Second Reading Speech
Today I am introducing a bill to amend a range of legislation including the Corporations Act 2001, the Payment Systems and Netting Act 1998, the Mutual Assistance in Business Regulation Act 1992, the Australian Securities and Investments Commission Act 2001, the Reserve Bank Act 1959, the Clean Energy Regulator Act 2011 and the Carbon Credits (Carbon Farming Initiative) Act 2011.
This Bill contains a range of important measures relating to the regulation of financial markets and products, which will complement the existing legislative framework to implement our core G-20 commitments in relation to over-the-counter (OTC) derivatives reforms.
One key measure is intended to assist clearing facilities in managing defaults and insolvencies by their participants. Clearing facilities are critical elements in the financial system, which manage the risks involved after two parties agree to a transaction, for example on a financial market such as the ASX or increasingly also for bilateral transactions for important products such as OTC derivatives.
The key risk addressed by clearing facilities is that one of the parties to the transaction subsequently defaults and fails to deliver on its obligations. Clearing facilities eliminate this risk and guarantee the performance of the underlying transaction by acting as a matching seller to the original buyer and a matching buyer to the original seller.
It is critical that clearing facilities have adequate means to manage the risk of a default by a party to one or more of the transactions they are clearing.
The effect of the Bill in this area would be to facilitate, in the case of a default of one of the participants in the clearing facility, the transfer of the obligations of that participant with respect to outstanding transactions to another participant. The transactions would then be completed as if no default had occurred.
The Bill makes amendments to the Payment Systems and Netting Act to provide legal certainty that such transfers of outstanding obligations can occur. Legal certainty is a vital element in facilitating such transfers, because they will generally be required in crisis situations when rapid action is called for. In particular, the Bill provides special protections to such transfers if a clearing participant becomes insolvent and comes under the control of an external administrator. Without the amendments in the Bill insolvency law would allow an external administrator to intervene and stop or unwind such transfers.
These measures are necessary to guarantee the stability of the financial system by providing important protections to clearing facilities as one of the key elements in that system.
A second measure in the Bill allows the Australian Securities and Investments Commission (ASIC) and the Reserve Bank to better manage their resources in assessing the compliance of market licensees and clearing and settlement licensees with their legal obligations. They are currently required to conduct formal assessments of each licensee every year, which may not be a prudent use of scarce resources. For example, ASIC is currently obliged every year to formally assess well-run, specialised markets catering mainly to professional investors.
The Bill will provide discretion to ASIC and the RBA in determining the timing of these assessments, which will allow them to better use their resources by focusing for example on large markets serving retail investors.
While the Government agrees that providing this relief to the regulators makes sense, we want to make sure that important markets used by large numbers of retail investors, for example the ASX and its clearing houses, continue to be subject to regular assessment.
ASIC has accordingly committed to continuing annual assessments of key retail-facing markets such as the ASX. In addition, the amendments include a power for the Government to prescribe by regulation any markets and clearing facilities which are to be subject to continuing annual assessments. Treasury will as a next step examine options for using the regulation-making power to ensure that retail investors continue to be adequately protected.
Financial regulators such as ASIC, APRA and the Reserve Bank are under increasing obligation to share information with other regulators and official bodies, in Australia or overseas, and with private entities. This is mainly due to the increasing complexity and globalisation of our financial markets. All the financial regulators therefore have provisions in their governing legislation allowing them to share protected information. These powers are subject to a range of safeguards, including that they can only be used for purposes related to their official duties or that they can only be exercised when properly authorised by designated officers.
The powers of the Reserve Bank in this area have for historical reasons been weaker than those given to ASIC and APRA.
However, the Bank's current powers are inadequate for its increasingly important role in promoting the stability of financial markets, including its role in regulating clearing facilities, and the cooperative international approach that this requires. The Bill more closely aligns the Bank's powers to share information with those of the other regulators.
ASIC is currently unable to exchange information with certain multijurisdictional regulators such as the European Securities Markets Authority due to the way in which the legislation is worded. The Bill makes the changes necessary to allow this to happen. While this is a minor drafting change, it is important for our financial sector. For example, Australian managed investment schemes may face difficulties in marketing their products in Europe if it is not made.
ASIC is given considerable information-gathering powers in the legislation. While these powers are necessary for ASIC to do its job, it is appropriate that there should be some transparency with respect to ASIC's use of these powers. The Bill therefore requires ASIC to report annually on its use of these powers; and provides the Minister with a power to specify by regulations the information required to be reported.
Finally, minor amendments are made in the Bill to legislation which is the responsibility of the Minister for Climate Change and Energy Efficiency. The changes allow the Clean Energy Regulator to share certain protected information with trade repositories, which are a special type of facility that centralise information in relation to OTC derivatives trading.
The Ministerial Council for Corporations has been consulted on the amendments to the Corporations Act and has approved the changes to the ASIC Act contained in this Bill.
This Bill delivers a number of important measures to improve the functioning of our financial system. While many of the amendments in the Bill may seem highly technical in nature they have a very real impact on the work of our financial markets and our regulators. Passage of the Bill will provide crucial protections to clearing facilities which are critical parts of the financial system. ASIC and the RBA will be able to better focus their resources in supervising those licensed markets as well as clearing and settlement facilities which pose the highest risks to our system or to retail investors.
The Bill will provide appropriate powers to our regulators allowing them to cooperate as required with other regulators and official bodies. This in turn will facilitate the business activities of our financial industry in overseas markets. These important reforms are part of the Gillard Government's broad agenda to promote Australia as a leading financial services hub and boost our reputation as one of the most attractive investment destinations in the world.