Oversight of Financial Market Infrastructures in New Zealand

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Oversight of financial market infrastructures (FMI)

Financial market infrastructures (FMI) arrange and provide for the clearing, settlement and recording of financial transactions like payments, securities, and derivatives.

Published:

Types of FMI

FMI play an important role in our financial system. They:

keep financial markets running smoothly

support the overall stability of the economy

give investor’s confidence.

In New Zealand, there are 4 main types of FMI:

Payment systems
— these are instruments, procedures and rules that we use to transfer funds between or among participants.

Securities settlement systems
— these use rules agreed by many participants to make sure tradable assets like stocks, bonds and other investments are transferred properly and settled by updating a ledger of ownership.

Central securities depositories
— these act as a central place to safely store investments like bonds and shares, and help manage the secure transfer of these investments, and other asset services .

Central counterparties
— these act as a middle party between many buyers and sellers of securities and make sure both parties receive their payment or securities following a trade.

There is also a fifth type of FMI called trade repositories. A trade repository records all derivative trades. There are no trade repositories currently in New Zealand.

The diagram shows the direct linkages between selected financial entities and financial market infrastructures (FMI) operating in New Zealand. The financial entities represented in the chart includes the Reserve Bank, New Zealand registered banks, the securities markets, and international financial institutions.

The FMI closely linked to the Reserve Bank in the chart are the Exchange Settlement Account Systems, NZClear and the CLS. Other key FMI represented here includes EFTPOS NZ, Settlement Before Interchange, NZCDC Settlement System, and ASXClear.

System

Description

Operator

Classes

Designated

Exchange Settlement Account Systems (ESAS)

Provides real-time gross settlement of interbank transactions across the exchange settlement accounts held with us.

Reserve Bank of New Zealand

Payments system

High Value Clearing System (HVCS)

A set of rules for customer-to-customer real-time payments and for high-value payments between participating financial institutions. Settlement occurs in ESAS.

Payments NZ

Payments system

CLS settlement

Provides payment versus payment settlement of foreign exchange transactions.

CLS Bank International

Payments system

Settlement Before Interchange (SBI)

Arrangements for the progressive exchange during the day of retail payment instructions (direct debits and credits, automatic payments, ATM settlement transactions, internet banking and phone banking). Payments are exchanged using SWIFT and settlement of net interbank positions occurs in ESAS.

Payments NZ

Payments system

Worldline New Zealand Limited

Provides a network for the interchange of point-of-sale card transactions.

Worldline SA

Payments system

EFTPOS NZ Limited

Provides a network for the interchange of point-of-sale card transactions.

EFTPOS NZ Limited, a company owned by VeriFone Systems

Payments system

NZClear

Allows members to settle fixed interest and equity transactions. Interbank payments occur directly in ESAS.

Reserve Bank of New Zealand

CSD and SSS

NZCDC Settlement System

Used to clear and settle trades on NZX markets. The system includes a central counterparty and securities depository.

New Zealand Clearing and Depository Corporation Limited, a wholly owned subsidiary of NZX Limited

CCP, CSD and SSS

LCH Limited

A multi-asset class, central counterparty for a number of major exchanges and markets. Used by New Zealand banks to clear trades in NZD-denominated interest rate swaps .

LCH Group Holdings Limited

CCP

ASXClear (Futures)

A central counterparty for clearing NZD interest rate futures and New Zealand energy futures traded on the ASX24 market.

ASX Clear Futures Pty Limited

CCP

SWIFT

Provides secure global financial messaging services.

SWIFT

Although not an FMI, it is a critical service provider to many FMI.

Why are FMI important?

FMI help make sure payments and trades—like buying and selling shares or other investments—are processed safely and efficiently every day. They also reduce transaction costs for participants by reducing the risk of a default and promoting transparency.

If FMI stopped working, you wouldn’t be able to make payments, or other financial transactions. This would affect financial markets, business and everyday people. Because of the important role that FMI play in the financial system, we regulate FMI to make sure they are operating safely.

FMI include:

rules and arrangements set out by an operator

systems and platforms that enable transactions

the people or companies that use them (participants).

FMI operators must set out clear rules, use reliable technology, and have strong risk management processes to help prevent things going wrong.