House of Representatives

Corporations Legislation Amendment (Derivative Transactions) Bill 2012

Second Reading Speech

Mr Shorten (Minister for Financial Services and Superannuation and Minister for Employment and Workplace Relations)

I move:

That this bill be now read a second time.

Today I introduce a bill to amend the Corporations Act 2001.

The Corporations Legislation Amendment (Derivative Transactions) Bill 2012 contains measures to implement commitments made by Australia and other G20 nations regarding the regulation of over-the-counter derivatives.

The global OTC derivatives market is enormous. At end of 2011 the Bank for International Settlements reported that the total notional amount outstanding for OTC derivatives worldwide was $648 trillion.

The global financial crisis highlighted structural deficiencies in the OTC derivatives market and the systemic risks that those deficiencies can pose for wider financial markets and the real economy.

In many countries, these structural deficiencies contributed to the build-up of large, insufficiently risk-managed, counterparty exposures between some market participants in advance of the global financial crisis, and to the lack of transparency about those exposures for market participants and regulators.

At the G20 summit in Pittsburgh in 2009, the Australian government joined other jurisdictions in committing to substantial reforms to practices in the OTC derivatives market. The three key G20 commitments addressed by the bill are:

the reporting of OTC derivatives to trade repositories;
the clearing of standardised OTC derivatives through central counterparties; and
the execution of standardised OTC derivatives on exchanges or electronic trading platforms, where appropriate.

These commitments are intended to:

increase transparency in the OTC derivatives market for regulators, market participants and the public; and
reduce counterparty credit risks and operational risks associated with OTC derivatives.

The implementation of the G20 commitments is being coordinated and monitored by the Financial Stability Board, the FSB. The FSB has called on all jurisdictions to aggressively push ahead to achieve full implementation of market changes by the end of 2012 to meet the G20 commitments in as many reform areas as possible.

In Australia, extensive consultation on implementing the G20 commitments has been conducted by the Council of Financial Regulators, which is comprised of the Reserve Bank of Australia, the Australian Prudential Regulation Authority, the Australian Securities and Investments Commission and the Australian Treasury.

The public consultation process was wide-ranging and comprehensive. A call for submissions was made following the release of a public consultation paper. Most of the submissions received were from the financial services sector, both in Australia and overseas. Further face-to-face consultations were subsequently held with interested parties.

The legislative framework

This bill amends the Corporations Act 2001 to allow for regulations and rules to be put in place to implement the G20 commitments in a form flexible enough to deal with changing market conditions and to impose any future obligations on a coordinated basis with other nations.

Under the legislative framework introduced in the bill the minister will be empowered by the Corporations Act to prescribe certain classes of derivatives. Once a class of derivatives is prescribed, ASIC will have the power to issue rules to establish one or more mandatory obligations (reporting, clearing or execution) for transactions in that class. The bill contains a range of checks and balances in relation to this rule-making power, including a requirement that ASIC consult and obtain ministerial consent for any new rules.

It is intended that Australia's financial regulators will conduct ongoing assessment and advise the government on whether various derivative classes should be made subject to trade reporting, central clearing and on-platform execution requirements. This will build on earlier assessments and consultations as well as assessments that are currently underway.

It is important to note that prior to making any decision to mandate reporting, central clearing or use of trading execution venues, the government will engage with stakeholders further and consider any advice from the Council of Australian Regulators.

The bill will provide a high degree of flexibility in implementing trading, clearing and on-platform trading mandates. The regime can therefore be readily adapted to overseas regulatory developments. This flexibility will enable Australia's financial regulators to work with their international counterparts to ensure a unified approach to regulation of the global OTC derivatives markets.

Consistent implementation by all economies is important to reduce systemic risk and the risk of regulatory arbitrage that could arise if there are significant gaps in implementation. International cooperation and flexibility will also help to avoid unintended consequences of national laws such as the burden on businesses of duplicated or conflicting rules and the costs of reduced access to international markets.

Trade repositories

As well as facilitating the possible introduction of trade reporting requirements, the legislation sets out a new licensing regime for trade repositories. Trade repositories will record derivative trade data and make it available to relevant regulators. This information can be used by regulators for monitoring market integrity and stability. Trade repositories also have the potential to facilitate efficiency improvements in post-trade processing and production of high-level statistical data for market use.

This licensing regime is based upon existing licensing regimes for financial markets and clearing and settlement operators, but adapted for the different role that this new form of market infrastructure entity will play. A key aspect of the regime is the strong protections against improper use and disclosure of reported derivative trade data.

Consequential amendments

In addition to the key reforms I have outlined, the bill also contains consequential amendments to the Australian Prudential Regulation Authority Act 1998, the Australian Securities and Investments Commission Act 2001, the Mutual Assistance in Business Regulation Act 1992, and the Reserve Bank Act 1959.

These amendments relate largely to information sharing by, and the protection of the confidentiality of information held by, regulators.

MINCO approval

The Ministerial Council for Corporations has also been consulted on the amendments to the Corporations Act contained in this bill.

Summing up

In conclusion this bill establishes the legislative framework necessary for Australia to implement its G20 commitments in relation to OTC derivatives.

The legislative framework in this bill aims to bring transparency to OTC derivatives in Australia and improve OTC risk management practices.

Implementing these reforms in a globally coordinated way will not only ensure that the risk of regulatory arbitrage is avoided but also ensure that Australian businesses can continue to participate in global markets while being primarily regulated in Australia.

Passage of this bill will enable the making of rules that will ensure Australian investors can be confident that financial markets will continue to function with certainty and transparency. The bill provides regulators and the government with the tools necessary to improve risk management in the OTC derivatives market in a flexible way, taking account of ongoing analysis of market developments by Australia's financial regulators, and in coordination with other economies.

Debate adjourned.