Financial Market Infrastructures Bill

Thank you, Madam Speaker. It’s good to finally be here at this third reading of this important Financial Market Infrastructures Bill—a bill which, as you will no doubt recall, is about ensuring that the infrastructure that underlies the financial transactions in New Zealand is well maintained.

One of the main aspects of this bill is to give powers of information gathering, because, as we know, a lot of these transactions go on out of sight. And these settlement transactions and the payment systems, which are absolutely fundamental to how our everyday finances work, we only see what scratches the surface. But underlying it are these very important high-value, high-frequency transactions that are undertaken often by private entities, which provide the services that connect up the banks, including the Reserve Bank. It’s really important that the information is available to understand how strong those entities are and, in particular, whether there are any risks, because the risk of failure in these instances is significant indeed. In fact, if there were a failure of one of these settlement entities, it could be catastrophic. So it’s really important, and this bill does it well, to strike the balance between the ability to gather and use that information, but at the same time protect it, because that information is sensitive at a number of levels, as all financial information is.

Of course, the other thing is that this designates institutions as subject to this regime because, of course, there are varying levels, and this isn’t about the banks themselves. It’s about the clearance entities that underlie them, right down to the providers of hard infrastructure, because we know, in fact, there have been instances—and here we see it simply when we go to the shops and we go to pay for something and the EFTPOS terminal doesn’t work. Now, that might be a local issue, but unbeknownst to many, there have been issues in New Zealand where there has actually been a failure at an infrastructure level. Essentially, the wire was cut, and there’s very fragile infrastructure in there. And when the payment system for the whole of New Zealand falls over, even for an hour it’s bad, but if it happened for any longer than that, it could have very, very significant impacts on our financial institutions. Of course, if the settlement of transactions between banks—if one bank can’t settle its obligations with another bank, then we have a risk of a cataclysmic failure, and that is what this addresses. So it identifies those institutions which are critical to our financial infrastructure, and it enables them to be regulated by this regime.

The other thing it does is that if there is a problem, if there is a crisis, it, essentially, enables a moratorium and enables parties to come in and to take management, to freeze the assets, to settle where settlements are needed. You’ll recall, members, the derivatives bill that we did not so long ago when we recognised the importance of settling derivative transactions, even if there was a financial failure. Now, this is the kind of thing we need to ensure here so that important settlements are made, but that the assets are at the same time protected.

The select committee did look at the bill and made a number of relatively detailed and technical recommendations, but nevertheless important. So confirming, for example, in terms of that moratorium that it doesn’t affect the statutory manager’s obligations to pay claims under FMI rules—the financial market infrastructures rules—just things like that to make sure that the mechanism is there, that it’s working properly, and that if the statutory manager does come in, that it can shepherd the liquidation, if necessary, of that entity, and it can ensure that the market itself, the whole market structure, essentially, doesn’t fall over.

This is a technical bill, but it’s a really important one. It’s one that, you know, the select committee worked really hard on, had some very technical submissions, but were well served by officials. So it’s good to see that this bill is ready to go, ready to have its final third reading. I commend this bill to the House.

I rise on behalf of National, an MP for North Shore, to talk on the Financial Market Infrastructures Bill, third reading. National supports this bill.

This bill will establish a new regulatory regime for financial market infrastructures (FMIs). It also provides certain FMIs with more legal protections relating to settlement, netting, and also the enforceability of those rules. The bill would also replace the current regime, which is contained in sections 5B and 5C of the Reserve Bank of New Zealand Act 1989. Financial market infrastructures, or FMIs using the acronym, are multilateral systems that provide trading, clearing, settlement, and reporting in relation to payments, securities, derivatives, and other financial transactions, I appreciate it is a mouthful but that is the reality of what it does. It includes payment systems, securities, settlement systems, central security depositories, central counterparties, and trade repositories.

This bill is important, because it creates an approved and properly regulated framework for a safe and efficient financial system. National supports this bill, as I stated. It formalises policy proposals announced by the Reserve Bank in 2015 and 2016, which were endorsed by the then National-led Cabinet. Under the existing regime, the systems and services have very little specific regulation, and this bill is intended to bring New Zealand’s regulatory framework for FMIs in line with what we see is global best practice.

This bill has been well signalled and well consulted on, as we’ve just heard, in terms of some of those improvements, in terms of the regulatory environment and the governing functions around that bill, and this will be a good thing for our financial institutions. The select committee has reflected, resulted, and looked at a number of amendments in regards to this bill, which I think have improved the bill, and amendments that we as a party support.

I guess just to provide a little bit of background and context, in 2015 and 2016, the Reserve Bank released policy proposals relating to an update of the regulatory regime for FMIs, particularly for payment systems, and as I said these proposals were endorsed by the Cabinet of the National Government. The bill came out of this, and has been through—as we just heard—three rounds of public consultation on the proposed framework as a whole, and on the crisis management powers contained in it. I think, overall, as we heard, the National Party support this bill, I think in terms of it’s sensible. I think the point that it will align us with global best practice is a good thing, and I would commend this bill to the House.

Madam Speaker, this is one of those pieces of legislation that comes before the House, and those who aren’t imbued in the financial system will look at it with something of horror because it is quite complicated, as my colleague Dr Duncan Webb said. However, in my experience in the fraud squad from many years ago, I got some advice from my detective sergeant. He said, “Don’t get too overwrought when you are confronted with a lot of financial papers in front of you that you have to put together. Simply break them down into something that people will understand.”—in our case, the jury. So that’s how I attack this bill, and when you do look down at it, this bill is simply something that keeps the whole financial system moving.

You might remember back in 2008 when there was the global financial crisis happening. Well, what actually happened there was that the reason the world nearly ground to a halt was the financial system broke down. Each of the banks knew they were sitting on this rubbish, which were called derivatives, which were going to potentially drag them down, but they also knew they had this stuff, and then they knew that the banks that they were doing business with had this stuff as well. So they weren’t going to commit themselves and ensure that they were then going to be subject or vulnerable to this breakdown. So what happened was that it took the American Federal Reserve to step in to lubricate the system. I see you’re on your feet, Madam Speaker, so I’ll take that as a—

This debate is interrupted and is set down for resumption next sitting day. The House stands adjourned until 2 p.m. tomorrow.

The House adjourned at 10 p.m.