Explanatory StatementIssued by the Authority of the Minister for Revenue and Assistant Treasurer
Corporations Act 2001
Corporations Amendment Regulations 2004 (No. 3)
Subsection 1364(1) of the Corporations Act 2001 (the Act) provides that the Governor-General may make regulations prescribing matters required or permitted by the Act to be prescribed by regulations or necessary or convenient to be prescribed by such regulations for carrying out or giving effect to the Act.
The Regulations relate particularly to the regulation of financial markets by the Act. Examples of financial markets regulated by the Act are those operated by the Australian Stock Exchange Limited and Sydney Futures Exchange Limited.
The purpose of the Regulations is to:
- allow the legislative regime to accommodate two different types of compensation arrangements (the National Guarantee Fund and another fidelity fund) applying to the one market;
- the assumption of the current legislative regime is that there would be only one type of compensation arrangement for a particular market;
- prescribe the Options Clearing House Pty Limited (OCH) for the purpose of section 850A of the Act;
- this means that OCH is subject to a 15% shareholding limitation, which is imposed on prescribed operators of markets and clearing and settlement facilities;
- make amendments to accommodate the restructuring of the Australian Stock Exchange's markets and clearing and settlement facilities;
- the Australian Stock Exchange is restructuring its operations so that there will be one market on which both securities and derivatives are traded, one clearing facility for both securities and derivatives and one settlement facility;
- address the use of monies in fidelity funds of markets which are no longer operational;
- delay for one year the commencement of section 912B (which relates to the obligation on certain financial services licensees to have compensation arrangements) and continue the current requirements during this period; and
- make minor, technical amendments to regulations relating to financial markets.
Details of the Regulations are in the Attachment.
The enabling Regulations and Schedule 1 commenced on gazettal. The amendments in Schedule 1 are needed prior to the end of the transition period for the Financial Services Reform Act 2001 (10 March 2004). Schedule 2 to the Regulations commences on 11 March 2004. The amendments in Schedule 2 need to commence immediately after the end of that transition period when, among other things, the restructuring of the Australian Stock Exchange's operations and revised licences commence.
Regulation 1 provides that the Regulations are to be known as the Corporations Amendment Regulations 2004 (No. 3).
Regulation 2 provides that the enabling regulations and Schedule 1 commence on gazettal. The amendments in Schedule 1 are needed prior to the end of the transition period for the Financial Services Reform Act 2001 (10 March 2004). Schedule 2 to the Regulations commences on 11 March 2004. The amendments in Schedule 2 need to commence immediately after the end of that transition period, when the restructuring of the Australian Stock Exchange's operations and revised licences commence.
Regulation 3 provides that Schedules 1 and 2 amend the Corporations Regulations 2001.
Items are grouped in the description below by subject.
The main equities market of the Australian Stock Exchange (ASX) is currently covered by the National Guarantee Fund. This provides investor protection in the case of, for example, a broker becoming insolvent holding client property entrusted to it.
The ASXF (the ASX's futures market) is covered by a fidelity fund which provides compensation in the case of fraud or misappropriation by a broker on that market.
The legislative framework assumes that a particular market is covered either by a fidelity fund or by the National Guarantee Fund, but not both.
However, the ASX is proposing:
- to restructure its markets so that there will only be one financial market, with both equities and derivatives traded on it; and
- that the National Guarantee Fund continue to apply only in relation to transactions in the products to which it currently applies, and that the fidelity fund arrangements under Division 3 of Part 7.5 apply only in relation to derivatives transactions.
The Regulations allow for this.
The SFE Corporation Limited (a subsidiary of which operates the Sydney Futures Exchange) restructured its operations several years ago but was left with two fidelity funds.
The Regulations assist it, and any other markets currently in a comparable position, to transfer funds from a fidelity fund which no longer relates to an operational market into a fidelity fund which relates to an ongoing market.
The ASX is proposing to restructure its clearing and settlement facilities also.
The result of the restructure will be that Options Clearing House Pty Limited will provide clearing services for all financial products, and will be the central counterparty. A central counterparty is interposed by virtue of the rules of the clearing house between the buyer and the seller. It becomes the buyer to every seller and the seller to every buyer. It thus absorbs the risk that a particular buyer or seller will not complete the transaction.
In the light of its increased importance in Australia's market infrastructure, Options Clearing House Pty Limited has been prescribed for the purpose of section 850A of the Corporations Act 2001. This means that the 15% shareholder limitation for which Division 1 of Part 7.4 of the Act provides apply.
However, transitional arrangements in Part 7.4 of the Act have the effect that the current shareholdings over 15% are taken to have been approved.
A significant number of other minor amendments are needed to accommodate:
- the restructuring of the ASX's markets and clearing and settlement facilities;
- re-organisation of the rule books of each; and
- the fact that an entity can now be a member of the market without having to be a member of the clearing house or the settlement facility.
- This would open the way for further specialisation by financial service providers and reflect the removal of requirements of the Australian Stock Exchange which were seen as anti-competitive.
The Regulations provide for these adjustments.
Subsection 926B(1) of the Act provides that the regulations may provide that Part 7.5 applies as if specified provisions were omitted, modified or varied as specified in the regulations.
This Regulation uses this power to modify section 912B.
Section 912B imposes a requirement on financial services licensees to have adequate compensation arrangements.
This requirement has been reviewed in an issues paper issued in 2002, and a position paper issued late in 2003. The position paper proposes amendments to this requirement. Submissions on the position paper are now being received.
Commencement of the requirement is therefore delayed for one year. In this period, the requirements which applied prior to the enactment of section 912B, and which have continued to apply during the transition period for the Financial Services Reform Act 2001, will continue to apply by virtue of the Regulation.
In this time also, it is expected that the Government will reach and implement a final decision on the appropriate requirement.
The Regulations would set out what is required to be included in the operating rules of a financial market. The current regulations imply that the terms of derivatives are set by the market operator. This is not always the case. The amendment in Item 2 clarifies this.
The amendments included in Items 22 and 45 have the effect that it is the Secretary of the Department of the Treasury, rather than the Secretary of the Department of Finance and Administration who will receive notifications of levies on market participants to fund compensation arrangements such as fidelity funds.
References to 'Options Clearing House Pty Limited' are replaced by 'OCH' (Items 1, 6, 7, 9, 13, 23, 25, 33, 34, 36, 38, 40, 42, 46).
Other minor improvements in wording and corrections are also made (Items 12, 21, 35, 37, 39, 41, 43, 44, 48-54).