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1. Question 1
(a) The Reserve Bank of Australia (RBA) determines whether a multi netting system will be authorized on the basis of risk only. Discuss this statement with reference to the legislation and regulations applied by the RBA.
1.1 Basic concepts
The term multilateral netting refers to a treasury management system which is often used by big MNCs in managing the cross-company payment, and in usual the netting operations would be dealt with by the netting center (euronetting.com 2005) and clearance will be done on a regular basis. The most obvious benefit of using the netting center and netting system is that it ensures the participating companies would have only single currency balance to the netting center.
It is not appropriate and comprehensive to say that the Reserve Bank of Australia (RBA) decides whether or not a multi netting system would be permitted with the consideration of risk only.
1.2 The Reserve Bank Act 1959
The The Reserve Bank Act 1959 has authorized the Payment System Board in term of implementing the Reserve Bank’s policy, and such permission is based on three major principles: first of all, risks should be controlled to ensure a healthy financial system among the companies; secondly, at the same time the practicing and carrying out of the policy could also take into consideration of the operating effectiveness and efficiency; and thirdly, the implementation of the Reserve Bank’s policy should promote sufficient competition in the finance sector (rba.gov.au 2011). Based on these regulations, we can see that risk control is only one of the three major principles to be following up in determining the payment system board’s responsibilities and rights. Therefore it is not comprehensive to say that a multi netting system would be permitted based on the consideration of risk only.
1.3 Payment Systems and Netting Act 1998
There are generally two major risks in the multi netting system: first of all, as mentioned above rather than doing the payment clearance on an immediate manner, many payments in Australia will be done on a regular basis which means that the members could some time own the center money or the center owns the members money, under such situations which is designed to provide efficiency in handling the payment transactions, failure of the participating parties would result in the other party’s insolvency or even risk of financial loss; secondly, there would also be risks of loss of value due to the changes and fluctuation of the exchange rate of the currencies. And obviously the first risk is a major concern of the regulating departments.
In fear that there should be loss caused to other members because of the failure of a particular participating member, the Payment Systems and Netting Act 1998 regulates that the setting of the multilateral netting arrangements should apply for the approval of from the Reserve Bank of Australia (RBA), but such act does not provide any statement and detailed treaties regarding under what situations and conditions any multilateral netting arrangements will be offered with the qualification of exempt. It is obvious that such regulations would take into consideration of the risk control to avoid of possible financial loss because of the failure of the members but obviously the fact that there is still flexibility and efficiency in the financial payment handlings will still be considered.