Second Reading Speech
Ms O'Dwyer (Minister for Small Business and Assistant Treasurer)I move:
That this bill be now read a second time.
Today I introduce the Financial System Legislation Amendment (Resilience and Collateral Protection) Bill 2016.
This bill will create a more resilient and stable financial system and provide for the continuing participation of Australian entities in international capital markets.
In doing so, the bill amends six existing pieces of legislation: the Payment Systems and Netting Act 1998, or Netting Act; the Banking Act 1959, or the Banking Act; the Financial Sector (Business Transfer and Group Restructure) Act 1999, or the Business Transfer Act; the Insurance Act 1973, or the Insurance Act; the Life Insurance Act 1995, or the Life Insurance Act; and the Private Health Insurance (Prudential Supervision) Act 2015, or the PHI Act.
In response to the global financial crisis (GFC), the Group of Twenty (G20) committed to improving transparency, mitigating systemic risk and protecting against market abuse in derivatives markets. Significant progress has already been made in pursuit of these aims, in Australia and international over-the-counter derivatives markets.
However, there is still more work to do. The international over-the-counter derivatives market is large, and requires further regulation. The Bank of International Settlements reports that the notional amount of outstanding over-the-counter derivative contracts was US$553 trillion (at the end of June 2015).
The next significant stage in the post-GFC reform of over-the-counter derivatives is to establish margin requirements for non-centrally cleared derivatives. The Basel Committee on Banking Supervision (BCBS) and the board of the International Organisation of Securities Commissions (IOSCO) have agreed on an international framework, to be implemented by national regulators. These margin requirements are expected to be phased in from 1 September 2016.
However, under existing law, Australian entities may not be able to comply with all of the relevant requirements. Without this bill, they will likely face increasing costs and other barriers to participation in international markets.
This bill creates a facilitative regime which will allow Australian entities to comply with the new requirements, and in so doing, remain globally competitive and efficient traders. The bill does not establish the margin requirements per se, but will complement and support any margin requirements for derivatives and risk mitigation standards set by Australian Prudential Regulation Authority, in accordance with the international framework, and by international regulators.
This bill also resolves other issues of concern to regulators and industry participants in Australian financial markets. For example, this bill strengthens the protection of certain payment systems, settlement systems, exchanges and central counterparties. These are fundamentally important to the stability of the Australian financial system and it is critical that they benefit from robust legal protections in all market conditions.
This bill is a result of careful and rigorous consultation with the Council of Financial Regulators (the Council, which is comprised of the Reserve Bank of Australia, the Australian Prudential Regulation Authority, the Australian Securities and Investments Commission, and the Australian Treasury); as well as a range of industry bodies, market participants and their advisers.
The government has consulted the public on various forms of the measures in this bill, and made a call for submissions on the entire reform package following the release of the draft bill. Submissions primarily came from the financial services sector, including from Australian and international industry bodies and other market participants. As a whole, they were highly supportive of the reforms.
The legislative framework
This bill will ensure Australian law continues to provide a strong foundation for modern, and truly international financial markets; and for the effective participation of Australian entities within them.
This bill establishes a functional and protective framework which is flexible enough to cope with a range of sophisticated financial market structures and inevitable changes in market practice.
It contains reforms which are technically sophisticated and which are expected to provide a pragmatic and practical regime for market participants and their advisers.
This bill does not impose onerous regulation. Rather, it allows entities which are subject to Australian law to provide, and enforce rights in respect of, margin provided under derivatives transactions in accordance with internationally developed regulatory requirements. It does this by expanding the protections afforded to close-out netting, to cover the enforcement of security.
This bill resolves an inconsistency in Australian law as to the circumstances in which a counterparty to an Australian regulated body may exercise its termination rights (that is, when it can close-out transactions related to a contract). This brings Australian law into line with international best practice, and supports efficient resolution of Australian financial institutions in distress.
This bill strengthens the protection of certain payment systems, settlement systems, exchanges and central counterparties. These are fundamentally important to the stability of the Australian financial system and require robust legal protections in all market conditions.
This bill also contains a number of regulatory powers to allow the government to move quickly to adapt to significant upheaval in financial markets and any events which could otherwise threaten systemic stability.
In addition to the reforms I have described, the bill also contains a number of more technical and consequential amendments to certain Australian acts related to Australian financial markets.
The new regime draws on a wealth of sources. It builds on lessons learned in other jurisdictions, including in the United Kingdom and European Union, the products of extensive consultation, and the input of technical experts.
MINCO approval
This bill will alter the effect, scope or operation of the corporations law. Accordingly, as required by clause 510 of the Corporations Agreement between the Commonwealth, the states and the Northern Territory, the Commonwealth has notified the states and the Northern Territory of the bill.
Summing up
This bill advances the Australian government's reform agenda for financial systems, by enhancing the integrity and safety of the derivatives markets in particular, and the financial system as a whole.
Passage of this bill will complement other important reforms to the regulation of Australian over-the-counter derivatives markets, and corresponding international efforts.
Passage of this bill will ensure Australia maintains its position as a regional financial centre with a strong regulatory and legislative framework, and that Australian entities can continue to transact with domestic and international counterparties-supported by Australian law.