Bills Digest No. 59 2001-02
Commonwealth Inscribed Stock Amendment Bill 2001
WARNING:
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
Bill.
CONTENTS
Passage History
Purpose
Background
Main Provisions
Concluding Comments
Endnotes
Contact Officer & Copyright Details
Commonwealth Inscribed Stock Amendment
Bill 2001
Date Introduced: 23 August 2001
House: House of Representatives
Portfolio: Treasury
Commencement: By Proclamation or within 6 months
of Royal Assent
To provide
for:
-
- the electronic creation, issue, recording and transfer of
Commonwealth Government Securities (CGS);
-
- the electronic transfer of Commonwealth Government Securities
by clearing and settlement facilities under the Corporations
Act 2001, as proposed to be amended by the Financial Services
Reform Bill;
-
- the creation of equitable interests in CGS;
-
- the electronic transfer of legal or equitable interests in CGS
in accordance with regulations made under the Commonwealth
Inscribed Stock Act 1911 (CIS Act), that may apply a provision
of the Corporations Act;
-
- the appointment of non-government clearing and settlement
facilities regulated under the Corporations Act as Registrars under
the CIS Act in addition to, or instead of, the Reserve Bank of
Australia (RBA).
Recent reforms to corporate law have gone some
way towards recognising that Commonwealth law has at times failed
to take account of the extent and speed of technological innovation
in modern commercial practices. It is frequently alleged that the
law is out of touch with the needs of contemporary business
operations. The Corporate Law Economic Reform Program Report No. 5
stated:
The increasing internationalisation of markets
and economies highlights the need to ensure that policies maximise
the competitiveness and efficiency of the domestic economy.
Australia's laws must provide the development of systems and market
practices that will reduce legal uncertainty and transaction costs,
and increase trading efficiency. This will, in turn, facilitate the
competitiveness of Australia's markets in the global trading
environment.(1)
The introduction of this Bill takes place
against a general background of much recent corporate law reform
activity, as well as reform of legislation applicable to electronic
commerce. This has included the Corporate Law Economic Reform
Program Act 1999, Electronic Transactions Act 1999,
Corporations Act 2001, and the Financial Services
Reform Act 2001. The latter Act makes provision for a
streamlined regulatory regime for financial markets and clearing
and settlement facilities, through amendments to the
Corporations Act 2001.
Rationale for the Bill
The issue and trade of Commonwealth government
securities is regulated by the Commonwealth Inscribed Stock Act
1911.(2) In summary, the Act is outdated
legislation - to the extent to which it fails to take account of
modern realities, such as electronic trading of securities. The Act
does not acknowledge the fact that Commonwealth securities are
already traded electronically, and have been so since 1991, with
the introduction of the RITS system (see: below). An
indication of the antiquity of the Act is the fact that it
provides: "The Treasurer may establish a Registry for the
inscription of stock at London in the United Kingdom"
(s.14(b)).
A primary objective of the Bill is to increase
the flexibility of options for trading in Commonwealth government
securities. As well as providing for the electronic creation,
issue, recording and transfer of Commonwealth Government Securities
(CGS), the Bill provides for the appointment of non-government
clearing and settlement facilities regulated under the Corporations
Act as Registrars under the CIS Act in addition to, or instead of,
the Reserve Bank of Australia.
Background on Commonwealth government
securities
Commonwealth government securities are debt
instruments (Treasury Bonds, and Treasury Notes) issued by the
Commonwealth government. These devices are issued by the
Commonwealth through the Registries of the Reserve Bank.
The raising, management and retiring of
Commonwealth debt is overseen by the Australian Office of Financial
Management (AOFM) which was established in July 1999 by the
Financial Management and Accountability Act 1997. The AOFM
is required to achieve these objectives at the lowest possible
long-term cost, consistent with an acceptable degree of risk
exposure.
The trade in Commonwealth securities is an
important aspect of monetary policy. According to the Reserve
Bank:
Since the mid 1980s, the RBA has been
implementing monetary policy through domestic market operations,
rather than using direct controls on banks as was previously the
case. The basic nature of these operations has not changed over the
intervening period: in essence they involve either sales of
securities to reduce the amount of funds in the money market (and
so cause interest rates to rise) or purchases of securities to
produce the opposite effect.(3)
At 30 June 2000, the total face value of net CGS
on issue for the Commonwealth was $74.4 billion or 11.8% of nominal
GDP. At 30 June 1999, the level of debt was $83.5 billion or 14.0%
of nominal GDP. The value of daily bond market turnover in CGS is
approximately $3 billion.(4)
Treasury Notes are short term discount
securities with maturities of 13 and 26 weeks issued by the Reserve
Bank on behalf of the Commonwealth government. Treasury Notes are
issued by competitive tender at regular intervals, usually weekly.
Treasury Notes are used by the Commonwealth in order to borrow
short term funds from the money market. This borrowing is necessary
because the day-to-day timing of Commonwealth receipts does not
match the pattern of its outlays. By targeting the maturity of
short term borrowings to projected periods of cash surplus, the
Commonwealth can achieve the management of its cash balances.
Treasury Bonds include Treasury fixed coupon
bonds, Treasury adjustable rate bonds, and Treasury indexed bonds.
Treasury Bonds are medium to long-term coupon securities issued by
way of inscribed stock. (Inscribed stock is a term used to refer to
securities, title to which is recorded in a register, rather than
acknowledged by the issue of a certificate of ownership.) The
Reserve Bank manages registries of inscribed stock at its
branches.
Bonds are usually fixed interest securities upon
which interest is paid at regular intervals. Treasury Bonds are of
various maturities and are also issued to the market by competitive
tender. Institutions who wish to make a tender bid must be
registered with the Reserve Bank or use registered bidders as
agents. Treasury Bonds are the major debt instrument currently
issued by the Commonwealth. Treasury indexed Bonds only play a
minor role in Commonwealth debt issuance. During the financial year
2001-2002, the Australian Office of Financial Management is
planning issuance of between $2 billion and $3 billion of Treasury
fixed coupon Bonds, and $200 million of Treasury indexed
bonds.(5)
The Reserve Bank Information and
Transfer System (RITS)
RITS is an electronic system, established and
operated since August 1991 by the Reserve Bank, which allows trade
in Commonwealth Government Securities. RITS provides facilities for
electronic tendering for CGS. Its primary function is the
electronic settlement and transfer of transactions in CGS.
By way of comparison, in other markets, CHESS,
the Clearing House Electronic Sub-Register System is the clearing
and settlement system for equities involving the Australian stock
exchange and the banking system. It enables electronic transfer of
title to securities and electronic payment instead of payment by
cheque.
By virtue of electronic processing, RITS allows
Commonwealth Government Securities to be transferred and settled
simultaneously (on a 'delivery versus payment' basis), in
real-time. The RITS system also provides automatic interest and
maturity payments for securities lodged in the system.
According to the RBA: 'Over 99 per cent of CGS
turnover in the market is handled by RITS and securities with a
face value of $64 billion are lodged in the system. There are 136
members of the system representing 248
organisations.'(6)
Members of RITS include all the banks and other
major traders of CGS. Non-bank members (other than credit unions
and building societies) must have a member bank take responsibility
for their payments. Credit unions and building societies may use
their SSP member.(7)
The other function of RITS is for settling the
inter-bank component of equity transactions on CHESS, the
Australian Stock Exchange's electronic settlement system. RITS is
Australia's real-time gross settlement (RTGS) system and is the
means through which banks and other approved institutions access
their Exchange Settlement accounts with the RBA.(8)
Relationship between RITS and the
Bill
The operation of the RITS system is not
specifically provided for in legislation. The Commonwealth
Inscribed Stock Act of 1911, as it stands, does not
make provision for the electronic settlement of CGS transactions.
The Act is desperately in need of modernisation, as it only
provides for transactions and transfers of legal title in CGS to be
settled by means of a paper based system. However electronic trade
in CGS has proceeded since 1991, in spite of the precise text of
the legislation.
The CIS Act has not presented any legal
obstacles to the establishment and use of an electronic system for
the transfer of beneficial interests in CGS. In practice, the
Reserve Bank's RITS system has been performing this function since
1991. The practice has been to grant a legal interest known as a
"chose in action" (a form of property right which is enforceable by
court action) in relation to Commonwealth government securities, in
order to overcome the existing impediments to electronic transfer
of the securities presented by the deficiencies of the CIS Act.
This involves electronic trading using the following transfer
process. Legal and beneficial ownership of securities lodged in the
RITS system by a trading member passes to the Reserve Bank (RBA).
In return, the RBA grants the member a chose in action. This chose
in action is then transferred through RITS. The chose in action
entitles the member to direct the Reserve Bank to deliver to the
member securities of a specified description and value. A member
does not have a proprietary interest in any of the securities.
Securities of the same description may be described as
fungible.(9)
However, it is proposed that with amendment of
the CIS Act, the electronic transfer of the direct beneficial and
legal interests in Commonwealth securities could take place without
resort to the device of a chose in action. This amendment of the
Commonwealth Inscribed Stock Act was suggested in Report
No 5 of the Corporate Law Economic Reform Programme, entitled
"Electronic Commerce: Cutting Cybertape -Building Business". This
CLERP report presented recommendations aimed at removing legal and
regulatory impediments to developments in electronic commerce.
Opening up Government securities market
to other settlement facilities
When introducing the Bill, by way of
2nd Reading Speech on 23 August 2001, the Hon. Tony
Abbott, Minister for Employment, Workplace Relations and Small
Business raised an important aspect of the Bill - which is to open
up the Commonwealth government securities market to clearing and
settlement facilities other than the Reserve Bank's RITS system. He
said:
The Commonwealth Inscribed Stock Amendment Bill
will provide a legal framework for the electronic transfer of
Commonwealth government securities that is flexible and that
promotes an efficient and innovative market. The bill will create a
more efficient business environment for market participants by
opening up the conduct of the Commonwealth government securities
market to clearing and settlement facilities involved in the
broader operation of the financial markets. The bill will make
clear that non-government clearing and settlement facilities
regulated under the Corporations Act may be appointed as registrars
under the Commonwealth Inscribed Stock Act in addition to, or
instead of, the Reserve Bank. However, the bill will not preclude
the Reserve Bank from continuing to have a role as a registrar.
Item 2 proposes the insertion of the term
'clearing and settlement facility' into section 3 of the CIS Act.
That term is defined as a clearing and settlement facility for the
purposes of Chapter 7 of the Corporations Act 2001.
Item 4 proposes a new
definition of 'stock', to take account of changes proposed in this
Bill.
Item 8 proposes additions to
section 7 of the CIS Act to enable stock to be issued by
electronic means, and issued to a person (including a registrar) on
trust for other persons. These changes will remove doubt that the
Commonwealth can create equitable interests in relation to CGS.
Item 12 (new subsection 14 (2))
will enable any person to be appointed by the Treasurer as a
Registrar under the Act. As proposed this will include other
clearing and settlement facilities regulated under the
Corporations Act.
Item 14 inserts new subsection
15 (2) which will provide that a stock ledger may be kept in
electronic form.
Item 19 inserts new subsection
24 (1) which provides that regulations may be made to enable the
transfer of legal or equitable interests in stock from one person
to another.
Item 20 proposes the insertion
of three new sections following section 24. New section
24A will provide that where a clearing facility is
appointed as a registrar, legal and equitable interests inscribed
in a ledger kept by that facility can be transferred according to
the rules of the facility as governed by the Corporations Act
2001.
Although 'infrastructure issues' such as the
existence of reliable and timely clearing, transfer and settlement
systems are essential to the efficient functioning of markets in
government securities, there are other more fundamental issues at
stake. According to Mr Peter McRae, Deputy Chief Executive Officer,
Australian Office of Financial Management:
The ultimate threshold issue in seeking to make
participation in the bond market an attractive proposition for
investors and intermediaries is that there be an economic case for
doing so. No matter how robust is a market infrastructure or how
efficient its operational features might be these considerations
will not of themselves generate major development momentum if the
product itself is unattractive in economic
terms.(10)
-
- Commonwealth of Australia (1997), Electronic Commerce:
Cutting Cybertape -Building Business, Report No 5 of the
Corporate Law Economic Reform Programme, AGPS, Canberra, p. 5.
- Note that the Commonwealth has crown immunity from the
obligations of the Corporations Law in respect of debt issues.
- Reserve Bank of Australia (2001) Annual Report 2001,
p. 5.
- Peter McCray, Deputy Chief Executive Officer, Australian Office
of Financial Management (2000) "The Australian Government Bond
Market", Paper presented to the Asian Development Bank Conference
on Government Bond Markets and Financial Sector Development in
Developing Asian Economies, 28-30 March 2000, Manila,
Philippines.
- AOFM, Media release, 29 June 2001.
- RBA, Annual Report 2001, p. 42.
- http://www.apca.com.au/Paymentinstruments.htm
(Australian Payments Clearing Association Limited)
- RBA, Annual Report 2000, p.42.
- Commonwealth of Australia (1997), Electronic Commerce:
Cutting Cybertape -Building Business, Report No 5 of the
Corporate Law Economic Reform Programme, AGPS, Canberra, p. 50.
- Peter McCray, op.cit..
James Prest
19 September 2001
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ISSN 1328-8091
© Commonwealth of Australia 2000
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