12 March 2019

Access to global financial markets safeguarded

Hon Kris Faafoi
08 March 2019

New Zealand’s continued access to key global financial markets is assured after legislation aligning New Zealand’s financial markets law with new international regulations reached its first milestone, Commerce and Consumer Affairs Minister Hon Kris Faafoi says.

“The Financial Markets (Derivatives Margin and Benchmarking) Reform Amendment Bill passed its first reading last night. The amendments in this Bill will align us with international regulations made to strengthen the resilience of global financial markets and reduce risk.”

Mr Faafoi said the Bill is critical to ensuring financial institutions that rely on derivatives can continue to transact seamlessly in international financial markets.

“Financial institutions like the Super Fund, ACC and banks use derivatives to hedge against factors such as currency risks when they make investments or raise money offshore.

“Being able to access the global financial markets ensures these entities can invest and raise funds cheaply and efficiently. This ultimately benefits New Zealand consumers and businesses, who are the end-users of these entities.”

Kris Faafoi says while the changes are complex and technical, they not only bring New Zealand into line with international best practice but also avoid potentially substantial damage to the economy.

“Without these amendments, New Zealand’s financial institutions could lose access to offshore funding markets because they don’t comply with new requirements that have resulted from overseas reforms.

“Not having access to these markets could also see an increase in the cost of raising capital, leading to higher interest rates. This would affect all New Zealanders, directly or indirectly, potentially costing millions of dollars to the economy. It could also have a negative impact on financial stability, if it meant New Zealand entities were raising funds from riskier sources or were no longer able to hedge certain risks.

“By progressing this legislation, the Government is future-proofing a significant part of our financial markets for the benefit of all New Zealanders.”

The Bill is now referred to the Finance and Expenditure select committee with a report back to the House by 22 July.

Notes to editors

International reforms: in recent years, various international reforms have been introduced to address significant risks in global financial markets.

G20 margin requirements

Following the Global Financial Crisis, the Group of Twenty (G20) countries introduced new rules requiring parties trading in “over the counter” derivatives (derivatives not traded on a formal exchange) to exchange collateral. The new rules are intended to protect one party to a contract in the event the other defaults or becomes insolvent. Under current laws, New Zealand financial institutions face impediments to comply with the new requirements, restricting their ability to trade in “over-the-counter” derivatives. The Bill will allow New Zealand entities to meet the new requirements.

EU benchmark regime

The European Union (EU) recently introduced a new regulatory regime for financial benchmarks, which underpin many financial instruments such as derivatives. The aim is to avoid potential manipulation of benchmarks, and other factors which could destabilise financial markets. Under the new regime, non-EU benchmarks need to be subject to regulatory oversight that is “equivalent” to the EU regulations. The Bill introduces a licensing regime that will comply with the EU regulations and allow New Zealand benchmarks to continue to be used in the EU.

Derivatives: derivatives are financial contracts that are used for, amongst other things, hedging risks. They are often used by financial institutions such as banks and large private and public sector entities as part of their investment and funding programmes. For example, banks might use them to hedge the foreign exchange risk associated with capital raised offshore.