the reform but cautioned against restricting regular risk management procedures and prevention of timely transfer of assets. The submission states:

…exercise of the crisis resolution powers should not prevent ASX from exercising default and recovery powers, or regular risk management arrangements such as the collection of margin. Given the breadth and seriousness of the proposed powers, it is also appropriate that the resolution powers are balanced with adequate protections for asset holders.

It seems a reoccurring theme in the submissions to Treasury that parties view the reform positively – if it is an avenue of last resort. This view is particularly poignant given ASIC’s ability to assign compulsory transfer powers to the RBA, without ministerial consent, if ASIC takes the view it is in the public interest to do so in order to protect:

• the economy;
• the efficiency, integrity, and stability of the Australian financial system; or
• the provision of fair and effective services by relevant facilities.

If this power is not amended in the final form of the legislation, it is some comfort that it is (hopefully) unlikely these powers will ever need to be activated. In any event, with FMI so central to Australia’s economy, with a strong connection to the broader banking framework, the seriousness of these powers is offset by their ability to limit the potential for the leeching of a contagion into the Australian financial ecosystem.

What does it mean for investment funds?

For our clients managing listed funds or managed investment schemes, we recommend keeping watch for the final installation of this legislation. The powers are serious, with regulators having the ability to significantly shift the market between facilities. If there is a crisis, there is a potential that transfer of your shares may suffer a brief disturbance as facilities are relocated. However, these powers are intended to cause a ‘hiccup’ in a crisis, rather allowing for a complete stall for all those members of any singular failing market.

You can take comfort the existence and availability of these powers offers a level of security, providing an established foundation for ASIC and the RBA to ensure operational effectiveness and uphold market integrity in times of crisis.