Financial regulation

Budget Review 2013–14 Index

Kali Sanyal

Background

The Government oversees corporate governance and supervises financial markets through the regulatory role of the Australian Securities and Investments Commission (ASIC), the Australian Prudential Regulation Authority (APRA) and the Australian Competition and Consumer Commission (ACCC). 

ASIC’s role in managing the supervision of financial markets was broadened when that task was transferred from the Australian Securities Exchange (ASX) in 2010. On 1 August 2010, ASIC took over responsibility for supervision of real-time trading on Australia's domestic licensed markets. This supplements its existing responsibility for enforcement of the laws against misconduct on Australia's financial markets and its supervision of Australian financial services licence holders.[1]

The measure announced in the 2013–14 Budget will enhance the capacity of ASIC, and follows from other ASIC capacity enhancing measures in the 2012–13 Budget.[2]

The 2012–13 Budget

In the 2012–13 Budget, the Government earmarked $43.7 million for ASIC over the forward estimates period (including $16.3 million in capital) to replace its ongoing market surveillance system with an enhanced, integrated system with increased data mining and analysis capacity.[3] In addition, the Government increased operational funding of ASIC by $101.9 million over the four years of the forward estimates period.[4]

The 2013–14 Budget

The potential risks inherent in market practices in over-the-counter (OTC) derivatives markets in the financial sector have been a concern for regulators around the world for more than a decade. [5] These risks were particularly evident during the peak of the global financial crisis (GFC). As a result, most governments in G20 countries have been engaged in developing a regulatory agenda to drive substantial reforms in the functioning of OTC derivatives markets.

In Australia, the agencies of the Council of Financial Regulators considered reforms in the Australian OTC derivatives market for a number of years, and the Council undertook a study of the OTC derivatives market in Australia in recent years.[6] They recommended that OTC derivatives transactions need to be brought under centrally managed Financial Market Infrastructures (FMIs). By providing a central location for price discovery, FMIs can increase liquidity and transparency, and reduce systemic risk. 

Following in the footsteps of major economic partners and in light of the Council of Financial Regulators’ recommendations, the Government introduced legislation in 2012 to amend previous Acts and provide a legislative framework to implement Australia’s G20 commitments in relation to OTC derivatives reforms. The Bill received Royal Assent on 6 December 2012.[7]

Accordingly, in the 2013–14 Budget, the Government announced that ASIC would receive $5.9 million over the forward estimates period of four years to implement the reforms.[8]

The Government estimates that the cost of the new measure in the 2013–14 Budget will be offset by an increase in financial sector levies collected by APRA.



[1].       Australian Securities and Investments Commission (ASIC), Market Supervision and Surveillance, ASIC website, accessed 15 May 2013; Australian Securities and Investments Commission, Regulatory Guide 214, Guidance on ASIC market integrity rules for ASX and ASX 24 markets, ASIC, August 2010, accessed 15 May 2013.

[2].       Australian Government, Budget measures: budget paper no. 2: 2012–13, Commonwealth of Australia, Canberra, 2012, p. 23, accessed 15 May 2013.

[3].       Ibid.

[4].       Ibid.

[5].       Over-the-counter (OTC) market - A security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase ‘over-the-counter’ can be used to refer to stocks that trade via a dealer network as opposed to on a centralized exchange. It also refers to debt securities and other financial instruments such as derivatives, which are traded through a dealer network. In general, the reason for which a stock is traded over-the-counter is usually because the company is small, making it unable to meet exchange listing requirements. Also known as ‘unlisted stock’, these securities are traded by broker-dealers who negotiate directly with one another over computer networks and by phone: Over-The-Counter – OTC, Investopedia Com (Forbes Com), accessed 16 May 2013.)

[6].       Reserve Bank of Australia, OTC Derivatives Market, Reform Considerations, A report by the Council of Financial Regulators, March 2012, p. 3, accessed 15 May 2013.

[8].       The budget figures have been taken from the following document unless otherwise sourced: Australian Government, Budget measures: budget paper no: 2: 2013–14, Commonwealth of Australia, Canberra, 2013, accessed 15 May 2013.

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