House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Jim Chalmers MP)

Chapter 1: Strengthening Australia's FMI regulatory framework - Establishing a crisis management regime

Outline of chapter

1.1 Schedule 1 to the Bill establishes the crisis management regime for domestic CS facilities. The amendments provide the RBA with powers to resolve crisis situations in CS facilities. The RBA's new crisis powers are explained in this Chapter. New powers for the RBA aimed at reducing the risk of a crisis occurring are explained in Chapter 2.

1.2 The amendments in Schedule 1 also establish a funding mechanism that is available to assist in resolving crisis situations.

1.3 All legislative references in this chapter are to the Corporations Act unless otherwise stated. Further, all references to "domestic CS facility licensee" in this Chapter are references to a body corporate registered under Chapter 2A who is granted an Australian CS facility licence under subsection 824B(1) of the Act unless the contrary intention is stated.

Context of amendments Australia's Financial Market Infrastructure

1.4 The entities that make up Australia's FMI are critical in facilitating and supporting Australia's capital markets. When these entities work well, they contribute to the financial stability, operational efficiency, and effective management of risk in Australian financial markets.

1.5 FMI entities are supervised either solely by ASIC, or, in respect of CS facilities, by both ASIC and the RBA. They are typically large and intertwined with the broader financial system.

1.6 These are, by necessity, highly regulated entities, as failure in any of these entities could have severe consequences for the operation of markets, and in turn damage the Australian economy.

1.7 Schedules 1, 2 and 3 to the Bill introduce a crisis management regime, granting powers to the RBA to provide for the management and resolution of a CS facility that has failed or is at risk of failing. New and enhanced regulatory powers are also provided to the RBA and ASIC to assist in mitigating and managing the risks FMI entities face and pose to the broader financial system. The amendments also transfer certain ministerial powers to regulators to streamline existing financial market regulation, and reflect their respective responsibilities.

Regulation of financial market infrastructure

1.8 Australia's FMI includes:

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financial markets (operated by financial market operators);

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clearing and settlement facilities;

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derivative trade repositories; and

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benchmark administrators.

1.9 These entities support trillions of dollars in securities and derivatives transactions each year.

1.10 The systemic importance of these entities calls for a high degree of regulation and supervision. Each of the entities mentioned above has a specific regulatory regime contained in Chapter 7 of the Act.

Financial Market Operators

1.11 Financial market operators provide the listing and trading services that allow financial products to be issued and traded on a financial market. They also facilitate transparent and competitive pricing of listed securities and derivatives and ensure fair and orderly trading.

1.12 A financial market is defined in the Act to be a facility through which offers to acquire or dispose of financial products are regularly made or accepted, or where offers or invitations are regularly made to acquire or dispose of financial products that are intended to result in the making of offers to acquire or dispose of financial products (see section 767A of the Act).

1.13 There are currently around 51 market licensees in Australia of which 37 are foreign bodies corporate.

1.14 Financial market operators are regulated under Part 7.2 of the Act. A person that operates a financial market in this jurisdiction must hold an Australian market licence unless the financial market is exempt from the operation of Part 7.2. The Minister has the power to, among other things, grant an Australian market licence and give directions to promote compliance with a licensee's obligations under Chapter 7 (including the obligation to comply with licence conditions). These powers are currently delegated to ASIC (see the Ministerial Powers (ASIC) Delegations 2021).

1.15 ASIC supervises licensed financial markets, issues market integrity rules, and monitors Australian market licensees' and participants' compliance with those rules. ASIC also monitors the compliance of Australian market licensees with the conditions of their licence and obligations set out in the Corporations Act. Market integrity rules made by ASIC can deal with the activities and conduct of licensed markets and of persons in relation to licensed markets and financial products traded on licensed markets (see paragraphs 798G(1)(a)-(c) of the Act).

CS facilities

1.16 CS facilities provide post-trade clearing and settlement of transactions. These facilities are integral to the functioning of financial markets.

1.17 CS facilities are defined in the Act as a facility that provides a regular mechanism for parties to transactions relating to financial products to meet obligations to each other that arise from entering the transactions and are of a kind prescribed in regulations (see section 768A(1) of the Act).

1.18 Clearing is a post-trade and pre-settlement risk management process which often involves novating (i.e. substituting attached rights and obligations of the parties to) trades to an entity known as a central counterparty which becomes the buyer to every seller and the seller to every buyer. Clearing provides transaction efficiency and allows counterparty risk to be managed centrally, enhancing investors ability to act confidently when trading on markets. Settlement involves the delivery of securities or cash from one party to another in accordance with the terms of the specific trade.

1.19 An operator of a CS facility is regulated under Part 7.3 of the Act. A person that operates a CS facility in this jurisdiction must hold an Australian CS facility licence unless the CS facility is exempt from the operation of Part 7.3 of the Act. The Minister has the power to, among other things, grant an Australian CS facility licence, impose licence conditions and issue directions to promote compliance with a licensee's obligations. These powers are currently delegated to ASIC under the Ministerial Powers (ASIC) Delegations 2021.

1.20 A licensed CS facility that is operated by a domestic CS facility licensee must have operating rules that deal with matters prescribed by regulations. These matters currently go to issues related to the of the operation of the facility, management of risk, the requirements of participants with respect to the facility, and other matters (see section 822A of the Act and regulation 7.3.05(a) to (j) of the Corporations Regulations). However, the requirement for the content of rules to contain prescribed content does not apply if the licensee is also authorised to operate the facility in the foreign country in which its principal place of business is located, and the licence was granted in that location.

1.21 The operating rules of a licensed CS facility have effect as a contract under seal between the licensee and issuers of financial products, between participants, and between participants and issuers of financial products. The operating rules are a market netting contract for the purposes of the PSN Act. Effectively, each party agrees to observe the operating rules and carry out their obligations under the rules. If changes to operating rules are made, a notice of those changes must be lodged with ASIC. The Minister can disallow changes to a domestic CS facility's operating rules – this power is currently delegated to ASIC under the Ministerial Powers (ASIC) Delegations 2021.

1.22 ASIC and the RBA have complementary supervisory responsibilities in relation to CS facility licensees. Broadly, ASIC has responsibility in relation to licensing and conduct of CS facility licensees and the RBA has responsibility in relation to financial stability and managing systemic risk.

1.23 The RBA does not have any enforcement powers but may make Financial Stability Standards under section 827D of the Act that applicable CS facilities must comply with. The RBA may assess how well a CS facility is complying with relevant standards and make reports to the Minister and ASIC.

1.24 There are currently four systemically important domestic CS facility licensees which are within the ASX Group. There are currently two overseas CS facility licensees operating in Australia that are licensed to operate as central counterparties for over-the-counter interest rate derivatives.

Derivative trade repositories

1.25 A derivative trade repository is a facility to which information about over-the-counter derivative transactions, or about positions relating to over-the-counter derivative transactions, can be reported. This information is provided to regulators to provide a picture of the activity and risks present in over-the-counter derivative markets. There are currently two derivative trade repository licensees licensed in Australia.

1.26 Derivative trade repository licensees are regulated under Part 7.5A of the Act. ASIC can make derivative trade repository rules that deal with the way licensees may provide their services, handling of data, governance of licensees, reporting and other matters (see Division 2 of Part 7.5A of the Act).

Financial benchmark administrators

1.27 Financial benchmarks measure the price or performance of certain financial products or classes of financial products. They are used to determine the price of, or payments due under, many financial products. Financial market benchmarks are defined in sub-section 908AB(1) of the Act.

1.28 Administrators of significant financial benchmarks must be licensed by ASIC. ASIC declares certain financial benchmarks to be significant financial benchmarks by legislative instrument under section 908AC of the Act. There are currently two benchmark administrator licensees operating in Australia. Benchmark administrator licensees are regulated under Part 7.5B of the Act. ASIC may impose, vary or revoke conditions on a licence.

1.29 ASIC can make two kinds of rules with respect to financial benchmarks. Firstly, the financial benchmark rules prescribe detailed requirements relating to the operation of financial benchmarks specified in a licence. Secondly, the compelled financial benchmark rules confer powers for ASIC to compel certain activity relating to significant financial benchmarks.

Other regulatory aspects of FMI entities

1.30 Certain Australian market licensees, CS facility licensees, and the holding companies of such licensees can be subject to ownership limits. Division 1 of Part 7.4 of the Act ensures Australia's national interest is considered in the control of significant licensees through a 15 per cent restriction on a person's voting power within certain bodies prescribed in regulations. These are known as widely held market bodies. Exceeding the 15 per cent voting power limit requires the approval of the Minister. Specific arrangements in this regard exist for ASX Limited, where a change in voting power above 15 per cent currently requires a regulation to be made.

1.31 This limit is imposed to ensure that Australia's national interest, and financial market integrity and stability are not at risk from the ownership of such widely held market bodies.

1.32 Division 2 of Part 7.4 of the Act provides for a mechanism to prohibit disqualified individuals from being associated with the management, ownership, or control of Australian market licensees, CS facility licensees, derivative trade repository licensees and licensed financial benchmark administrators. This mechanism applies to all licensees, not just widely held market bodies.

1.33 Part 7.5 of the Act establishes a requirement for each financial market licensee to have a compensation regime. However, Part 7.5 of the Act does not apply to financial markets that are licensed under subsection 795B(2) of the Act.

Council of Financial Regulators Advice to Government

1.34 The failure of an FMI can cause fundamental and systemic disruption to financial markets.

1.35 The CFR is the coordinating body for Australia's main financial regulatory agencies. Its members are APRA, ASIC, the RBA and The Treasury. The CFR's objectives are to promote stability of the Australian financial system and support effective and efficient regulation by Australia's financial regulatory agencies.

1.36 The CFR provided advice to Government in 2020 on measures to mitigate and address risks related to Australia's FMI (see CFR Advice).

1.37 The advice to Government highlighted deficiencies in the current regulatory framework for Australia's FMI. The report identified the need for stronger powers to enable regulators to monitor and manage certain risks, before they materialise, and highlighted the lack of an appropriate regime to ensure the continuity and stability of CS facilities in the event of a crisis.

1.38 The advice to Government made 16 recommendations for regulatory reform focused on:

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Introducing a resolution regime for licensed CS facilities, supported by a standing special appropriation and the establishment of a Resolution Authority.

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Strengthening the supervisory, licensing and enforcement powers of ASIC and the RBA in relation to FMI entities.

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Redistributing existing regulatory powers in the Act between ASIC, the RBA and the Minister.

1.39 The CFR consulted on these proposals in November 2019, following previous consultations on policy proposals in 2011 and 2015. Operators of FMI, market participants and industry associations provided feedback into the final recommendations.

1.40 On 14 December 2022, the Government announced it would deliver an FMI regulatory reform package consistent with the CFR's recommendations. The amendments in this Bill implement that package.

1.41 The amendments also support recommendations of the Financial System Inquiry and International Monetary Fund's Financial Sector Assessment Program. The amendments are also consistent with the international principles established by the Committee on Payments and Market Infrastructure and the International Organisation of Securities Commissions.

Summary of new law

1.42 Significant events such as the Global Financial Crisis and COVID-19 have highlighted not only the importance of CS facilities, but also the heightened risk they pose as they can concentrate and transmit financial risk with the potential to adversely impact the Australian economy.

1.43 Schedule 1 to the Bill introduces an FMI crisis management regime in accordance with recommendation 1 of the 2020 CFR advice to Government. This crisis management regime is explained in Chapter 1 of this explanatory memorandum.

1.44 The proposed resolution regime will provide resolution powers to the RBA to manage distressed CS facilities and support the continuity of CS facility services that are critical to the stability of the financial system.

1.45 In the event of a crisis, the RBA will be empowered to exercise certain powers to facilitate the resolution of a CS facility. A crisis is defined where certain conditions are met, broadly relating to:

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threats to CS facility viability or critical service continuity; or

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financial instability.

1.46 The RBA's powers to facilitate crisis management in a distressed CS facility include:

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giving directions to manage or respond to a crisis;

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taking control of distressed domestic CS facility licensees and, in some circumstances, related bodies corporate; and

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initiating the transfer of business or shares of a domestic CS facility licensee (and, in some circumstances, related bodies corporate) to a third party.

1.47 In exercising these powers, the RBA's primary objectives will be to maintain the overall stability of the financial system and provide for the continuity of CS facility services that are critical to the functioning of the financial system.

1.48 The RBA may only exercise these powers with respect to overseas licensees (who hold CS facility licence issued under subsection 824B(2) of the Act) where the RBA reasonably believes that an overseas regulator is exercising or intending to exercise powers to manage or respond to a crisis in their jurisdiction and the overseas regulator requests assistance.

Detailed explanation of new law

Overview of crisis management regime

1.49 The crisis management regime is contained in Part 7.3B of the Act. The objective of this Part is to provide for the efficient management and resolution of threats to CS facility licensees' ability to continue providing CS facility services, and/or threats to the stability of the financial system in Australia. The RBA's new powers can be exercised in circumstances where the RBA reasonably believes provision of CS facility services, critical to the functioning of Australia's financial system or where the failure of those services may jeopardise the stability of Australia's financial system, are failing or at risk of failure. [Schedule 1, item 14, section 830B of the Act]

1.50 The existing operating rules of a CS facility provide important transparency and predictability including with regard to default management and recovery arrangements. The resolution powers under Part 7.3B of the Act allow the RBA or statutory manager to continue to operate the CS facility according to these rules, including with respect to loss allocation, wherever doing so is consistent with the resolution objectives. In undertaking resolution the RBA can also consider the potential for contagion and flow on effects to the rest of the economy, the need to use public funds only as a last resort with appropriate recoupment, and in the case of overseas licensees the need to coordinate with the licensee's home regulator and exercise deference as appropriate.

1.51 To reflect the RBA's new crisis resolution powers under Part 7.3B of the Act, the functions of the RBA are updated to include Part 7.3B of the Act. [Schedule 1, items 46, 60, 61, and 62, paragraphs 5(1)(c) and 10B(1)(d), subsection 10(2) and paragraph 10B(3)(c) of the RB Act]

1.52 A simplified outline of key aspects of Part 7.3B of the Act is included in section 830A of the Act to assist readers of the Part. [Schedule 1, item 14, section 830A of the Act]

What resolution powers are available?

1.53 The RBA may need to use tools to take control of a body corporate in cases where it does not have confidence that the board and management are capable of resolving a crisis satisfactorily, or where the board and management are mismanaging the entity, including where it is insolvent or approaching insolvency.

1.54 When a condition for resolution has been met (see paragraphs 1.72 to 1.86), the RBA may access its resolution powers. The suite of powers to facilitate crisis resolution and resolve distressed bodies corporate include:

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appointing a statutory manager to the domestic CS facility licensee or a related body corporate;

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initiating the transfer of business or shares of a domestic CS facility licensee (and related bodies corporate) to a third party; and

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issuing directions.

1.55 Automatic statutory protections will apply when powers are exercised including stays on the exercise of certain contractual rights, such as rights where the right arises due to the fact a licensee is subject to an exercise of a resolution power, and moratoriums on the commencement of certain enforcement and litigation actions.

1.56 An exercise of any powers by the RBA would occur in the context of the object of Part 7.3B of the Act, which is to provide for the effective management and resolution of threats posed to:

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the stability of the financial system in Australia; and

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the continuity of CS facility services that are critical to the functioning of the financial system;

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that arise from, or in relation to, CS facility licensees.

[Schedule 1, item 14, section 830B of the Act]

1.57 The RBA also has regulatory powers that help it to mitigate the risk of financial crises developing. These 'non-crisis' powers are further explained in Chapter 2.

1.58 In certain circumstances, the RBA may use a subset of its resolution powers in respect of an overseas CS facility licensee, this is discussed in more detail in paragraphs 1.88 to 1.92.

Statutory management

1.59 When a condition for resolution has been met, the RBA can appoint itself or a third party as a statutory manager to a CS facility and its related bodies corporate in certain circumstances. Where a statutory manager is appointed to an entity, it has the powers of the board of directors and takes control of the entity. The RBA may need to use these powers to safeguard financial stability and ensure continuity of CS facility services that are critical to the functioning of the Australian financial system. [Schedule 1, item 14, Division 3 of Part 7.3B of the Act]

1.60 The appointment of a statutory manager can help stabilise a failing entity, so that steps can be taken to implement an orderly resolution in a way that protects the interests of participants and maintains financial system stability. Depending on the circumstances, this could include maintaining some or all of the entity as a going concern, facilitating the recapitalisation of the entity, or facilitating the transfer of some or all of the business to another entity.

1.61 The statutory management provisions are explained further in paragraphs 1.100 to 1.165.

Transfer

1.62 The compulsory transfer of shares and business powers are an important tool in the RBA's crisis resolution toolkit. The transfer powers enable some or all of the shares or business of a body corporate (including assets, liabilities, legal rights and obligations, data and systems) to be transferred to another consenting body corporate. [Schedule 1, item 14, Division 4 of the Act]

1.63 The transfer provisions are explained further in paragraphs 1.166 to 1.219.

Directions

1.64 Directions powers enable the RBA to compel a CS facility licensee and/or related bodies corporate to take, or refrain from taking, specific action to address issues of concern that have been identified. For example, directions powers may be used to limit further deterioration to the functioning of critical CS facility services in a period of emerging stress, and to facilitate the resolution of a distressed regulated entity. [Schedule 1, item 14, Division 5 of the Act]

1.65 Directions are intended to allow the RBA to respond to a crisis at a CS facility in a timely and decisive way.

1.66 Introducing a specific immunity provision for a body corporate, its directors and other officers when complying with a RBA direction will mitigate the risk of potential conflicts in obligations that may give rise to delay, or impede the effectiveness of the direction, particularly in a crisis. The directions power:

•

may require entities to take specified actions to facilitate resolution;

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may be used despite an external administrator being appointed;

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ensures that complying with an RBA direction will not be grounds for an entity, its directors or management to be held liable under any other law (subject to a good faith and reasonableness test); and

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provides for the RBA to determine that the giving of a direction should be confidential in certain circumstances.

1.67 The directions powers, as well as associated secrecy determinations and protections are explained at paragraphs 1.220 to 1.237.

Stays and moratorium provisions

1.68 An important aspect of the resolution regime is the operation of the stay and moratorium provisions. These provisions prevent counterparties of a body corporate from exercising certain contractual rights solely on the grounds that the RBA has exercised its powers (including directions, statutory management and transfer powers) in respect of the body corporate, a related body corporate or because of the body corporate or a related body corporate's financial position. This is important to ensure that actions by counterparties do not impede the ability for the RBA to implement an orderly resolution. [Schedule 1, item 14, Divisions 6 and 8 of the Act]

1.69 Corresponding stay provisions are required to ensure that the exercise of crisis powers by the RBA at a CS facility licensee does not give rise to termination or other legal rights in contracts of entities within the same group of bodies corporate (for example, a group comprising a CS facility licensee and its related bodies corporate) because the exercise of these rights against a related body corporate is likely to undermine the resolution of, or continuity of services by, the CS facility licensee. The stays are not intended to impede the ability of the CS facility participants to closeout their positions or otherwise manage their risk.

1.70 The protections in the PSN Act for the contracts and arrangements covered by that Act prevail over these stays and moratoria. The PSN Act ensures the effectiveness of approved RTGS payment systems, approved netting arrangements, close-out netting contracts and market netting contracts (all defined in section 5 of the PSN Act). The contracts and arrangements covered by the PSN Act can therefore be enforced according to their terms. Schedule 1 to the Bill amends the PSN Act to ensure the validity of relevant obligations and transactions subject to the PSN Act are preserved despite anything in new Part 7.3B of the Act. [Schedule 1, items 41, 42, and 43, definition of 'external administrator' and 'specified provisions' in section 5 and paragraphs 15C(1)(c) and 15D(1)(c) of the PSN Act]

1.71 The stays and moratorium provisions are explained further in paragraphs 1.266 to 1.326.

When can the resolution powers be used?

1.72 The RBA may only exercise a resolution power mentioned above in relation to a domestic CS facility licensee after at least one condition for resolution has been met. There are separate conditions to enact resolution powers for overseas licensees which is discussed in further detail from paragraphs 1.88 to 1.92.

1.73 A condition of resolution is met where:

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The RBA reasonably believes, in the absence of external support, the licensee is likely to be unable to continue to provide one or more CS facility services in a way that causes or promotes, or is critical to, the stability in the Australian financial system.

•

the licensee notifies the RBA its financial viability is or is likely to be at risk;

•

the RBA reasonably believes the licensee's financial viability is likely to be at risk;

•

an external administrator is intended to be appointed or has been appointed, or the licensee notifies the RBA that it is considering appointing an external administrator (the term external administrator has a modified definition in Part 7.3B of the Act to include receivers or managers to ensure all types of external support are captured – see paragraph 1.138); or

•

the RBA reasonably believes that a person is seeking to have an external administrator appointed. [Schedule 1, item 14, paragraphs 831A(1)(d), (e), (f), (g), (h) and (i) of the Act]

1.74 For the following resolution conditions to be met, the RBA must reasonably believe that the circumstances are likely to pose a threat to the stability of the Australian financial system or the ability of the licensee to continue to provide one or more CS facility services that are critical to the functioning of the financial system in Australia. Those circumstances are:

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a domestic CS facility licensee requests the RBA's assistance;

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a domestic CS facility licensee has contravened a direction from the RBA (these direction powers for the RBA are introduced in the amendments and are explained from paragraph 1.222)

•

the licensee notifies the RBA that the licensee has ceased or, in the absence of support, intends to cease or is likely to cease providing CS facility services;

•

a licensee is doing an act or thing, or omitting to do and act or thing; and

•

in relation to a related body corporate of the licensee, any of the following has occurred:

o

an external administrator has been appointed to the related body corporate, or a similar action in a foreign jurisdiction has occurred;

o

the related body corporate notifies the RBA it is considering appointing an external administrator;

o

the RBA reasonably believes a person is seeking to have an external administrator appointed to a related body corporate, or a similar circumstance is occurring in a foreign jurisdiction in relation to a related body corporate; or

o

the RBA reasonably believes the related body corporate is doing or not doing an act or thing, causing a threat to financial stability or the ability of the licensee to continue providing critical services.

[Schedule 1, item 14, paragraphs 831A(1)(a), (b), (c), (j), (k), (l) and (m) of the Act]

The facility requests resolution

1.75 The domestic CS facility licensee may request the RBA to exercise its powers under Part 7.3B of the Act. The RBA may take action if it reasonably believes an event relating to the licensee is likely to pose a threat to the stability of the financial system in Australia or the continuity of CS facility services that are critical to the functioning of the financial system in Australia. [Schedule 1, item 14, paragraph 831A(1)(a) of the Act]

1.76 This condition is designed to encourage a CS facility licensee to inform the RBA once it perceives a relevant risk or that its financial position is deteriorating to an extent that could threaten its viability or ability to provide CS facility services, and not to wait until the point of insolvency. The RBA does not have any obligation to commence resolution where a request is made, or to exercise a particular power in accordance with the request. In considering the request the RBA will have consideration to the two primary objectives underpinning any resolution action.

The facility contravenes a direction issued by the RBA

1.77 The RBA may exercise resolution powers where a domestic CS facility licensee contravenes a supervisory direction issued by the RBA. The RBA may take action if it reasonably believes the contravention is likely to pose a threat to the stability of the financial system in Australia or the continuity of critical CS facility services. [Schedule 1, item 14, paragraph 831A(1)(b) of the Act]

1.78 Only contraventions of supervisory directions issued by the RBA under sections 823E, 823F or 823G of the Act may enable the RBA to use its powers in relation to this condition. The provision does not extend to any directions issued by ASIC.

The facility faces a threat to service continuity or financial viability

1.79 The RBA may exercise resolution powers where there is a threat to the continuing provision of CS facility services in the absence of external support or the financial viability of a domestic CS facility is at risk. The RBA may determine that a domestic CS facility licensee requires external support due to the likelihood of critical services ceasing or the risk of becoming financially unviable. [Schedule 1, item 14, paragraphs 831A(1)(c), (d), (e) and (f) of the Act]

1.80 The RBA may also access resolution powers if the domestic CS facility notifies the RBA that:

•

the provision of critical CS facility services:

o

has ceased; or

o

is intended to cease or is likely to cease; or

o

is unable to be provided in the absence of external support;

•

financial viability of the CS facility:

o

is at risk; or

o

is likely to become at risk; or

o

in the absence of external support may become at risk.

1.81 A threat to financial viability arises where the licensee is no longer able to meet its obligations or is considered likely to be unable to meet its obligations in the near future. This could arise, for example, where there is a material risk to the security of the assets owned by the domestic CS facility licensee or a related body corporate of the CS facility licensee.

Appointment of external administrator

1.82 The appointment or likely appointment of an external administrator (for example, a liquidator or receiver) to a CS facility or a related body corporate, has the potential to trigger contagion impacts within the group that could lead to or exacerbate distress in the CS facility.

1.83 The appointment of an external administrator to a CS facility licensee, the licensee considering such an appointment, or the RBA reasonably believing the licensee is seeking to appoint an external administrator are all circumstances that satisfy a resolution condition. [Schedule 1, item 14, paragraphs 831A(g), (h) and (i) of the Act]

1.84 The appointment of an external administrator to a related body corporate of the licensee, the related body corporate considering such an appointment, or the RBA reasonably believing the related body corporate is seeking to appoint an external administrator can also satisfy a resolution condition. But these facts can only sustain a resolution condition if the RBA also reasonably believes that the appointment or anticipated appointment is likely to pose a threat to financial stability in Australia or the ability of the licensee to provide critical CS facility services. [Schedule 1, item 14, paragraphs 831A(j), (k) and (l) of the Act]

1.85 The inclusion of the appointment of an external administrator to a related body corporate of a CS facility licensee is necessary as such an appointment has the potential to adversely affect the financial continuity or orderly resolution of the relevant CS facilities. This is because there are likely to be intragroup linkages, for example, service or financial support agreements that, if terminated in the course of the external administration could negatively impact the viability and continuity of CS facility services.

Financial stability

1.86 The RBA may access resolution powers if the RBA reasonably believes that the domestic CS facility licensee or related body corporate is doing or omitting to do anything that interferes with the stability of the Australian financial system or the continuity of critical CS facility services, for example, including:

•

conducting affairs in a way that may cause or promote instability in the Australian financial system; or

•

being unable to continue to provide critical CS facility services without external support. [Schedule 1, item 14, paragraph 831A(1)(m) of the Act]

1.87 These conditions are, in some cases defined relatively broadly. More specific conditions may limit the RBA's ability to take effective action due to the difficulty in forecasting what circumstances may arise.

Recognising an overseas CS facility crisis

1.88 The crisis regime is intended to operate differently for overseas CS facility licensees compared to domestic CS facility licenses. Overseas CS facility licensees are licensees that have had their Australian CS facility licence granted under subsection 824B(2) of the Act. [Schedule 1, item 14, subsections 831A(3) and (4) of the Act]

1.89 The distinction aligns with the framework under Part 7.3 of the Act where overseas CS facility licensees are primarily regulated by their 'home' overseas regulator. Consistent with this approach, the home regulator will primarily be responsible for resolving a distressed body corporate. Division 8 of Part 7.3B of the Act provides the RBA with the power to support the home regulator's actions when requested.

1.90 Where a foreign regulator requests assistance or the RBA reasonably believes that the foreign regulator is considering exercising, or is exercising similar resolution powers, the RBA may make a notifiable instrument that recognises the circumstance in respect of an overseas CS facility licensee. The RBA may then exercise certain resolution powers in support of the home regulator's powers with respect to an overseas licensee with operations in Australia, as if the overseas CS facility licensee was a domestic CS facility licensee. [Schedule 1, item 14, subsection 847A(1), (2) and (5) of the Act]

1.91 However, the RBA may not appoint a statutory manager to an overseas CS facility licensee, conduct a transfer of shares, or wind up the overseas CS facility licensee. [Schedule 1, item 14, subsection 847A(6) of the Act]

1.92 The RBA may revoke an instrument recognising the foreign crisis if the overseas regulator terminates or withdraws its request or the RBA no longer reasonably believes the overseas regulator is intending to or is exercising resolution powers. [Schedule 1, item 14, subsection 847A(3) and (4) of the Act]

Winding up a body corporate

1.93 If a condition for resolution is met and the RBA considers that the body corporate is insolvent and could not be restored to solvency within a reasonable period, then the RBA may apply to the Court for an order that a body corporate be wound up. The application to be wound up can only be made in respect of a body corporate that is:

•

a CS facility licensee;

•

a related body corporate of the CS facility licensee that is incorporated in Australia; or

•

a related body corporate before a transfer of business or shares, and is still incorporated in Australia.

1.94 The RBA must inform ASIC as soon as practicable of the application for the body corporate to be wound up. [Schedule 1, items 5 and 14, the note under subsection 459P(1) and section 849AA of the Act]

Funding for crisis resolution

1.95 Where a crisis has materialised and the RBA decides resolution powers are required, funds are made available by the Commonwealth to support the RBA's activities in protecting the stability of the financial system in Australia.

1.96 The Treasurer, with the written approval of the Finance Minister, is permitted to activate a maximum appropriation of up to $5 billion per event to maintain the vital functions of a domestic CS facility during a crisis. An event occurs when at least one resolution condition has been triggered. This authorisation must specify the amount of funds, that does not exceed $5 billion per event, authorised to be drawn down from the appropriation. The initial appropriation may be less than the limit, with the Treasurer and Finance Minister being permitted to amend the appropriation amount to provide additional funds up to the maximum amount. [Schedule 1, item 14, subsections 846A(1), (2), (3) and (4) of the Act]

1.97 Funds designated for use in a CS facility resolution can only be used for the purposes of protecting the stability of the financial system in Australia or ensuring the service continuity of an Australian CS facility, critical to the functioning of Australia's financial system. Public funds for CS facility resolution are intended to be limited to situations where a CS facility's resources and recovery tools are insufficient to address losses, or the RBA considers the use of some recovery tools poses a threat to financial stability or otherwise compromises resolution objectives. It is expected that funds will be recovered after the crisis is resolved. Recovery mechanisms may be outlined in funding agreements. The provision of public funds is intended to be a last resort option, as preliminary tools available to regulators (such as the powers explained in Chapter 2) are expected to assist in crisis prevention. [Schedule 1, item 14, section 846B of the Act]

1.98 The authorisation cannot be revoked. The authorisation or amendment commences from the time it is made rather than when it is registered or specified on the instrument. Retrospective application in subsection 12(2) of the Legislation Act is not applicable to the authorisation as it will only be prospective. [Schedule 1, item 14, subsections 846A(5),(7) and (8) of the Act].

1.99 The authorisation is a legislative instrument but is not subject to disallowance under section 42 of the Legislation Act. The authorisation is not subject to sunsetting as specified in Part 4 of Chapter 3 of the Legislation Act. During a crisis event if funding is required to facilitate effective resolution, it is important that funding arrangements are provided with maximum certainty in order to be most effective. [Schedule 1, item 14, subsection 846A(6) of the Act]

Statutory management

1.100 The introduction of a statutory management regime empowers the RBA to appoint a statutory manager to take control of a distressed CS facility or related body corporate. Extending the power to related bodies corporate addresses potential interdependencies within the group, such as the provisions of critical CS services, that could otherwise impede effective resolution. The appointment of a statutory manager may be appropriate where the RBA reasonably believes other less invasive powers, such as directions would be ineffective.

Appointment of a statutory manager

1.101 The RBA has the power to appoint a statutory manager to a distressed CS facility or related bodies corporate to promote effective resolution. The RBA may only appoint a statutory manager if at least one of the conditions of resolution has been met. The RBA must reasonably believe that appointing a statutory manager to the body corporate is appropriate to respond to the resolution condition being satisfied in relation to the CS facility licensee. [Schedule 1, item 14, section 832A(1) of the Act]

1.102 The statutory manager appointed would either be the RBA (where it is in control) or an independent appointment by the RBA to control a CS facility or related body corporate. [Schedule 1, items 3 and 14, the definition of 'statutory manager' in section 9 and subsection 832A(2) of the Act]

1.103 If the RBA appoints a statutory manager to a related body corporate of a domestic CS facility licensee, a statutory manager must be, or about to be, simultaneously appointed to the domestic CS facility licensee. The RBA must consider that the appointment would facilitate resolution of the CS facility licensee. The statutory manager appointed to a related body corporate may be different to the one appointed to the domestic CS facility licensee. [Schedule 1, item 14, subsections 832A(3) and (4) of the Act]

1.104 The RBA must provide a body corporate with written notice of the intention to appoint a statutory manager. The body corporate is under statutory management at the time a statutory manager is in control of the body corporate's business which is either at future time specified on the notice or the time the notice is given. The appointment of a statutory manager cannot have a retrospective start date. [Schedule 1, items 3 and 14, the definition of 'statutory management' in section 9, subsections 832A(5) and 832C(1), (3) and (4) of the Act]

1.105 There is no specified duration for the term of statutory management. The appointment of a statutory manager will be terminated where the RBA considers it is no longer appropriate to continue the statutory appointment, such as, where there is no longer a threat to Australia's financial system stability or the continuity of CS facility services. The RBA must provide written notice to the statutory manager and body corporate that statutory management has ceased. [Schedule 1, item 14, subsections 832C(2), (3) and (4) and section 832B of the Act]

1.106 In the case of the RBA coming to a decision to replace a statutory manager, this does not result in the body corporate ceasing to be under statutory management. Instead, if a statutory manager is no longer in control because the RBA ceases its own appointment or the RBA terminates the appointment of an external statutory manager, there is no period where the body corporate ceases to be under statutory management. For example, if the RBA terminated the appointment of a statutory manager with a view to taking on the role of statutory manager itself or appointing a different statutory manager, there is no gap between termination of the previous statutory manager and appointment of the new statutory manager.

1.107 More than one statutory manager may be appointed, which can either be the RBA itself or an independent person. Where two or more statutory managers are appointed, the functions and powers of the statutory manager may be performed by either or all statutory managers acting jointly and severally, except to the extent otherwise specified under a notice from the RBA. [Schedule 1, item 14, section 836B of the Act]

1.108 Any instruments made in appointing, ending statutory management, terminating the appointment of a statutory manager or specifying limits or conditions on the statutory manager are not legislative instruments. [Schedule 1, item 14, subsection 832A(8) and 832B(7) of the Act]

Limits may be specified

1.109 At the time of appointment, the RBA may provide notice to the statutory managers specifying limits or conditions on any or all of the statutory managers' ability to perform functions and exercise powers jointly or individually. [Schedule 1, item 14, subsections 832A(6), and (7) of the Act]

PGPA Act not applicable under statutory management

1.110 The Public Governance, Performance and Accountability Act 2013 (PGPA Act) does not apply to a statutory manager in a crisis. Directors of a body corporate are not automatically removed at the time a statutory manager is appointed, but are unable to exercise any powers unless the RBA or statutory manager consents. Therefore, the RBA's influence or control in relation to the statutory management process does not result in the entity falling within the definition of a Commonwealth company in the PGPA Act and therefore there are no corporate governance and financial reporting obligations. [Schedule 1, item 14, subsection 832C(5) of the Act]

Powers and functions of a statutory manager

1.111 When a statutory manager is appointed to a domestic CS facility licensee it is in control of the business of the body corporate. It has the power to perform any function, and exercise any power, that the body corporate or any of its officers could perform or exercise if the body corporate were not under statutory management. In this capacity, when a statutory manager performs a function or exercises a power, it is taken to be acting as the body corporate's agent.

1.112 The statutory manager may:

•

exercise powers under the operating rules;

•

remove a director of the body corporate;

•

appoint a person as a director of the body corporate (regardless of whether it is fulfilling a vacancy);

•

execute a document, bring or defend proceedings;

•

control the body corporate's business, property and affairs;

•

alter the body corporate's constitution or other arrangements for governance; or

•

do anything else, in the name of the body corporate and on its behalf for the purposes of resolving a crisis. [Schedule 1, item 14, subsections 833A(1) and (2) and sections 833B, 833C, and 833F of the Act]

1.113 The statutory manager may only dispose of business or property at the direction of the RBA or with the RBA's consent. [Schedule 1, item 14, subsection 833A(1)(c) of the Act]

1.114 However, the statutory manager must follow certain procedures before taking action to alter the body corporate's constitution or governance arrangements, recapitalise the body corporate or effect a transfer of shares in the body corporate. [Schedule 1, item 14, subsection 833A(3) of the Act]

1.115 The statutory manager may only alter the body corporate's constitution or other governance arrangements if it considers it is reasonably necessary for facilitating the performance of the statutory manager's functions and duties, or the exercise of powers. Altering the body corporate's constitution does not allow the statutory manager to initiate a transfer of the body corporate's shares or business other than in accordance with Division 4 of Part 7.3B of the Act. [Schedule 1, item 14, subsections 833C(1) and (2) of the Act]

1.116 These powers are intended to override any restrictions that are present in the Act, the body corporate's constitution, any contracts, agreements or arrangements to which the body corporate is a party, and any listing rules of a financial market on which the body corporate is listed. [Schedule 1, item 14, subsection 833C(3) of the Act]

Requests for information and assistance

1.117 For effective resolution of a body corporate the RBA must have access to critical information about the operations of domestic CS facilities. The RBA may need information that relates to services provided by, and arrangements of, other group entities on which the operation of the CS facility services rely, or which could potentially affect the domestic CS facility licensee.

1.118 At the written request of a statutory manager, past and current officers of the domestic CS facility licensee or related body corporate must provide any information relating to the business of the body corporate. A past officer will only be required to comply with the request if they were an officer of a body corporate in the three years prior to the time the body corporate came under statutory management. A requirement to give information may include a requirement to produce books, accounts, documents or the location of information. [Schedule 1, item 14, subsections 833E(1), (2) and (3) of the Act]

1.119 The statutory manager may pass on any information to the RBA that it receives under its power to request information. The secrecy provision in section 79A of the RB Act applies to information and documents the RBA obtained as a statutory manager. [Schedule 1, items 14, 47, 51 and 52, subsection 833E(5) of the Act and subsections 79A(1) and (4) of the RB Act]

1.120 A person that fails to deliver all information relevant to the body corporate to the statutory manager is liable to a criminal offence of 12 months imprisonment or 60 penalty units, or both. [Schedule 1, items 14 and 23, subsection 833E(4) and Schedule 3 of the Act]

Recapitalisation

1.121 The recapitalisation of an institution is an internationally recognised method of addressing a distressed institution and restoring the institution's financial health. The recapitalisation powers are intended to be strong and flexible to allow a statutory manager to respond quickly and decisively to a range of circumstances. Given the high level of intervention recapitalisation represents, the statutory manager's powers to facilitate recapitalisation can only be enforced at the direction of the RBA or with the RBA's consent.

1.122 Recapitalisation is when a body corporate acts to:

•

issue, cancel or sell shares, or rights to acquire shares;

•

reduce share capital by cancelling any paid-up share capital that is not represented by available assets;

•

vary or cancel rights or restrictions attached to shares in a class of shares in the body corporate. [Schedule 1, item 24, section 9 of the Act]

1.123 A statutory manager may take a recapitalisation action with respect to a body corporate at the direction of or with the consent of the RBA. [Schedule 1, item 14, subsection 833D(1) of the Act]

1.124 An expert report on the fair value for each of the shares and rights, or the fair value of the rights affected must be obtained prior to the recapitalisation action (see paragraphs 1.127 to 1.129). [Schedule 1, item 14, the note in subsection 833A(1) and subparagraph 849CB(1)(a)(i) and subsection 849CB(2) of the Act]

1.125 As soon as practicable after the statutory manager takes a recapitalisation action with respect to the body corporate, the statutory manager must provide a written notice to members of the body corporate. That notice must state the action and the effects of the action with respect to the member's interests. A failure to provide this notice does not impact the validity of the recapitalisation action. This is to ensure the continuity of CS facility services and ensure that a technical failure in the acquisition of an expert report does not invalidate recapitalisation activities that may be crucial to broader financial stability. [Schedule 1, item 14, subsections 833D(2), (3) and 849CB(6) of the Act]

1.126 The power of a statutory manager to take an action to recapitalise a body corporate in the way described above is intended to override any restrictions that are present in the Act, the body corporate's constitution, any contracts, agreements or arrangements to which the body corporate is a party. It is also intended to override any operating rules or procedures of a licensed CS facility of which the body corporate is the licensee, and any listing rules of a financial market on which the body corporate is listed. However, the statutory manager cannot use its power to recapitalise to effect a transfer of all or part of the shares in the body corporate – the statutory manager must only do that in accordance with the transfer powers under Division 4 of Part 7.3B of the Act (see paragraph 1.166). [Schedule 1, item 14, subsections 833D(4) and (5) of the Act]

1.127 Prior to undertaking an action to recapitalise the CS facility, the statutory manager or the RBA, must obtain an independent valuation report which sets out the expert's opinion of the fair value for each of the shares and rights, or the fair value of the rights affected. The expert responsible for the report must not be an associate of the body corporate or the statutory manager. The statutory manager or the RBA are required to consider the report, and may draw on its content, but are not compelled to follow the recommendations of the report when determining the terms of a recapitalisation action. [Schedule 1, item 14, subsection 849CB(1), (2) and (3) of the Act]

1.128 The RBA may determine in writing that a statutory manager is not required to obtain a report if it is satisfied that the delay in obtaining the report would detrimentally affect either financial system stability in Australia or the continuity of CS facility services. [Schedule 1, item 14, subsection 849CB(5) of the Act]

1.129 The RBA may publish details of the report on its website. Publication of the determination may occur when the RBA considers it is appropriate, such as after the relevant secrecy notices have ceased to apply. [Schedule 1, item 14, subsection 849CB(4) of the Act]

1.130 As an example of a recapitalisation act, a statutory manager may facilitate a capital injection into a CS facility by issuing new shares and selling them to a new investor. Under this example the new investor would gain a stake in the company and pre-existing shareholders would have their stake in the company diluted but would retain their shares in the company.

Effects of statutory management on the body corporate

1.131 At the time a statutory manager is appointed to a body corporate, directors of that body corporate are not automatically removed from office. However, directors are prohibited from performing or exercising their functions and powers as directors without the written approval of the statutory manager or the RBA.

1.132 A director that purports to perform or exercise a function or power of a director commits an offence with a penalty of 30 penalty units.

1.133 If the statutory manager provides approval, the statutory manager must immediately notify the RBA, and the RBA has discretion to vary or revoke the approval. Any unapproved exercise of power is void. [Schedule 1, items 14 and 23, subsections 834A(1), (2), (3), (4), (5) and (7) and Schedule 3 to the Act]

1.134 Where a director's actions in accordance with a written consent conflict with a function or power of the statutory manager, the statutory manager's function or power prevails. [Schedule 1, item 14, subsection 834A(6) of the Act]

1.135 Secured creditors will have limited rights to realise or otherwise deal with their security interest. These rights will be constrained by the Act and the specific circumstances. [Schedule 1, item 14, subsection 834A(8) of the Act]

Body corporate under external administration

1.136 If a statutory manager is appointed to a body corporate that is under external administration, the external administrator's appointment is terminated at the time the statutory manager takes control of the body corporate. Any subsequent actions or purported actions by the external administrator in relation to the body corporate's business, property and affairs after the termination are invalid and of no effect. [Schedule 1, item 14, subsections 836A(1) and (4) of the Act]

1.137 The RBA must provide written notice of the statutory management appointment to the external administrator, however, a failure to provide notice does not invalidate the appointment of the statutory manager. Throughout the duration of statutory management, an external administrator can only be appointed if the RBA consents. [Schedule 1, item 14, paragraph 832A(5)(b) and subsections 836A(2) and (3) of the Act]

1.138 The amendments introduce a definition of external administrator into section 9 of the Act that adopts the meaning giving in Schedule 2 to the Act. That definition is modified for Part 7.3B of the Act to extend to receivers, managers and managing controllers. The new external administrator definition for Part 7.3B of the Act does not cover Chapter 5 of the Act, this is to preserve the meaning the term had in respect of the chapter prior to the commencement of the amendments in the Bill. A reference in Chapter 2D of the Act to the definition in Schedule 2 to the Act that is now covered by the section 9 definition is repealed. [Schedule 1, items 1 and 4, the definition of 'external administrator' in section 9 and subsection 198G(9) of the Act]

Annual general meeting

1.139 There is no obligation to continue to hold annual general meetings under section 250N or 601BR of the Act whilst the body corporate is under statutory management. The annual meetings may resume once statutory management concludes. [Schedule 1, item 14, section 836D of the Act]

Transfer or alteration effect on members

1.140 Any transfer of shares or alteration in the status of members of a company is void except with either the written consent of the RBA or statutory manager. Further, only the statutory manager is permitted to deal with a transfer or alteration in the status of the members.

1.141 If the RBA or statutory manager's written consent is conditional, those conditions must be met before the transfer or alteration can take effect. A transfer or alteration is not void if done pursuant to a recapitalisation action under section 833D of the Act or to give effect to a compulsory transfer of shares under Division 4 of Part 7.3B of the Act. [Schedule 1, item 14, subsections 834C(1) and (2) of the Act]

1.142 Before any alteration of status that is made during statutory management, the statutory manager must notify all persons that were members of the body corporate before the alteration. The notice must identify the alteration and explain to members how their interests are affected by the alteration.

1.143 A subsequent failure by the statutory manager to give that notice after the alteration has occurred does not affect the validity of the alteration. This is to clarify that an actual or alleged technical failure to provide a notice to members does not cast doubt on the validity of the alteration. [Schedule 1, item 14, subsections 834C(3) and (4) of the Act]

Dealing with interests in property

1.144 A statutory manager may deal with the secured property of a body corporate in any way the body corporate could deal with the secured property subject to certain conditions. The statutory manager may deal with the secured property as if it had the original character, where the secured property may be treated as:

•

a circulating asset – if the PPSA security interest had stopped being a circulating asset; or

•

a floating charge – if the security interest was a floating charge when it arose and has become a fixed or specific charge. [Schedule 1, item 14, section 836E of the Act]

1.145 To safeguard the interests of creditors whose rights have been suspended from the operation of stay provisions, limits are introduced to prevent the statutory manager from disposing of the property that provides the security. The safeguard will be extended to prevent disposal of property owned or leased by another and operated by the body corporate. [Schedule 1, item 14, subsection 836F(1) of the Act]

1.146 There are three exceptions that allow for disposal of property that is subject to a security interest under statutory management which extinguishes the security interest, including:

•

disposing of property where this is done in the ordinary course of the body corporate's business;

•

the secured party, owner or lessor consents to the disposal; or

•

the RBA consents or directs the disposal of property. [Schedule 1, item 14, subsections 836F(2) and (3) of the Act]

1.147 A disposal of property may be considered in the ordinary course of business despite the owner demanding the return of property, subject to the following conditions:

•

the property is used or occupied, or in the possession of a body corporate; and

•

another person is the owner of the property; and

•

the property is either a PPSA retention of title property or subject to a retention of title clause under a contract. [Schedule 1, item 14, subsection 836F(4) of the Act]

Proceeds of sale of property

1.148 The amendments include specific procedures for the net sale proceeds of a property a statutory manager disposes of by sale if a body corporate is under statutory management.

1.149 In the event there is excess proceeds from the sale of property, the statutory manager must set aside the net proceeds to pay any debts secured by the possessory security interest and any other security interest in the property with a priority interest. [Schedule 1, item 14, paragraphs 836G(1)(a), (b), (c) and (d) of the Act]

1.150 Where there is a shortfall from the sale of property, debts must be paid in the order of priority, and where there are outstanding debts the amount of debt that remains unpaid can be recovered from the body corporate as an unsecured debt. [Schedule 1, item 14, paragraph 836G(1)(e) of the Act]

1.151 The same process of determining excess or shortfall is used when a statutory manager sells property that is subject to a retention of title clause under the contract. [Schedule 1, item 14, subsection 836G(3) of the Act]

1.152 Contrastingly, for the disposal of property that is a PPSA retention of title property, the statutory manager must instead apply the net proceeds of the sale in the same way as a secured party is required to under the PPSA. This involves applying an amount, personal property or proceeds of collateral received by the secured party as a result of enforcing a security interest in the property. [Schedule 1, item 14, subsection 836G(2) of the Act]

Statutory manager obligations

1.153 The RBA will have oversight of any powers exercised by the statutory manager. To assist in this oversight, the statutory manager must:

•

report to the RBA;

•

comply with any directions issued by the RBA; and

•

notify the RBA of any actions that may affect financial stability.

1.154 When the RBA requests, a statutory manager must give a written report to the RBA, within a reasonable time, showing how the control of the body corporate's business, property and affairs is being carried out. Similarly, where statutory management is terminated, a written report must be provided to the RBA outlining how the business was carried out over the period of statutory management. That report is to be provided without a request from the RBA and is part of the process when statutory management ends. [Schedule 1, item 14, section 835A of the Act]

1.155 The RBA may direct a statutory manager to take a specified action relating to the business, property or affairs of the body corporate to which it is appointed. [Schedule 1, item 14, subsection 835B(1) of the Act]

1.156 The statutory manager must comply with the direction or varied direction issued by the RBA. Alternatively, the statutory manager may immediately request the direction to be altered and provide supporting information justifying the request. Where the RBA declines the statutory manager's request, the statutory manager must comply with the original direction. [Schedule 1, item 14, subsections 835B(2) and (3) of the Act]

1.157 In general, the statutory manager may take actions to resolve a distressed body corporate. However, where an action may threaten Australia's financial system stability or the continuity of critical CS services, the statutory manager must notify the RBA and obtain written approval to complete the action. The RBA may subsequently provide written notification of the consent. An action by the statutory manager is not invalidated by a failure to comply with this requirement. The RBA can however terminate the appointment of the statutory manager if it fails to comply with any reporting or notification requirement under Part 7.3B of the Act. [Schedule 1, item 14, section 835C of the Act]

Legal protections

1.158 Whilst a body corporate is under statutory management, qualified privilege is afforded to statutory managers when exercising any powers, functions, or duties, except where these actions or omissions are not in good faith. [Schedule 1, item 14, section 836J of the Act]

1.159 However, consistent with section 1316A of the Act, the privilege against self-incrimination is not available to bodies corporate.

1.160 Where the statutory manager of a body corporate makes a payment, or enters into a transaction or does any other thing in good faith or with the consent of the RBA, that action is valid and is not liable to be set aside in a winding up of the body corporate. [Schedule 1, item 14, section 834B of the Act]

1.161 The ASIC Act states that disclosing information to the RBA is authorised use and disclosure of otherwise confidential or protected information. However, this authorisation of disclosure to the RBA by itself does not automatically authorise disclosure to a statutory manager.

1.162 The amendments ensure that disclosure of information to a statutory manager of a body corporate is an authorised use and disclosure of information. [Schedule 1, item 35, paragraph 127(2A)(da) of the ASIC Act]

Protections for a person dealing with a statutory manager

1.163 Persons dealing with the statutory manager will be entitled to make the same kinds of assumptions about the authority of persons to act, as if the statutory manager was the officer of the company. This includes assumptions about compliance with the company's internal management procedures as such persons are entitled to make in dealing with other company officers. [Schedule 1, item 14, section 836K of the Act]

Costs of statutory management

1.164 The costs incurred by the RBA in appointing a statutory manager to a body corporate are payable from the body corporate's funds and are a debt due to the RBA.

1.165 These costs include remuneration and expenses of a statutory manager, regardless of whether the RBA and/or another person is the statutory manager. Debts due to the RBA as a result of the costs of statutory management have priority in a winding-up of the body corporate over all other unsecured debts. [Schedule 1, item 14, section 836C of the Act]

Transfer

1.166 Compulsory transfer of shares and business is an important tool in the package of resolution options available to the RBA. This power enables the RBA to transfer a failing or insolvent CS facility to a solvent body corporate to continue providing critical CS services.

1.167 Once a condition for resolution has been met, the RBA has discretion to issue a transfer determination for a transfer of shares or business of the CS facility licensee, and related bodies corporate. Given the degree of intervention in transferring a business or shares, this power is exclusively available to the RBA. An appointed statutory manager cannot authorise a transfer, but may facilitate the transfer, at the direction of the RBA.

Compulsory transfer

1.168 The amendments enable some or all of the shares or business of a CS facility licensee or a related body corporate (including assets, liabilities, legal rights and obligations, data and systems) to be transferred to another body corporate or a newly established bridge entity that is incorporated in Australia.

1.169 In general, the process for a transfer of shares or business from one entity to another is for the RBA to obtain consent from the appropriate parties, issue a determination outlining a transfer will take effect, and finally issue a certificate of transfer stating the transfer is to occur.

Transferring shares or business of a related body corporate

1.170 The RBA may determine that a transfer of shares, of part or all of the business of a related body corporate is reasonably appropriate when a domestic CS facility licensee is being, or has been, transferred. This includes a body corporate that was a related body corporate immediately prior to the transfer of the domestic CS facility licensee. [Schedule 1, item 14, subsections 837A(2) and 837B(2) of the Act]

1.171 For the transfer of shares or business of the related body corporate of a domestic CS facility licensee the target body must be incorporated in Australia. [Schedule 1, item 14, paragraphs 837A(2)(d) and 837B(2)(d) of the Act]

1.172 Discretion to transfer a related body corporate is based on the RBA's assessment that it is required to facilitate the CS facility's resolution, including to enable the conduct of default management actions, restore or maintain financial stability or anything else that the RBA considers is necessary for the CS facility's resolution. For example, the RBA may consider it necessary to transfer the business or shares of related bodies corporate of a domestic CS facility licensee, where a related body corporate:

•

supplies services or funding that are necessary for the domestic CS facility licensee to operate its CS facility services, and access to those services could not be guaranteed unless the related body corporate is transferred with the domestic CS facility licensee; or

•

operates a market for which the domestic CS facility licensee provides CS facility services and the operation of this market is required to effectively conduct default management actions that are necessary for resolution.

Transfer determination

1.173 Regardless of whether the RBA makes a transfer of shares or a transfer of business, there are certain requirements that must be satisfied. The written transfer determination sets out how a transfer is to take effect for either a domestic CS facility licensee or a related body corporate. Prior to making the determination the RBA must:

•

obtain the Minister's consent to the transfer;

•

reasonably believe the transfer to the receiving body is appropriate to manage or respond to a condition being satisfied in relation to the licensee;

•

be satisfied that the target body is incorporated in Australia; and

•

be satisfied that the board of directors of the receiving body has consented to the transfer (where the consent remains in force until it is withdrawn by the board of directors with the RBA's agreement). [Schedule 1, item 14, subsections 837A(1) and (2), and 837B(1) and (2), (6) of the Act]

1.174 A transfer determination must include the particulars of the transfer including:

•

the names of the target body and the receiving body;

•

a statement of reasons why the transfer is made;

•

whether it will be a total transfer or a partial transfer; and

•

in the case of a partial transfer, an identification of the part of the target body's business or shares to be transferred. [Schedule 1, item 14, subsections 837A(3)and 837B(3) of the Act]

1.175 A copy of the transfer determination must be provided to the target body and receiving body. Given the time critical nature of the transfer, the determination is not a legislative instrument. [Schedule 1, item 14, subsections 837A(4) and (5) and 837B(4) and (5) of the Act]

1.176 The consent of the board of directors of the receiving body to receive the transfer of shares or business continues to have effect until the consent is withdrawn and the RBA agrees to the withdrawal having regard to any of the following:

•

circumstances that have arisen since the consent was given;

•

circumstances that were in existence at or before the time when the consent was given but which were not known to the receiving body's board when it gave its consent; or

•

any other relevant matter. [Schedule 1, item 14, section 837C of the Act]

Transfer determination conditions

1.177 The determination may impose conditions that the target body or receiving body must comply with either before or after the certificate of transfer is issued. [Schedule 1, item 14, subsection 837E(1) of the Act]

1.178 The RBA, either on its own volition or at the request of the target or receiving body, may vary or revoke a condition. The RBA is not obliged to comply with the request. However, where the RBA varies or revokes a condition, written notice must be provided to each affected entity so that all entities are aware of the conditions. [Schedule 1, item 14, subsection 837E(2), (3) and (4) of the Act]

1.179 The body corporate must comply with the conditions imposed on the determination if there is no certificate of transfer in force and a subsequent determination that a transfer is not to take effect is not issued.

1.180 If the body corporate fails to comply with conditions outlined in the determination, a penalty of 200 penalty units applies. This is consistent with a similar provision in section 31 of the Financial Sector (Transfer and Restructure Act) 1999. The penalty provides for a strong deterrence effect as a breach of conditions outlined in a determination may have significant impacts on or impede resolution, putting financial system stability at risk. [Schedule 1, items 14 and 23, subsection 837E(5) and Schedule 3 to the Act]

1.181 A protection is included for the body corporate that by complying with a condition of a transfer determination, that body corporate will not commit an offence under the Act. The body corporate would bear an evidential burden. [Schedule 1, item 14, subsection 837E(6) of the Act]

1.182 Similar to obtaining an expert report for a recapitalisation act, the RBA should obtain an independent expert valuation of property prior to making a transfer determination. However, the RBA is not required to do this if obtaining the valuation would threaten the stability of Australia's financial system or continuity of CS services. Obtaining the expert report is subject to the same conditions outlined from paragraph 1.127. [Schedule 1, item 14, section 849CB of the Act]

Transfer agreement

1.183 After a determination is made about a compulsory transfer of a business or body corporate or shares in a business or body corporate, the receiving or target body has the opportunity to write to the RBA to specify the mechanism for how the shares or assets and liabilities of the business are to be transferred. The RBA may approve this statement in writing before the certificate of transfer is issued if the mechanism is appropriate and both parties agree to the statement. [Schedule 1, item 14, section 837D of the Act]

Determination that transfer is not to take effect

1.184 If after issuing a transfer determination, but prior to issuing a certificate of transfer, the board of the receiving body withdraws their consent or the RBA no longer reasonably believes the transfer should occur, then the RBA must issue a certificate stating that a transfer is not to take effect. [Schedule 1, item 14, subsection 837F(1) of the Act]

1.185 The RBA may decide that a transfer is not required if it is no longer appropriate to facilitate resolution or the condition of resolution that was previously satisfied no longer poses a threat to the stability of the financial system in Australia. [Schedule 1, item 14, subsection 837F(2) of the Act]

1.186 Copies of a certificate that a transfer is not to occur must be provided to all relevant bodies corporate. The certificate is not a legislative instrument. [Schedule 1, item 14, subsection 837F(3) and (4) of the Act]

Information to the receiving body

1.187 The RBA may provide general and/or confidential information to a prospective receiving body about the business or shares that are or may be transferred in connection with a determination or possible determination of a transfer or proposed transfer. The RBA may impose conditions on the information that a body corporate must comply with. Disclosure of confidential or personal information to the receiving body is necessary and appropriate to fulfill the objective of stabilising Australia's financial system. [Schedule 1, item 14, section 839B of the Act]

Certificate of transfer

1.188 Where the RBA reasonably believes that a transfer of business or shares should proceed after a transfer determination is issued, then the RBA must issue a certificate of transfer stating that the transfer is to take effect provided that the consent of the receiving body has not been withdrawn. [Schedule 1, item 14, subsection 838A(1) of the Act]

1.189 The certificate of transfer must include:

•

the names of the target body and the receiving body;

•

the date the certificate of transfer is to come into force;

•

whether the transfer is a total or partial transfer of business or shares;

•

the shares that are being transferred, in the case of a part transfer of shares; and

•

a list of the assets and liabilities of the target body that are being transferred, in the case of a partial transfer of business. [Schedule 1, item 14, subsection 838A(2) of the Act]

1.190 It is at the discretion of the RBA to specify the mechanism for determining the other things that are to happen in relation to the:

•

assets and liabilities that are to be transferred; or

•

shares that are to be transferred. [Schedule 1, item 14, subsection 838A(5) of the Act]

Notice of certificate

1.191 The certificate of transfer has effect from the day specified on the notice. The RBA must give a copy of the certificate of transfer to the target body and the receiving body and publish the certificate on the RBA website. The certificate is not a legislative instrument. [Schedule 1, item 14, subsections 838A(3), (4), and (6) of the Act]

1.192 Any document that purports to be a certificate under this Division is taken to be a certificate and properly given. [Schedule 1, item 14, section 839E of the Act]

1.193 Land or assets may be lodged on a register and become the property of the receiving body subject to the RBA issuing an enabling certificate in relation to land, interests in land and other assets to be dealt with, and given effect to, in certain circumstances. [Schedule 1, item 14, sections 839C and 839D of the Act]

Time and effect of compulsory transfer of shares or business

1.194 A compulsory transfer may take effect without the approval of licensees, their shareholders, market participants, or contract holders.

1.195 In relation to a transfer of business, when the certificate of transfer comes into force, the receiving body becomes the successor in law of the target body to the extent of transfer:

•

for a total transfer – all assets and liabilities of the target body, wherever those assets and liabilities are located, become assets and liabilities of the receiving body without any transfer, conveyance or assignment; and

•

for a partial transfer – only the assets and liabilities of the target body listed in the certificate of transfer, wherever located, become assets and liabilities of the receiving body without any transfer, conveyance or assignment; and

•

to the extent of the transfer, the duties, obligations, immunities, rights and privileges applying to the target body apply to the receiving body. [Schedule 1, item 14, subsections 838C(1) and (2) of the Act]

1.196 The effect of a transfer of shares is that all shares become shares held by the receiving body without any transfer, conveyance, or assignment. The shares become shares held by the receiving body free from any trust, liability, or other encumbrance. [Schedule 1, item 14, subsections 838B(1) and (2) of the Act]

1.197 At the time of the transfer, the specified things that are included in a certificate of transfer for business or for shares (as appropriate) are taken to occur. Similarly, where a transfer agreement specifying the mechanism for certain things was approved by the RBA, then those things are taken to have happened at the time of the transfer. [Schedule 1, item 14, subsections 838B(3) and (4) and 838C(3) of the Act]

Effect of transfer

1.198 At the time a certificate of transfer comes into force, the receiving body is substituted for the target body in any instrument in relation to:

•

any asset or liability transferred; or

•

a share in the target body transferred. [Schedule 1, item 14, section 839F of the Act]

1.199 Further, from when the certificate of transfer is in force the target body must:

•

promptly account to the receiving body for any income or other distribution received if the income or distribution arises from assets transferred under Part 7.3B of the Act; and

•

at the request of the receiving company, give the receiving body access to all of the books in its possession that relate to assets or liabilities transferred. [Schedule 1, item 14, sections 839G and 839H of the Act]

1.200 Consistent with other provisions throughout the Act, failure to comply with the above requirements is an offence with a penalty of 12 months imprisonment. [Schedule 1, item 23, Schedule 3 to the Act]

1.201 The operation of the trust will not be affected where a trustee or beneficiary of a trust is transferred.

Effect of partial transfer on contracts

1.202 A transfer of business of a body corporate is a partial transfer if it relates to some, but not all, of the target body's business. In CS facility resolution, this would be expected to be applied to separable business lines/financial products or to particular assets and liabilities, subject to the voidance conditions below.

1.203 The partial transfer will be void where the following apply to a body corporate:

•

just prior to the partial transfer the target body is a party to a close-out netting contract, market netting contract or approved netting arrangement in respect of an obligation of the target body under the contract or arrangement (consistent with the PSN Act); and

•

the assets and liabilities covered by the transfer certificate includes some assets and liabilities the body has under the close-out netting contract, market netting contract, or approved netting arrangement, or assets that are property over which security is given in respect of an obligation of the target body under the close-out netting contract or market netting contract. [Schedule 1, item 14, subsection 839A(1) of the Act]

1.204 The partial transfer is void only:

•

to the extent of the assets or liabilities of the target body under any of those contracts with respect to the counterparty; and

•

if security is given over financial property in respect of an obligation of the target body under a close-out netting contract – to the extent that the assets are financial property in the possession or control of the counterparty (or another person on its behalf); and

•

if security is given over property in respect of an obligation of the target body under a market netting contract – to the extent that the assets are that property. [Schedule 1, item 14, section 839A(2) of the Act]

Minister's power to grant a CS licence to a receiving body

1.205 The Minister has the power to issue a domestic CS facility licence to the receiving body that is transferred all or some of the target body's business. The licensing power for the Minister to grant a CS facility licence on an expedited basis is integral to the functioning of Australia's financial system. The domestic CS facility licence may be subject to licence conditions, including conditions to reflect the expedited nature of the licence approval process. [Schedule 1, item 13, subsections 824B(3) and (4) of the Act]

1.206 A licence granted in this way is, once granted, taken to have been granted by ASIC in the usual way and is subject to the relevant regulatory powers of ASIC and the RBA.

Bridge entity

1.207 Where a receiving body does not consent or an alternative receiving body is unable to be found, the RBA may establish a temporary 'bridge' institution to take over and continue operating certain critical functions of the CS facility or related body corporate for a period, without incurring liability for any legacy claims.

1.208 Transfer to a bridge entity allows the Commonwealth to take ownership of the business or shares of a domestic CS facility licensee in resolution. A similar model exists under the crisis resolution powers afforded to APRA for ADIs. The power to create a wholly-owned Commonwealth company is authorised by section 85 of the PGPA Act.

Function and purpose of a bridge entity

1.209 The use of a temporary bridge institution would support continuity of CS facility services and financial stability. While the RBA may seek to wind down the business of the bridge institution, this would only occur if a transfer or sale was not possible within a reasonable timeframe and if to do so would be consistent with the objectives of the RBA. Given that the bridge arrangement is temporary, the RBA must complete an exit arrangement as soon as reasonably possible.

1.210 The RBA will establish terms and conditions under which the bridge entity will operate, including:

•

its ownership structure;

•

the source of its capital;

•

operational financing and liquidity support;

•

the applicable regulatory requirements, including compliance with licence conditions and the Financial Stability Standard;

•

the applicable corporate governance framework; and

•

the process for appointing the directors of the bridge institution and its mandate.

1.211 The RBA may also arrange the sale or wind-down of the bridge institution, or the sale or onward transfer of some or all of its assets and liabilities to a third-party, subject to the objectives of resolution.

Legal protections for transfer

1.212 A transfer done in accordance with the amendments generally has effect despite any other law, contract, deed, undertaking, agreement or other instrument.

1.213 Actions taken under the transfer provisions cannot cause the receiving body, the target body or any other person to be in breach of any contract, civil wrong or any law of the Commonwealth or a State or Territory or in any contract, deed, undertaking, agreement or other instrument. These overrides are intended to ensure timely action to address financial stability risks.

1.214 However, the provisions of the operation of the Privacy Act 1988, the Fair Work Act 2009, the Fair Work (Registered Organisations) Act 2009, and the Fair Work (Transitional Provisions and Consequential Amendments) Act 2009 are not limited by the transfer powers. This arrangement is consistent with the Transfer Act. [Schedule 1, item 14, section 839J of the Act]

Compensation

1.215 The crisis regime includes arrangements for the acquisition of property so that it is not invalid under the Constitution. If the operation of the RBA's powers would result in the acquisition of property on other than just terms and would be invalid because of paragraph 51(xxxi) of the Constitution, then the person is entitled to reasonable compensation. If the Commonwealth and the person do not agree on the amount of compensation, the person may apply to the Court, where the Court will determine the amount. [Schedule 1, item 14, section 849CE of the Act]

1.216 The purpose of having explicit compensation arrangements built in is to facilitate the RBA effectively executing any powers involving the acquisition of property and avoid delays resulting from a challenge to the constitutional validity of the RBA's actions.

Power to make rules

1.217 The RBA may, by legislative instrument, make rules in relation to transferring the shares or business of a body corporate which may include:

•

the purchase price and payment of shares;

•

dispute resolution;

•

publication of information;

•

freeing of shares from any trust or other encumbrance; or

•

any other incidental matter to the transfer of shares or business. [Schedule 1, item 14, section 839K of the Act]

1.218 A person must comply with any rules the RBA makes in relation to a transfer. A failure to comply with the rules that apply to a person is an offence of 30 penalty units. [Schedule 1, items 14 and 23, subsection 839K(3) and Schedule 3 of the Act]

1.219 The ability for the RBA to make rules in respect of a transfer of shares or business reflects the need for flexibility whilst in a crisis. Given the RBA will be dealing with the bodies corporate directly, the RBA will have the most relevant and timely information to make rules that supplement the transfer process.

Directions during resolution

1.220 Resolution directions may be issued by the RBA after a condition for resolution has been met. A direction issued during a crisis may require domestic CS facility licensees, and, in certain circumstances, related bodies corporate to take, or not take, specified action that must be complied with.

1.221 A resolution direction may be issued to a related body corporate of a domestic CS facility licensee provided that it is incorporated in Australia and:

•

the body corporate is related at the time of issuing the direction, or was related immediately before a transfer of business; and

•

the RBA reasonably believes the direction is appropriate to manage or respond to the condition that placed the CS facility licensee under resolution powers. [Schedule 1, item 14, subsection 840A(1) of the Act]

Resolution direction

1.222 The RBA may issue any direction it considers appropriate in facilitating resolution. A direction may be issued to a CS facility licensee or a related body corporate that is incorporated in Australia, including a body corporate that was related to the CS facility licensee prior to the transfer of business or shares. [Schedule 1, item 14, subsection 840A(2) of the Act]

1.223 For example, the RBA may issue any of the following resolution directions:

•

to do anything, refrain from doing or do something differently under the CS facility operating rules or procedures (CS facility licensee only);

•

to amend its operating rules (but in accordance with the procedure to amend the rules outlined in the operating rules) (CS facility licensee only);

•

to provide specified information to the RBA, in connection with the performance of the RBA's functions and duties;

•

not to appoint an external administrator;

•

to remove, appoint or not appoint a director or senior manager of the body corporate;

•

not to borrow any amount;

•

not to pay a dividend or repay any amount paid on shares;

•

not to pay or transfer any amount or asset to any person, or create an obligation (contingent or otherwise) to do so (unless pursuant to an order of a court or a process of execution);

•

to acquire shares, issue, sell or cancel shares in a body corporate;

•

vary or cancel rights or restrictions attached to shares in a class of shares in the body;

•

to issue debt instruments;

•

to stop, delay or restrict an acquisition or divestiture;

•

to continue or take new actions to provide services or funding to the CS facility licensee in accordance with any existing agreement (related body corporate only);

•

to continue to operate a business where the RBA considers that the business is necessary to facilitate the resolution of the CS facility licensee (related body corporate only); or

•

to do, or refrain from doing, anything else the RBA considers relevant in relation to maintain the stability of the financial system or to continue to provide critical CS facility services.

1.224 Where a CS facility licensee is directed to change the operating rules according to the procedures outlined in the operating rules and the Act, the licensee must provide notice to ASIC under section 822D(1) of the Act. However, if notification is provided outside of the 21 day limit specified under subsection 822D(2) of the Act, the changes to the operating rules will continue to have effect. ASIC may not disallow changes under section 822E of the Act when a CS facility is directed to make such changes. [Schedule 1, item 14, section 840C of the Act]

1.225 Where the RBA issues a direction to continue to operate a business, this requires the recipient to continue to provide services or facilities that are necessary to enable the CS facility licensee to continue to operate effectively. The services and facilities must be provided on the same terms as they were under any pre-existing agreement for the duration of the agreement, or otherwise on reasonable commercial terms. The obligation to continue to provide services may include intra-group funding arrangements but cannot be extended to third party service providers.

Information gathering direction

1.226 After a condition to exercise a resolution power is satisfied, the RBA may issue a direction to a person to provide relevant information that relates to the business of a domestic CS facility licensee. The RBA must reasonably believe the person can give the information, and that the information is required for the RBA to fulfil its functions in protecting the financial system in Australia or ensuring the continuity of critical CS services.

1.227 The direction to provide information may specify the particulars of the information or documents containing the information and the form and manner it is to be provided. It must specify a reasonable time or period by which it is to be complied with and the form and manner in which the information or documents must be given. [Schedule 1, item 14, section 841A of the Act]

1.228 The required information may include a book, account or document from any person that relates to the operations of domestic CS facility licensees and related bodies corporate.

Details of Directions

Compliance

1.229 A body corporate must comply with a resolution direction despite any other provision of the Act, its constitution, its operating rules or procedures, any contract or arrangement to which it is a party and any listing rules of a financial market in whose official list it is included. However, the licensee must comply with any processes or procedures for changing the operating rules that are outlined within the operating rules (for example, consulting with participants) following a direction to change the operating rules. [Schedule 1, item 14, subsections 840A(5) of the Act]

1.230 Failure to comply with a resolution direction or an information gathering direction is an offence. Failure to comply with a direction will differ for individuals and bodies corporate, where individuals will be subject to 100 penalty units for each day or part of a day of non-compliance, and bodies corporate will be subject to ten times this amount, being 1,000 penalty units. [Schedule 1, items 14 and 23, subsection 840A(3) and Schedule 3 to the Act]

1.231 Refusal or failure to give information (or documents containing information), relating to the business of a body corporate in resolution is a criminal offence of 12 months imprisonment or 60 penalty units. [Schedule 1, items 14 and 23, subsections 841A(3) and Schedule 3 of the Act]

1.232 These penalties reflect the severity of the contravention which would likely have detrimental effects on the stability of the Australian financial system. It is imperative that directions issued during resolution are complied with in order to resolve distressed CS facilities. In addition, the penalty for contravention of a direction issued by the RBA is consistent with contravention of ASIC directions in non-crisis times.

1.233 Where a CS facility licensee fails to comply with a direction, the RBA may apply to the Court for orders enforcing the direction. The Court may make orders on the application of the RBA, if it appears to the Court that a person has contravened a direction. However, the Court can only make such an order if the Court is satisfied that the order would not unfairly prejudice any person. [Schedule 1, item 14, subsection 840A(4) and sections 841A(4) of the Act]

Period of direction

1.234 All directions issued by the RBA may specify a time or period for the body corporate to comply with the direction. [Schedule 1, item 14, subsections 840A(2) and, 841A(2) of the Act]

1.235 However, if no period is specified, the direction will continue to apply until the RBA revokes the direction. A direction continues to apply despite an external administrator or statutory manager being appointed.

Variation or revocation of a direction

1.236 The RBA may vary or revoke a direction if it is consistent with the resolution objectives. The RBA is required to provide written notice to the CS facility if it varies or revokes a direction. Upon revocation of a direction, the direction ceases to have effect. [Schedule 1, item 14, section 840B and 841B of the Act]

1.237 The making, variation or revocation of a resolution direction or information gathering directions are not legislative instruments. [Schedule 1, item 14, subsections 840B(4), 841B(4) of the Act]

Directions and other information may be subject to secrecy

1.238 The RBA may specify, in writing, that certain information relating to a direction or an exercise of a resolution power by the RBA is to be covered by a secrecy determination. In making a determination, the RBA must reasonably believe that the determination is appropriate to manage or respond to the crisis. Specified information that may be covered by a secrecy determination is information that reveals a specific resolution direction was given to a body corporate or a document was given to a body corporate by the RBA that contains specific information. [Schedule 1, item 14, subsection 848A(1) of the Act]

1.239 A body corporate is covered by a secrecy determination if it is:

•

incorporated in Australia and it is a CS facility licensee;

•

a related body corporate of a CS facility licensee or was a related body corporate of a CS facility licensee before a transfer of business or shares under this Part; or

•

a body corporate to which information has been provided in relation to a transfer. [Schedule 1, item 14, subsection 848A(2) of the Act]

1.240 A secrecy determination may be varied or revoked if the RBA considers it appropriate. A secrecy determination is valid and continues in force until it is revoked. As soon as practical after making, varying or revoking the determination, the RBA must give the body corporate a copy of the determination. [Schedule 1, item 14, subsections 848B(1), (2) and (3) of the Act]

1.241 A determination nor a variation or revocation of a determination is not a legislative instrument. A determination, variation or revocation being a legislative instrument would make the information covered by the determination or variation public, undermining the goal of the determination. [Schedule 1, item 14, subsections 848A(6) and 848B(5)]

Considerations

1.242 In making a secrecy determination, the RBA may consider if it is appropriate for specified individuals, or a class of individuals, to disclose certain information. If the RBA makes a determination in relation to specific individuals, the RBA must provide a copy of the determination to both the body corporate to which the determination relates and each person specified in the determination. If the RBA makes a determination in respect of a class of individuals, the RBA must provide a copy of the determination to the body corporate, take reasonable steps to identify who may be captured by the class, and as far as practicable, give each person in the class a copy of the determination. [Schedule 1, item 14, subsection 848E(2), (3), (3A) and (3B) of the Act]

1.243 The determination that the RBA makes permitting a person or class of persons to disclose information may specify conditions that relate to entities to which the disclosure may be made, the way the disclosure is to be made or any other matter that the RBA considers appropriate. Any conditions outlined by the RBA must be satisfied before disclosure can occur. [Schedule 1, item 14, subsection 848E(4) of the Act]

1.244 A determination allowing the disclose of information is not a legislative instrument for similar reasons outlined in paragraph 1.241.

Contravention of a secrecy determination

1.245 A person must not disclose information if that information is covered by a secrecy determination and the person is:

•

the body corporate to which the determination relates

•

an officer, employee, contractor or statutory manager of that body corporate (at the time the determination was made); or

•

any other person that, because of their employment, or in the course of their employment, has acquired the information covered by the determination.

1.246 A person listed above that discloses information covered by a determination without an exception (discussed below) or as required by a court of tribunal commits an offence with a penalty of 2 years imprisonment. The person may also be liable for a civil penalty. [Schedule 1, items 14, 22 and 23, sections 848A, 848B, and 848C, subsection 1317E(3) and Schedule 3 to the Act]

1.247 As soon as practicable after the body corporate receives a secrecy determination, the body corporate must take reasonable steps to discover and provide a copy of the secrecy determination to relevant persons. Relevant persons may include body corporates that are covered by the secrecy determination or persons that are an officer, employee, contractor or statutory manager of the body corporate to which the determination relates. Failure to take reasonable steps to determine persons that are covered by the secrecy determination and subsequently provide a copy of the determination is a criminal offence of 2 years imprisonment. [Schedule 1, items 14 and 23, subsection 848A(4) and Schedule 3 of the Act]

1.248 The strong deterrent effect of a criminal sanction is necessary for failing to comply with a secrecy determination given the substantial impacts that unauthorised disclosure of information could have on the Australian financial system. Unauthorised disclosure of information covered by the secrecy determination risks exacerbating any market instability or factor causing the crisis, further increasing financial contagion and stability risks. The same offence and same penalty applies for both Commonwealth officers and third parties. The reason for this is that the gravity of the consequences is the same no matter who discloses that information.

1.249 The provisions of the Criminal Code Act 1995 apply recklessness as the fault element for this offence. A person that impermissibly discloses information covered by a determination must be aware that the secrecy determination applies to them to be liable for an offence (see sections 5.4 and 5.6 of the Criminal Code Act 1995).

Permissible disclosure of information covered by a secrecy determination

1.250 Disclosure of the information covered by the secrecy determination is allowed where the information:

•

has already been lawfully made available to the public;

•

is disclosed to a legal representative to seek legal advice;

•

is allowed to be disclosed by an RBA determination and the relevant conditions are satisfied (see paragraph 1.242);

•

is protected information within the RB Act or ASIC Act and disclosed by a Commonwealth officer, RBA officer, ASIC member or staff member in accordance with section 79A of the RB Act or section 127 of the ASIC Act (see paragraph 1.162);

•

is allowed by the Minister's determination;

•

is disclosed to another person who is subject to the secrecy arrangement; or

•

a court or tribunal orders or directs the entity to do so. [Schedule 1, item 14, subsections 845E(1), 848C(3) and sections 848D, 848E, 848F, 848G, 848H, 848J and 848K of the Act]

1.251 The reference to officer is limited to a person employed or engaged with the RBA or for the purposes of assisting the RBA to exercise its powers. For the purposes of allowed disclosure, protected information with respect to the secrecy provisions of the RB Act is taken to include information that reveals the fact a direction has been given and information specified in the determination. Commonwealth officers may disclosure the information in the same way provided that, notwithstanding the determination, they could disclose protected information as allowed under the RB Act. [Schedule 1, item 14, subsection 848G(2) of the Act]

1.252 Because the section deems information relating to the determination to be protected information, the offence in the RB Act is disapplied where the information is authorised to be disclosed under other sections. For the avoidance of doubt, Commonwealth officers are explicitly deemed to be officers for the purpose of that protection. [Schedule 1, item 14, subsection 848G(3) and paragraph 848G(2)(c)]

1.253 The grounds allowing disclosure under the secrecy provision operate independently and do not limit each other. [Schedule 1, item 14, section 848L of the Act]

1.254 The Minister may, by legislative instrument, determine further circumstances in which disclosure can be made. The circumstances provided for in an instrument would apply to secrecy determinations generally and therefore would not reveal specific information intended to be covered by a determination. [Schedule 1, item 14, section 848J of the Act]

Protection

1.255 Where the RBA has exercised a crisis power and a person has acted in accordance with fulfilling a function under the crisis regime, that person is generally protected from criminal or civil proceedings. The protection from liability only applies to a person that acts in good faith and it is considered reasonable for the person to act in a way that achieves the purpose of performing a function or power under the crisis regime. [Schedule 1, item 14 paragraphs 849CD(1)(a) and (b) and (2) of the Act]

1.256 This protection is available to the body corporate, an officer, senior manager, employee or agent of the body corporate or person engaged to provide services to the body corporate. The protection applies to those persons with respect to a related body corporate, or an entity that was a related body corporate prior to a transfer under Part 7.3B of the Act taking place. [Schedule 1, item 14, paragraph 849CD(1)(c) of the Act]

1.257 Statutory managers have a broad immunity for any decisions and acts they make of their own volition rather than acting in accordance with a formal direction or determination from the RBA. There is sufficient oversight from the RBA in ensuring independent statutory managers are acting to resolve a crisis. [Schedule 1, item 14, subsection 849CD(3) of the Act]

1.258 When under statutory management, a director of a body corporate is protected from criminal or civil liability when doing anything or omitting to do anything in good faith under the written approval of the statutory manager. Additionally, a director acting or omitting to act, in good faith, and who may be in breach of an obligation or duty under Part 2D.1 of the Act or a similar duty under common law while the body corporate is under statutory management will not be liable for any act or omission under those Parts. That protection lasts for the period the body corporate is under statutory management. [Schedule 1, item 14, subsections 849CD(4) and (5)]

Protections for the RBA and RBA staff

1.259 The amendments introduce a broad protection in the RB Act for RBA staff and other public sector staff seconded to the RBA. The protection applies to things done, or omitted to be done, in good faith for the purposes of exercising, or purporting to exercise, powers conferred on them by:

•

Part 7.3B of the Act; or

•

section 823F of the Act (dealing with directions to preserve stability in the Australian financial system).

1.260 A civil or criminal action does not lie against a person in relation to a good faith action or omission in performance or purported performance of powers or duties under those provisions if it is reasonable for the person to do the act or make the omission to achieve the purported purpose. [Schedule 2, item 114, subsections 84A(1), (2) and (4) of the RB Act]

1.261 The persons covered by this protection are:

•

the RBA;

•

the Governor and Deputy Governor of the RBA;

•

a member of a Board of the RBA;

•

a staff member of the Reserve Bank Service;

•

an officer of another Commonwealth agency who is seconded to the RBA. [Schedule 2, item 114, subsection 84A(3) of the RB Act]

1.262 The protected information and protected document definitions in the RB Act are amended to reflect the new crisis powers. This ensures that current and previous officers do not disclose protected information or documents to any person or court unless expressly permitted or required under specified provisions. [Schedule 1, items 48, 49, 50 and 55, definition of 'protected information' and 'protected document' in subsections 79A(1), (2) and (8) of the RB Act]

Preservation of existing information sharing arrangements

1.263 The existing information sharing arrangements between the RBA and ASIC are preserved for the purposes of resolving a crisis under Part 7.3B of the Act. This is necessary to facilitate the joint administration and enforcement of CS facilities by the RBA and ASIC. [Schedule 1, items 53 and 54, subsection 79A(6A) and (6B) of the RB Act]

1.264 Consistent with the existing information sharing arrangements, the RBA and ASIC do not need to notify any person that it plans to, or has, shared information with the other regulator. While the natural justice hearing rule will not apply to the act of information sharing between the regulators, this is a limited restriction as procedural fairness will still be afforded in relation to uses of the shared information. This approach ensures the interests of affected persons are taken into account in making substantive decisions.

1.265 Disclosure of information between the regulators constitutes an authorisation by an Australian law for the purpose of Australian Privacy Principle 6 of the Privacy Act 1988.

Stays and moratorium

1.266 Effective resolution requires that critical contractual relationships of the CS facility and any related body corporates remain in place. Therefore, counterparties of the CS facility and its related body corporates are prevented from denying an obligation, accelerating debt, closing out certain transactions or enforcing security under a contract during resolution.

1.267 The stays operate to maintain CS facility functions by preventing the operation of certain kinds of rights, such as those arising from 'ipso facto' clauses. These clauses allow a party to terminate or modify the operation of a contract upon the occurrence of some specific event, regardless of otherwise continued performance of the counterparty. These ipso facto provisions have the effect of reducing the effectiveness of successful resolution.

1.268 The stay provisions ensure that vital contracts remain in place and are intended to mitigate the risk of pre-emptive actions by counterparties impeding the ability of the RBA to implement an orderly resolution or the ability of the CS facility or related body corporate to continue to operate. In addition, the primacy of the PSN Act ensures that critical contractual relationships between the CS facility and its participants are maintained.

1.269 Similarly, the RBA exercising resolution powers could result in enforcement procedures that have the potential to interfere with the orderly resolution of a body corporate. Therefore, moratorium provisions apply to suspend the enforcement of certain rights to facilitate timely assessment of the financial and operational position of the entity for administration purposes and any resolution action.

Moratorium

1.270 The moratorium will apply at the time a crisis power is exercised, either by appointing a statutory manager, a transfer is in effect, or the RBA issuing a resolution direction to the body corporate. The moratorium operates to prevent a person from beginning or continuing certain actions against a body corporate to ensure the RBA can effectively resolve a crisis. [Schedule 1, item 14, subsection 842A(1) of the Act]

1.271 The moratorium provisions do not apply to payments and property transfers to the CS facility, such that netting and collateral arrangements remain protected under the PSN Act. This includes approved real-time gross settlement systems, approved netting arrangements, close-out netting contracts and market-netting contracts that will be unimpacted by the moratorium provisions. This is intended to ensure that current protections under the PSN Act are retained and the rights of counterparties to close-out netting contracts are clear. Counterparties to a CS facility will continue to be able to close out positions to manage their risk exposures during the period of the moratorium. However, counterparties will not be able to deny their obligations under the operating rules and must continue to meet their margin obligations and any obligations under the CS facility's default management and recovery arrangements.

Application of moratorium

1.272 The moratorium provisions will commence as described above. The moratorium provisions will end when the relevant event or events occurs:

•

all statutory manager appointments are terminated by the RBA;

•

the RBA issues a Certificate of Transfer or determines the transfer should not proceed;

•

no resolution direction remains in force; or

•

if at least one statutory manager has been appointed and a transfer determination has been made – the later of:

o

(i) the appointment of all statutory managers being terminated by the RBA; and

o

(ii) the RBA issuing a Certificate of Transfer or the RBA determining that the transfer should not proceed. [Schedule 1, item 14, subsection 842A(2) of the Act]

1.273 The moratorium provisions may apply again to a body corporate if a relevant event applying a subsequent moratorium occurs in relation to the body corporate. [Schedule 1, item 14, subsection 842A(3) of the Act]

Effect of the moratorium

1.274 The moratorium provisions apply to creditors and other third parties that have rights or rights over property in relation to the body corporate in resolution.

Voluntary winding up prohibited

1.275 A body corporate cannot be wound up voluntarily while a moratorium is in effect. The Court will adjourn any applications received for the winding up of a body corporate during the moratorium. Similarly, the Court may not appoint a provisional liquidator of a body corporate under a moratorium. [Schedule 1, item 14 section 844A of the Act]

1.276 If a body corporate goes into liquidation after the moratorium provisions end, the liquidation provisions under sections 468, 471B, 471C and 500 of the Act will take effect. The CS facility licensee is required to meet any liabilities incurred and recommence legal proceedings after the lapse of the moratorium provisions.

Restricting third party property rights

1.277 In general, while the moratorium provisions apply to a body corporate a third party is restricted in exercising their rights in property of the body, or other property used or occupied by, or in the possession of, the body. This includes the restriction on a third party against enforcing a security interest where the third party, is either a secured party or a PPSA secured party in relation to the property of the body corporate. A third party that is a secured party in relation to a possessory security interest also cannot sell the property. [Schedule 1, item 14, subsections 844B(1) of the Act]

1.278 The following additional restrictions apply to a third party that is a PPSA secured party:

•

who is a lessor of property in relation to a PPSA security interest in goods arising out of a lease of the goods, then the distress for rent must not be carried out against the property, and the third party cannot take possession of the property or otherwise recover it; or

•

who is an owner (that is not a lessor) of property in relation to a PPSA security interest in the property, then the third party cannot take possession of the property or otherwise recover it. [Schedule 1, item 14, subsections 844B(1) of the Act]

1.279 The secured party may continue to possess the property while the moratorium provisions apply to the body corporate only if the secured party has lawful possession of the property that is subject to a possessory security interest. [Schedule 1, item 14, subsection 844B(3) of the Act]

1.280 The general restrictions will not apply in relation to the exercise of a third party's rights in property if the rights are exercised with the RBA or statutory manager's consent or with leave of the court. [Schedule 1, item 14, subsection 844B(2) of the Act]

1.281 At the time the moratorium provisions begin to apply, any PPSA security interest which was perfected, registered or enforceable against a third party is vested if the collateral is not registered within time. [Schedule 1, items 6 and 7, subparagraphs 588FL(1)(a)(v) and (vi) of the Act]

1.282 Similarly, upon a statutory manager being appointed to a body corporate an unperfected security interest is vested. [Schedule 1, items 44 and 45, subparagraphs 267(1)(a)(iiic) and (iiib) of the PPSA]

1.283 For the purposes of Part 7.3B, the definition of 'property' is altered to include any PPSA retention of title property of the body corporate. [Schedule 1, items 2 and 14, definition of 'property' in section 9, and subsection 833A(4) of the Act]

1.284 To the extent there is any inconsistency in the operation of subsections 844B(1) to (3) and the PSN Act, the PSN Act applies. [Schedule 1, item 14, subsection 844B(4) of the Act]

Enforcement processes suspended

1.285 Only the Court may grant leave or impose conditions to allow the enforcement process to begin or continue. A person who applies for leave of the Court must notify the RBA. The RBA is entitled to be heard on the application to the Court.

1.286 The RBA may apply to the court or tribunal to be joined as a party or to intervene in the proceedings for leave. If the RBA is joined as a party, the court or tribunal must have regard to the RBA's views in deciding whether to grant leave, and if so, whether to impose terms and the nature of those terms. [Schedule 1, item 14, section 844E of the Act]

Beginning or continuing a court proceeding

1.287 At the time the moratorium provisions come into effect, except for criminal proceedings or a proceeding prescribed in regulations, or where the RBA has given consent or the Court has given leave, a proceeding against a body corporate to which the moratorium applies cannot be continued or proceed. If a person applies for the leave of the Court that person must notify the RBA who is entitled to be heard with respect to the application. [Schedule 1, item 14, section 844C of the Act]

1.288 Various processes occur with respect to a body corporate's property to protect the rights of other people involved in the enforcement process. Upon notification that the moratorium provisions apply to a body corporate, the court officer (who may be a sheriff, registrar or other appropriate officer) is restricted from certain actions so as not to interfere with resolution. At any time from receiving the notification, the court officer is prevented from the following, unless the Court otherwise approves:

•

taking action:

o

in relation to the attachment or a debt due by the body corporate; or

o

to sell the property of the body corporate; or

•

paying a person:

o

money in relation to money received because of the attachment of a debt due;

o

proceeds of selling a property;

o

money of the body corporate seized; or

o

money paid to avoid seizure or sale of property. [Schedule 1, item 14, subsections 844F(1), (2) and (6) of the Act]

1.289 Any money or proceeds that are paid to the Court and in the court officer's possession must be provided to the statutory manager at the time of notification. If there is no statutory manager, the Court may direct the court officer to make the payment as appropriate. The position of the person who commissioned the enforcement action will be protected by providing that the court officer may retain, as a first charge on the proceeds or money given to the statutory manager, so much of the proceeds or money that the court officer thinks necessary to cover the costs of the enforcement action which has already taken place and costs which might otherwise be levied against the person who commissioned the enforcement action. [Schedule 1, item 14, subsections 844F(3), (4) and (5) of the Act]

1.290 Finally, a person who buys property in good faith under a process of execution will be protected, by providing that person with good title to the property as against the company and the statutory manager. A person that acts in good faith has the sincere intention to be fair, open, and honest. [Schedule 1, item 14, subsection 844F(7) of the Act]

1.291 The RBA or statutory manager of a body corporate is not liable to an action or other proceeding for damages in respect of a refusal to give an approval or consent for protecting the body corporate's property. [Schedule 1, item 14, section 844D of the Act]

Stays

1.292 The resolution regime includes several stay provisions that generally operate to:

•

deny termination rights or other rights when the RBA exercises a resolution power;

•

suspend enforcement of rights;

•

temporarily suspend rights when the RBA makes a notifiable instrument; and

•

prevent the termination of essential services to the CS facility.

General stay provision

1.293 The stay provisions apply to prevent counterparties from exercising certain rights under a contract with a body corporate where the RBA exercises a resolution power over that body corporate or a body corporate within the corporate group. This has the effect of preventing a party from exercising the rights mentioned below against a body corporate where another body corporate in the same corporate group is under a resolution power and either that body corporate, or a third body corporate (not necessarily subject to an exercise of power by the RBA) is suffering a deterioration in its financial position. The stay provisions also extend to a body corporate that was a related body corporate prior to a transfer of business or shares. [Schedule 1, item 14, subsections 849CC(1), (3) and (4) of the Act]

1.294 This specific type of stay is necessary to prevent credit risk across a corporate group being grounds for the denial of obligations under a contract. Termination of those services could worsen the crisis that the RBA's exercise of power is intended to address.

1.295 Counterparties must not use the RBA's exercise of power as a reason to exercise a rights such as deny an obligation, accelerate a debt, terminate or closeout a transaction, or enforce a security under a contract with a body corporate that is subject to a resolution power or a related body corporate. [Schedule 1, item 14, subsections 849CC(2) of the Act]

1.296 To the extent that the general stay may interfere with the protection provided to a particular right or transaction by the PSN Act, the PSN Act applies (see paragraphs 1.321 to 1.326). [Schedule 1, item 14, sections 849CC(5) of the Act]

1.297 Regulations may prescribe specific kinds of arrangements that the stay would not apply to allow more specific types of contracts to continue to operate despite the stay. [Schedule 1, item 14, subsection 849CC(6) of the Act]

Stay on enforcement rights and temporary suspension of rights

1.298 The stay on enforcement rights applies when a statutory manager is appointed to a body corporate, the RBA determines that a transfer is to take effect or the RBA makes a resolution direction.

1.299 The temporary suspension of rights operates by the RBA providing public notification that temporary stays are to apply if there is an intention to exercise any resolution powers.

Application of stay on enforcement rights

1.300 The stay intends to capture any of the following entities:

•

a contractual counterparty of a domestic CS facility licensee;

•

a current or former related body corporate;

•

any participants of the CS facility;

•

intra-group service providers to the CS facility licensee; and

•

third party service providers to the CS facility licensee.

1.301 The stay on clauses in contracts is intended to apply to a contract entered into by any group entity, even if no resolution action has been taken by the RBA in respect of that particular entity. For example, if a statutory manager is appointed to only a domestic CS facility licensee, the exclusion of contractual terms will apply to contracts entered into by a related operations entity with a third-party service provider.

1.302 To avoid contractual parties from exercising commercial rights that would subvert the RBA's objective of restoring financial stability, an express right is not enforceable for the reason that:

•

the body corporate being under statutory management;

•

a transfer determination being made;

•

a resolution direction being issued;

•

the financial position of the body corporate;

•

a reason prescribed in the regulations and relates to either the moratorium provisions possibly applying or the body corporate's financial position; or

•

any other reason that is in substance contrary to the aforementioned reasons. [Schedule 1, item 14, subsections 843A(1), (2) and (3) of the Act]

1.303 Generally, the period during which a right cannot be enforced begins at the time a statutory manager is appointed, a transfer determination is made or a direction is issued. The right may only be enforced after the body corporate is no longer under statutory management, a transfer has been completed, a transfer is determined not to proceed or the direction ceases to be in force. [Schedule 1, item 14, subsections 843A(4) and (5) of the Act]

1.304 The Court may extend the period for which a right is not enforceable against a body corporate if the Court is satisfied that doing so is in interests of justice. An interim order may be made while the application is being considered but cannot require an undertaking relating to damages as a condition. [Schedule 1, item 14, subsection 843A(6) of the Act]

1.305 Once the general stay period has ended, third parties are indefinitely prevented from enforcing rights to the extent that the reason for exercise of the rights relates to:

•

the body corporate's financial position before or during the stay period;

•

the body corporate being under statutory management;

•

the RBA making a transfer determination;

•

the RBA making a resolution direction in relation to the body corporate; or

•

a reason prescribed in the regulations relating to circumstances in existence before the end of the stay period. [Schedule 1, item 14, subsection 843A(7) of the Act]

Application of temporary suspension of rights

1.306 If the RBA intends to exercise a resolution power, the RBA may declare, via notifiable instrument, that a suspension of termination rights applies to a body corporate. Any action the RBA may take when a resolution condition is satisfied does not apply to the declaration made for the purposes of temporarily suspending termination rights. This is because the declaration power is based on the RBA intending to take exercise a resolution power rather than exercising the resolution power. [Schedule 1, item 14, subsection 831A(2) and section 849BA(2) of the Act]

1.307 The declaration ensures that pre-emptive actions by contractual counterparties do not impede the ability of the RBA to implement an orderly resolution or the ability of the domestic CS facility licensee or related body corporate to continue to operate. This is necessary to facilitate effective resolution without the risk of key contracts being terminated or discontinuation of services.

1.308 The temporary suspension of termination rights applies to suspend any termination right, such as termination at call or on notice (but not termination due to non-payment). The performance of those substantive obligations is subject to the application of any contractual or statutory loss allocation rules (for example, where a central counterparty's rulebook allows it to reduce mark-to-market payments following default of a participant). A counterparty may still exercise rights to early termination which arise from a failure to make payments, deliver obligations or provide collateral.

1.309 Where a declaration is in force, the temporary suspension applies to:

•

a domestic CS facility licensee; or

•

related body corporate, of a domestic CS facility licensee, that is incorporated in Australia. [Schedule 1, item 14, section 849BA(1) of the Act]

1.310 The declaration has the effect of temporarily suspending an entity's right to terminate a contract with the body corporate, by preventing a third party from exercising a right to terminate:

•

a contract, agreement or arrangement; or

•

an obligation arising under a contract, agreement or arrangement from an express provision or because of anything done in accordance with a direction to preserve financial stability under section 823F of the Act. [Schedule 1, item 14, section 849BB(1) of the Act]

Rights not subject to the stay under enforcement of rights and temporary suspension

1.311 There are some cases where it would not be appropriate for a stay against the enforcement of rights to apply because of the nature of the agreement or the parties to the agreement. The stay on enforcement rights and temporary suspension of rights does not apply to:

•

rights that relate to a contract, agreement or arrangement that was entered into after either the statutory manager was appointed or the notifiable instrument is in force (as relevant);

•

rights that are part of a type of contract, agreement or arrangement that are specified in the regulations or are declared by the Minister; or

•

a right of a kind declared by the Minister; or

•

to the extent that the RBA or liquidator (appointed after the stay period) has provided written consent. [Schedule 1, item 14, subsections 843B(1), (2), (3) and (4) and 849BB(2) and (4) of the Act]

1.312 Notwithstanding the operation of the stay, a counterparty maintains the ability to enforce a right for reasons such as where the body corporate has failed to meet payment, performance or other obligations under the agreement such as a default management or recovery action.

1.313 However, where rights cannot be enforced against a body corporate or exercised by the body corporate because they are under the stay period and the body corporate has a right against another entity to a new advance of money or credit. However, the body corporate may exercise this right if the entity which owes the body corporate is a related body to the body corporate and is exercising its own right against the body corporate. This is required to ensure continuity of arrangements within the broader group of which the body corporate is a part. [Schedule 1, item 14, subsections 843C(1) and (2) of the Act]

1.314 For the temporary suspension of rights, there are two additional rights that are not captured including:

•

a right that is exercisable only in particular circumstances; or

•

a right that arises from acting in accordance with a direction to preserve financial stability or a recapitalisation direction under section 823F of the Act after the notifiable instrument is in force. [Schedule 1, item 14, paragraphs 849BB(2)(a) and (b) of the Act]

1.315 During the temporary stay, parties to a contract retain the ability to exercise contractual termination rights in particular circumstances, such as if substantive obligations under the contract are not complied with. Additionally, participants retain the ability to execute new transactions, which may have the same effect as the closing out of certain positions, or other market risk management transactions.

1.316 A declaration of rights by the Minister is a legislative instrument. The Minister may declare contracts or agreements that are referred to in Commonwealth law or declare kinds of rights to which a stay on enforcement rights broadly does not apply, or does not apply in specific circumstances. [Schedule 1, item 14, subsection 849BB(3) of the Act]

1.317 The regulation making powers are intended to ensure that reasons and clauses in agreements are appropriately captured or excluded. The regulation making power to extend the stay to apply to clauses in agreements is appropriately designed to ensure relevant reasons for not enforcing a right are adequately captured. The regulation making power to exclude certain types of contracts is necessary to ensure that rights which are central to the operation of the CS facility such as those arising from market netting contracts and other types of financial contracts remain enforceable. The regulation making power may be relied upon to protect transactions underpinned by International Swaps and Derivatives Association (ISDA) Master Agreements and similar contractual arrangements that are not within the scope of the PSN Act. The regulation making powers under the stay provisions are consistent with the existing regulation powers under the stay regime under Part 5.3A of the Act.

Automatic stay

1.318 An automatic stay on early termination and certain other rights operates so that resolution actions by the RBA are not undermined. The stay provisions apply to self-executing provisions of contracts, agreements or arrangements. The stay on the exclusion of contractual terms comes into operation automatically, at the time the RBA appoints a statutory manager, makes a transfer determination or issues a resolution direction and ensures that a contract cannot be terminated. [Schedule 1, item 14, sections 843D and 849BC of the Act]

Temporary suspension of rights: revocation of notifiable instrument

1.319 The RBA must revoke the declaration that temporary suspension of rights applies if there is no intention to exercise a resolution power. [Schedule 1, item 14, subsections 849BA(3) and (4) of the Act]

Supply of essential services

1.320 Whilst under statutory management a supplier of essential services such as gas, electricity, water or a carriage service must not refuse to supply these services nor make it a condition that an amount be paid before supplying of the essential service. The statutory manager may apply for an injunction jointly with the RBA if a supplier refuses to comply with the requirement to supply essential services or imposes a condition that an amount be paid first. [Schedule 1, item 14, subsection 836H the Act]

Stay interactions with other laws

1.321 Despite the explicit provision on the enforcement of rights, where there is an inconsistency between the PSN Act, the International Interests in Mobile Equipment (Cape Town Convention) Act 2013 (Cape Town Convention Act), the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act) and the Autonomous Sanctions Act 2011 (ASA 2011), those Acts will take priority. [Schedule 1, item 14, sections 843E and 849BD of the Act]

1.322 The PSN Act takes precedence to ensure that critical market netting, close out netting, and real time gross netting contracts continue to function despite the operation of the moratorium and stays. For example, the CS facility operating rules are a market netting contract that underpin the operation of the facility, and it is therefore crucial that those arrangements operate as normal during resolution. Given this important function, the RBA will generally follow the CS facility's operating rules to the extent possible under the prevailing financial stability conditions when exercising resolution powers. If the RBA intends to alter any the operating rules, the RBA would be required to follow the usual process of consultation with participants. These changes are unlikely to include fundamental changes to loss allocation such as initial margin haircutting.

1.323 The justification for this explicit hierarchy in relation to the Cape Town Convention Act and ASA 2011 is that these Acts outline Australia's approach to international coordination. In particular, the Cape Town Convention codifies the treaty to standardise transactions involving movable property. Its purpose is to protect the interest of the sellers, purchasers and creditors through the creation of an International Registry. It outlines internationally consistent remedies available to the lender in the event of default or insolvency.

1.324 Because of the nature of the offence in section 16 of the ASA 2011 (particularly the strict liability nature), a person could be theoretically acting in accordance with the Act, but would be in breach of the ASA 2011.

1.325 It is important that the AML/CTF Act take precedence. The AML/CTF Act regulates financial, gambling, remittance and bullion sectors that provide designated services and imposes key obligations on regulated businesses. Given the policy significance of these obligations, this provision has been included to ensure these amendments do not unintentionally affect the operation of the AML/CTF Act.

1.326 If a transaction was entered into when the moratorium provisions apply to the body corporate and the transaction is uncommercial, or an unfair preference was given by the body corporate to a creditor of the body corporate, an insolvent transaction occurred, or a creditor defeating disposition by the body corporate occurred – the transaction is not voidable under section 588FE of the Act merely for those reasons. [Schedule 1, item 14, sections 843F and 849BE of the Act]

General power to make orders

1.327 The Court has the power to make orders in respect of any moratorium provision to deal with property disputes over how the stay provisions apply. In addition, the Court may make an order for how the temporary suspension of termination rights should apply. The inclusion of the general power is to mostly deal with how the RBA may operate in relation to a particular body corporate, subject to conditions. An order may be made on application of the body corporate, a creditor of the body corporate, a statutory manager of the body corporate, the RBA, or any other interested person. [Schedule 1, item 14, sections 845A and 849BF of the Act]

Interactions between regulators in a crisis

1.328 During resolution, it is intended that the RBA's powers to resolve a crisis will have priority over any powers ASIC takes in respect of CS facilities, and, in certain circumstances, Australian market licensees. Accordingly, ASIC:

•

must act in a way that supports resolution of a CS facility licensee;

•

must not exercise rule-making or directions powers in respect of CS facilities and market licensees without a non-objection from the RBA; and

•

may comply with the RBA's request to exercise rule-making and direction powers (where no other conditions need to be met to exercise the power).

1.329 The RBA may request ASIC to issue directions or make CS facility or market integrity rules during a crisis. The request must be in writing and outline the reasons for the request to exercise a power. [Schedule 1, item 14, section 849AB of the Act]

1.330 ASIC's compliance with the RBA's request to exercise powers does not require any other conditions to be met. That is, ordinary conditions to issue a supervisory direction or make CS facility or market integrity rules do not need to be met if the RBA has requested ASIC's assistance. [Schedule 1, item 10 and 11, subsections 798G(5A) and (6) of the Act; Schedule 2, item 65, subsection 826Q(1) of the Act]

1.331 If the RBA requests ASIC to make or vary a direction, ASIC may issue the written direction to a market licensee that may require the licensee to do, or refrain from doing, certain actions. The written direction must include a reasonable period to comply with the direction. The licensee must comply with the direction. Failure to comply with the direction is 100 penalty units for an individual and 1,000 penalty units for a body corporate for each day or part of day the offence is committed. Further, failure to comply with the direction may result in ASIC applying to the Court for an order that the licensee comply with the direction. [Schedule 1, items 9 and 23, sections 794AA and 794AB and Schedule 3 of the Act]

1.332 ASIC must also give written notice of the direction, variation or revocation to the operator of the CS facility with which the market licensee has arrangements. [Schedule 1, item 9, subsection 794AB(3) of the Act]

1.333 These directions are not legislative instruments. [Schedule 1, items 9, subsections 794AB(4) of the Act; Schedule 2, items 70 and 65, section 798JA and subsection 826Q(5) of the Act]

1.334 If ASIC makes CS facility or market integrity rules in accordance with the RBA's request, the Minister does not need to provide consent. However, ASIC must provide a copy of the RBA's request to the Minister. If the Minister considers it appropriate, the Minister may direct ASIC to vary or revoke the rules, and ASIC must comply with that direction. [Schedule 1, item 10, subsections 798G(5B), (5C) and (5D) of the Act; Schedule 2, item 65, subsections 826Q(1), (2), (3) and (4) of the Act]

1.335 Whilst a body corporate, or a related body corporate of that body corporate is:

•

under statutory management;

•

subject to a potential transfer of shares or business (a certificate has been issued but the RBA has not yet determined the transfer should take effect);

•

subject to a resolution direction;

•

ASIC must not exercise any rule-making or direction powers in respect of that body corporate, a related body corporate of that body corporate, or a market licensee that has a clearing and settlement arrangement with the body corporate, without receiving a request or express, written non-objection from the RBA to exercise those powers. This includes making rules, giving advice or a direction to the licensee, or an act under the regulations. [Schedule 1, item 14, subsections 849CA(1), (2), (3) and (6) of the Act]

1.336 These provisions are intended to allow for control over CS facilities and their related bodies corporate that is necessary for successful resolution. These requirements also ensure close coordination between ASIC and the RBA over any actions with respect to CS facilities and their related bodies corporate.

1.337 In the event that the RBA objects to the action by ASIC, ASIC may escalate the matter to the Minister, who may direct the RBA to withdraw the objection. The RBA must comply with the Ministers direction. [Schedule 1, item 14, subsections 849CA(4), (5) and (6) of the Act]

1.338 While RBA actions under Part 7.3B of the Act are likely to be pertinent to ASIC's regulatory remit in respect of CS facilities and potentially related bodies corporate of CS facilities, explicit legislative requirements for RBA consultation with ASIC before action is taken under Part 7.3B of the Act are not included. This is so that resolution actions can be undertaken as efficiently and effectively as possible without needing to satisfy additional legislative requirements. This does not limit the ability of RBA and ASIC to communicate regarding crisis resolution actions. RBA and ASIC can arrange a memorandum of understanding specifying how and when any consultation related to the use of powers under Part 7.3B of the Act should occur. A memorandum of understanding could be used similarly for powers outlined in Chapters 2 and 3 where consultation between the regulators is not legislatively required.

Merits review in a crisis

1.339 Any decisions made under Part 7.3B of the Act are not subject to merits review. This includes RBA decisions and extends to any directions issued by ASIC in accordance with the RBA's request. The exclusion of merits review in a crisis is justified on the basis that it is not conducive to certainty in a regime designed to address a crisis. Furthermore, the crisis regime relates to financial decisions with a significant public interest, which is an allowable exemption from merits review under the Administrative Review Council's publication 'What decisions should be subject to merit review' (see paragraphs 4.34 to 4.38 of that publication). [Schedule 1, items 18, 19, 20 and 21, paragraphs 1317C(gcad), (gcba), (gccf) and (gcf) of the Act]

1.340 Decisions in a crisis, such as, the appointment of a statutory manager, are likely to have a strong public interest element and to occur where there is a need to take rapid action to restore or maintain confidence in the markets serviced by the CS facility. A merits review could cause substantial delay in resolution and could result in the original decision being varied, substituted with a new decision, or remitted back to the RBA for reconsideration. This delay in the ability for the statutory manager to take action, or a lack of certainty underpinning resolution decisions, has potential to significantly impact financial stability or the continuity of CS facility services.

Consequential amendments

1.341 As a result of the additional directions powers to be given to a market licensee in a crisis under subsections 794AA(1) or 798JB(1) of the Act, a consequential amendment is made to ensure that Division 3 financial products are deemed to be tradable for the purposes of the prohibition against insider trading. [Schedule 1, items 15, 16 and 17, section 1042E of the Act]

1.342 In line with the ALRC recommendation to have a single glossary of defined terms in section 9 of the Act, the definition of essential service has been repealed from section 600F(2) of the Act and moved to section 9 of the Act. This has caused a number of provisions in the industry Acts to be amended to refer generally to the Corporations Act to capture the defined term in section 9. This amendment is aimed at improving navigability and does not change the operative function of the provisions. [Schedule 1, items 1, 36, 37, 38, 39, and 40, definition of 'essential service' in section 9 and subsection 600F(2) of the Act, subsection 15BD(2) of the Banking Act 1959, subsections 62PD(2) and 62ZOV(2) of the Insurance Act 1973, and subsections 161D(2) and 179AV(2) of the Life Insurance Act 1995]

Commencement, application, and transitional provisions

1.343 The amendments that establish the crisis resolution powers and the crisis prevention powers in Schedule 1 and Part 9 of Schedule 2 to the Bill commence on the seventh day after Royal Assent.

1.344 Given that the amendments to the functions of the RBA interact with the amendments under Treasury Laws Amendment (Reserve Bank Reforms) Act 2024, three alternative commencement dates are included to ensure that regardless of whether that Bill commences, the new crisis functions under Part 7.3B of the Act are included. [Schedule 1, items 64, 65, and 66 , paragraph 10(2), 10B(1) and 10B(3) of the RB Act]

1.345 A contingent amendment is included in anticipation of the Treasury Laws Amendment (Reserve Bank Reforms) Act 2024 commencing. That Bill will abolish the RBA Board and establish a Governance Board and a Monetary Policy Board. The amendment will omit the Reserve Bank Board and add the Governance Board and the Monetary Policy Board as persons covered by the protection. This amendment will commence only if and when the above mentioned Bill commences. [Schedule 2, item 143, paragraph 84A(3)(d) of the RB Act]