House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Scott Morrison MP)

Chapter 8 Exemptions from regulatory requirements relating to Australian Market Licences and clearing and settlement facility licences

Outline of chapter

8.1 This Chapter sets out the new exemption powers that can be used to provide for a more tailored regulatory regime to facilitate the operation of specialised and emerging financial markets and clearing and settlement facilities, including in relation to CSF securities.

8.2 All legislative references within this Chapter are to the Corporations Act 2001 unless specified otherwise.

Context of amendments

8.3 Currently, under Part 7.2 of the Act, any person that falls within the definition of operating a financial market is required to obtain an Australian Market Licence (AML) or seek an exemption from the Minister. The Minister has the power to exempt a market from the operation of Part 7.2 in full, but does not have the power to provide a partial exemption from particular requirements under the regime.

8.4 The AML regime was designed to address the risks associated with the operation of traditional exchanges (such as the Australian Securities Exchange) or other significant financial markets and imposes obligations commensurate with the nature and risks of those financial markets. The full suite of obligations may not be as appropriate for operators of emerging or specialised financial markets such as crowd-sourced funding (CSF) intermediaries.

8.5 Generally, requiring these types of market operators to obtain an appropriately modified AML may ensure that they have adequate arrangements to meet their obligations and to provide the market environment expected by persons participating in the market.

8.6 Amending the AML framework to provide the Minister with the power to exempt certain market operators from specified obligations would ensure that the AML regime could be tailored to particular markets. The exemption power could be used to facilitate the development of emerging and specialised markets, including CSF intermediaries.

8.7 To be able to effectively tailor the regulatory obligations to suit emerging or specialised financial markets, similar partial exemption powers are required in relation to Parts 7.2A, 7.3 and 7.5 of the Act.

8.8 Part 7.2A provides for Australian Securities and Investments Commission (ASIC) supervision of financial markets. Some or all of these requirements may not be suitable for all emerging and specialised financial markets. Similarly, Part 7.5 requires AML holders to maintain compensation arrangements designed for public markets but that may not be appropriate for other types of financial markets.

8.9 Part 7.3 provides for the licensing of clearing and settlement facilities. The definition of clearing and settlement is wide and could apply to emerging or specialised financial markets and their operators owing to some incidental activities they perform as part of operating a financial market. These include transferring money between the trading accounts of investors. Like Part 7.2, some of the requirements imposed by Part 7.3 may not be appropriate for such incidental activities.

8.10 As such, providing the Minister with enhanced powers to exempt some emerging and specialised financial markets - such as intermediaries operating facilities for secondary trading in CSF interests - from some or all of the requirements in parts 7.2, 7.2A, 7.3 and 7.5 would provide for a more effective, efficient and flexible regulatory regime.

8.11 The ability to offer more tailored regulation of financial markets and clearing and settlement facilities, and their operators would provide a more agile framework that would facilitate innovation in and the development of new types of funding mechanisms, including CSF.

Summary of new law

8.12 The Bill provides the Minister with additional exemption powers to provide financial markets and clearing and settlement facilities, and their operators, with exemptions from specified parts of the AML and clearing and settlement facility licensing regimes.

8.13 The Bill amends the existing exemption power under Part 7.2 of the Act to provide the Minister with the power to exempt a financial market or class of financial markets, or their operators, from some of the AML regulatory requirements under Part 7.2 of the Act. The existing exemption power only allows for a full exemption from holding an AML.

8.14 An identical exemption power is also being introduced into Part 7.2A of the Act so that the Minister can exempt a financial market or class of financial markets, or their operators, from some or all of the obligations relating to ASIC supervision under Part 7.2A of the Act. This is a new exemption power that exactly mirrors the amended exemption power being introduced into Part 7.2 of the Act.

8.15 The existing exemption power in Part 7.3 of the Act is being amended to provide the Minister with the power to exempt a clearing and settlement facility or class of clearing and settlement facilities, or their operators, from some of the clearing and settlement facility licensing requirements under Part 7.3 of the Act. The current exemption power only allows for a full exemption from needing a licence for operating a clearing and settlement facility.

8.16 An identical exemption power is also being introduced into Part 7.5 of the Act so that the Minister can exempt a financial market or class of financial markets, or their operators, from some or all of the compensation arrangement requirements under Part 7.5 of the Act. This is a new exemption power that exactly mirrors the amended exemption power being introduced into Part 7.2 of the Act.

8.17 The introduction of these four identical exemption powers creates a streamlined approach to granting some emerging or specialised financial markets and clearing and settlement facilities, and their operators, with exemptions from some of the regulatory requirements in Parts 7.2, 7.2A, 7.3 and 7.5 of the Act to provide for a more tailored regulatory approach.

Summary of key features of new law and current law

Detailed explanation of new law

8.18 The Bill provides for changes in the exemption powers in Parts 7.2, 7.2A, 7.3 and 7.5 of the Act. The changes provide a more flexible and appropriate regulatory regime for emerging and specialised financial markets and their operators.

Exemptions from AML obligations

8.19 The Bill repeals the exemption power in existing section 791C of the Act and replaces it with an amended exemption power. [Schedule 3, item 1, section 791C]

8.20 The new amended exemption power largely replicates the existing power being replaced but provides greater flexibility in allowing the Minister to provide an exemption from specified obligations under Part 7.2 of the Act (as opposed to only being able to provide a complete exemption from the AML regime). The changes will offer more tailored regulation for financial markets and their operators. [Schedule 3, item 1, subsection 791C(1)]

8.21 The exemption can be applied in relation to a particular market or a particular class of markets. Where an exemption is made in relation to a class of financial markets, then the exemption is a legislative instrument and is subject to disallowance and sunsetting, consistent with the existing exemption power. [Schedule 3, item 1, subsection 791C(4)]

8.22 Where an exemption applies in relation to a particular market, an exemption is not a legislative instrument and the Minister is required to publish a notice of the exemption in the Gazette [Schedule 3, item 1, subsection 791C(5)]. This is the same approach as is currently provided for in the existing exemption power.

8.23 The new exemption also replicates the Minister's powers to vary or revoke an exemption after providing notice and providing affected market operators with the opportunity to make submissions. The only change to these requirements is that notice of a change to an exemption relating to a class of financial markets must be published on the ASIC website instead of a newspaper. [Schedule 3, item 1, subsections 791C(2) and (3)]

8.24 The new amended exemption power has also been rewritten to reflect modern drafting requirements.

8.25 As the existing exemption is being repealed to be replaced with the amended exemption, a savings provision has been introduced to ensure that all exemptions made prior to the change continue to operate. [Schedule 3, item 2]

Exemptions from ASIC supervision

8.26 The Bill provides the Minister with a new power to exempt a particular financial market or a class of financial markets from ASIC supervision under Part 7.2 of the Act. [Schedule 3, item 3, section 798M]

8.27 This new exemption power operates identically to the amended exemption power being introduced into Part 7.2 of the Act (refer to paragraphs 8.19 to 8.25 for a detailed description of how the power operates).

8.28 There is already a broad regulation making power under section 798L of the Act to exempt financial markets or types of financial markets from ASIC supervision under Part 7.2A of the Act.

8.29 The new exemption power is being introduced despite the existence of the regulation making power so that a consistent approach can be taken in providing a more tailored regulatory regime for emerging and specialised financial markets and their operators. Under this approach, where relevant, the Minister can exempt a financial market or class of financial markets, or their operators, from obligations relating to ASIC supervision in the same way that these markets can be given an exemption from the AML requirements in Part 7.2 of the Act.

Exemptions from clearing and settlement licensing obligations

8.30 The Bill repeals the exemption power in existing section 820C of the Act and replaces it with an amended exemption power. [Schedule 3, item 4, section 820C]

8.31 The change to the exemption power is identical to the change being made to the exemption power in Part 7.2 of the Act (see paragraphs 8.19 to 8.25 for a detailed description of how the power operates).

8.32 The main change to the provision is, therefore, to give the Minister the power to exempt a clearing and settlement facility or class of clearing and settlement facilities from part of the clearing and settlement licensing regime [Schedule 3, item 4, subsection 820C(1)].

8.33 The changes will offer more tailored regulation for clearing and settlement facilities and their operators. The new exemption also replicates the Minister's powers to vary or revoke an exemption, with the required notice now able to be provided on the ASIC website rather than in a newspaper [Schedule 3, item 4, subsections 820C(2) and (3)].

8.34 The new amended exemption power has also been rewritten to reflect modern drafting requirements.

8.35 As the existing exemption is being repealed to be replaced with the amended exemption, a savings provision has been introduced to ensure that all exemptions made prior to the change continue to operate. [Schedule 3, item 5]

Exemptions from compensation regime requirements

8.36 The Bill provides the Minister with a new power to exempt a particular financial market or a class of financial markets from the compensation arrangement requirements under Part 7.5 of the Act. [Schedule 3, item 6, section 893B]

8.37 This new exemption power operates identically to the amended exemption power being introduced into Part 7.2 of the Act (see paragraphs 8.19 to 8.25 for a detailed description of how the power operates).

8.38 There is already a broad regulation making power under section 893A of the Act to exempt financial markets or types of financial markets from the compensation arrangements requirements under Part 7.5 of the Act.

8.39 The new exemption power is being introduced despite the existence of the regulation making power so that a consistent approach can be taken in providing a more tailored regulatory regime for emerging and specialised financial markets and their operators. Under this approach, where relevant, the Minister can exempt a financial market or class of financial markets from some of the compensation arrangement requirements in Part 7.5 of the Act in the same way that these markets can be given an exemption from the AML requirements in Part 7.2 of the Act.

Application and transitional provisions

8.40 These amendments will take effect from the day after the Bill receives Royal Assent. This is before the CSF regime commences because the changes will have application to other emerging or specialised market operators in addition to CSF intermediaries.

8.41 These amendments will take effect from the day after the Bill receives Royal Assent. This is before the CSF regime commences because the changes will have application to other emerging or specialised market operators in addition to CSF intermediaries.