Bills Digest No. 80 2001-02
Commonwealth Inscribed Stock Amendment Bill 2002
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 2002
Date Introduced: 14 February 2002
House: House of Representatives
Portfolio: Treasury
Commencement: The substantive provisions of this Bill commence
on Proclamation or alternatively 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
-
- 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), or by applying provisions
of the Corporations Act, and
-
- 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).
This Bill is essentially identical to the
Commonwealth Inscribed Stock Amendment Bill 2001 which was
introduced into the House of Representatives on 23 August 2001.
That Bill was passed by the House on 19 September and was then
referred by the Senate to the Economics Legislation Committee. The
Bill lapsed when Parliament was prorogued for the 2001 General
Election. Nevertheless, the Committee continued with its inquiry
and unanimously endorsed the Bill in its report released on 6
December 2001.(1)
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.(2)
Reason for the Bill
The issue and trade of Commonwealth government
securities is regulated by the Commonwealth Inscribed Stock Act
1911.(3) 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. The Bill provides for the electronic creation, issue,
recording and transfer of Commonwealth Government Securities (CGS).
Furthermore, it will facilitate competition in the provision of
clearing and settlement(4) facilities for CGS by
allowing the appointment of non-government bodies 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.(5)
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.(6)
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. The issue of bonds does not
imply a budget deficit. 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.(7)
The Reserve Bank Information and Transfer
System (RITS)
The CIS Act, as it stands, does not
make provision for the electronic settlement of CGS transactions.
It only provides for transactions and transfers of legal title in
CGS to be settled by means of a paper based system. In the 1980s
this began to cause difficulties for the Reserve Bank as the
operator of the Registry for CGS. The Registry was unable to
maintain a timely record of title due to the large increase in the
volume of CGS transactions
In 1991, the RBA established a separate
electronic settlement facility - RITS. The operation of RITS is not
specifically provided for in legislation. In its submission to the
Senate Economics Committee, the Reserve Bank explained that RITS
enabled the restriction on paper-based transfer of CGS within the
Registry to be 'overcome':
Market participants who want to settle their
transactions in CGS electronically transfer their holdings into a
pooled account held in the name of the Reserve Bank at the
Registry. The Reserve Bank issues legal claims [a chose in action]
against holdings into that pooled account, which market
participants are then able to trade in RITS ie as far as the
registry is concerned, the stock remains in the name of the Reserve
Bank while RITS maintains a separate record of claims by individual
members over the CGS in the pooled account.(8)
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.'(9)
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 special service provider member.(10) Inactive
investors hold around 8 per cent of CGS on issue, these investors
still settle through the Registry rather than
RITS.(11)
Thus while 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 that system
is only open to wholesale market participants.
In 1997, the Government released a paper
entitled 'Electronic Commerce: Cutting Cybertape -Building
Business' as part of the Corporate Law Economic Reform
Program.(12) Amongst other measures the paper proposed
the amendment of the CIS Act to allow electronic transfer of the
direct beneficial and legal interests in Commonwealth securities
rather than through the legal device of the chose in action used in
RITS.(13)
The Bill implements that proposal and may allow
investors who do not participate in RITS to participate in
electronic trading of CGS. As the Minister noted in his second
reading speech:
This Bill will create the potential for retail
investors to gain the same access to the risk-free, secure
investment product that Commonwealth Government Securities
represent, that is currently enjoyed by institutional
investors.(14)
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 inserts new subsection
14(2) which 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 inserts new section
24A. It provides 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.
While the Bill will permit competition in the
provision of settlement services for CGS it seems unlikely that
this will occur in practice. The Senate Economics Committee
reported that the RBA is in the process of transferring its role in
the settlement of CGS through RITS to Austraclear. Austraclear
already provides a settlement system for private sector and State
Government debt securities. According to the RBA, this transfer has
the 'strong support of market participants, as it will allow them
to lower their cost; in future they will need to maintain access to
only one system to settle trades on all their debt
securities.'(15)
Although this transfer will see the RBA largely
withdraw from a role in settling CGS, under Part 7.3 of the
Corporations Act, the Reserve Bank retains responsibility for the
regulatory oversight of clearing and settlement facilities. It may
determine standards to ensure that such facilities operate in a way
which causes or promotes overall stability in the financial system.
The RBA is required to assess compliance with these standards at
least once a year.(16)
The RBA will still provide registry services to
holders of CGS who are not in RITS. These services encompass the
issue, transfer and registration of securities, the maintenance of
ownership records, the distribution of periodical interest payments
and the redemption of securities at maturity. The RBA has indicated
that it will continue to provide registry services for as long as
the Commonwealth requires it to do so.(17)
-
- Senate Economics Legislation Committee, Commonwealth Inscribed
Stock Amendment Bill 2001, December 2001. The report is located at
the following link:
http://www.aph.gov.au/senate/committee/economics_ctte/stock_amendbill01/stock_amendbill01_report.pdf
- 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.
- Settlement is a process whereby parties meet obligations to
each other that arise from entering into the transactions. It
includes transfer of ownership and payment.
- 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.
- Reserve Bank of Australia, Submission to Senate Economics
Legislation Committee, 16 November 2001, p. 2.
- RBA, Annual Report 2001, p. 42.
- http://www.apca.com.au/Paymentinstruments.htm
(Australian Payments Clearing Association Limited)
- Reserve Bank of Australia, Submission to Senate Economics
Legislation Committee, 16 November 2001, p. 2.
- This paper is also known as CLERP 5.
- Commonwealth of Australia (1997), Electronic Commerce:
Cutting Cybertape -Building Business, Report No 5 of the
Corporate Law Economic Reform Programme, AGPS, Canberra, p. 50.
- The Hon. Peter Slipper, Second Reading Speech, House of
Representatives, Hansard, 14/02/2002, p. 140.
- Reserve Bank of Australia, Submission to Senate Economics
Legislation Committee, 16 November 2001, p. 2.
- See Corporations Act 2001 section 823CA.
- RBA, Annual Report 2001, p. 42.
James Prest and Mark Tapley
19 February 2002
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ISSN 1328-8091
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