Corporations and Financial Sector Legislation Amendment Bill 2013

Bills Digest no. 154 2012–13

PDF version  [693KB]

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.

Bernard Pulle
Economics Section
20 June 2013

Contents
Purpose of the Bill
Background
Financial implications
Committee consideration
Statement of Compatibility with Human Rights
Key issues and provisions

 

Glossary

Abbreviation

Definition

AML

Australian market licence

APRA

Australian Prudential Regulation Authority

APRA Act

Australian Prudential Regulation Authority Act 1998

ASIC

Australian Securities and Investments Commission

ASIC Act

Australian Securities and Investments Commission Act 2001

ASX

Australian Securities Exchange

Bill

Corporations and Financial Sector Legislation Amendment Bill 2013

CCP

Central counterparty

CER Act

Clean Energy Regulator Act 2011

CFI Act

Carbon Credits (Carbon Farming Initiative) Act 2011

CSFL

Clearing and settlement facility licence

Corporations Act

Corporations Act 2001

DT Act

Corporations Legislation Amendment (Derivative Transactions) Act 2012

FSB

Financial Stability Board

G20

Group of Twenty (G20) forum of 19 countries and the European Union

MABR Act

Mutual Assistance in Business Regulation Act 1992

OTC derivatives

Over-the-counter derivatives

PSN Act

Payment Systems and Netting Act 1998

RBA

Reserve Bank of Australia

RB Act

Reserve Bank Act 1959

RIS

Regulation Impact Statement

 

Date introduced: 20 March 2013
House: House of Representatives
Portfolio: Treasury
Commencement: Sections 1 to 3 commence on Royal Assent. Schedule 1 which contains all the substantive provisions of the Act, commences on the 28th day after the Act receives Royal Assent.

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill's home page, or through http://www.aph.gov.au/Parliamentary_Business/Bills_Legislation. When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the ComLaw website at http://www.comlaw.gov.au/.

Purpose of the Bill

The main amendments proposed in this Bill are included in Schedule 1 which has seven Parts. This is the only Schedule in this Bill and it amends the Corporations Act 2001 (the Corporations Act), the Payment Systems and Netting Act 1998 (the PSN Act), the Mutual Assistance in Business Regulation Act 1992 (the MABR Act), the Australian Securities and Investments Commission Act 2001 (the ASIC Act), the Reserve Bank Act 1959 (the RB Act), the Clean Energy Regulator Act 2011 (the CER Act) and the Carbon Credits (Carbon Farming Initiative) Act 2011 (the CFI Act).

The Explanatory Memorandum states that the purpose of these amendments is to introduce a range of miscellaneous measures related to the regulation of over-the-counter derivatives (OTC derivatives)[1] and other financial products. The key measures are intended to:

  • assist central counterparties (CCPs)[2] in managing defaults of clearing participants
  • enable the Australian Securities and Investments Commission (ASIC) and the Reserve Bank of Australia (RBA) to improve the allocation of their resources in assessing the compliance of Australian market licence (AML) and clearing and settlement facility licence (CSFL) holders with their legal obligations
  • allow:

–      certain Australian regulators including the RBA to exchange protected information with other entities in Australia and overseas in the execution of their duties subject to appropriate safeguards and

–      ASIC to gather and share protected information with regulatory entities overseas for supervision and enforcement purposes; and require ASIC to report on the use of those powers.[3]

Background

The Global Financial Crisis (GFC) and OTC derivatives

In September 2009, in the aftermath of the global financial crisis (GFC), the Group of 20 (G20),[4] which comprises the 19 largest economies, including Australia, plus the European Union, entered into an agreement at Pittsburgh (the G20 Pittsburgh Statement) to enhance transparency and to reduce systemic risk associated with OTC derivative transactions.

Because of the manner in which OTC derivative markets[5] operate regulatory authorities are not in a position to assess the risk attached to the trades in OTC derivatives and whether the price of these transactions had any correlation to the value of the underlying assets which supported these OTC derivatives.

Financial Stability Board to monitor the regulation of the over-the-counter derivatives markets

The G20 Pittsburgh Statement required that all standardised OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through CCPs by end-2012 at the latest. Further, OTC derivative contracts should be reported to trade repositories (TRs). A suggested functional definition of a trade repository is that it is a central registry of authoritative copies of open OTC derivatives trades or trade transactions, which has been accepted by the European Central Bank.[6]

The G20 Pittsburgh Statement also required the Financial Stability Board (FSB)[7] and its relevant members to assess regularly the implementation of this directive and to report whether the measures proposed would be sufficient to improve transparency in the derivatives markets, mitigate systemic risk, and protect against market abuse.[8]

Response of the Australian Government to the G20 commitments to date

Enactment of the framework legislation to meet the G20 commitments by the Commonwealth

The Australian Government responded to the G20 commitments by amending, among other Acts, the Corporations Act by the Corporations Legislation Amendment (Derivative Transactions) Act 2012 (the DT Act)[9] to insert a new Part 7.5A to provide a framework to regulate trading in OTC derivatives. Part 7.5A came into effect on 3 January 2013.

The reader is encouraged to refer to the Bills Digest on the Corporations Legislation Amendment (Derivative Transactions) Bill 2012 (Bills Digest no. 49, 2012–13) because the matters considered in the sections of that Bills Digest dealing with Background, Basis of policy commitment, Committee consideration, Position of major interest groups and Main issues are relevant to matters dealt with in the current Bill.[10]

Subsection 901B(2) of Part 7.5A of the Corporations Act provides that the Minister may by legislative instrument determine one or more classes of derivatives in relation to which execution requirements[11], reporting requirements[12], or clearing requirements[13] may be imposed.

The Bills Digest to the Corporations Legislation Amendment (Derivative Transactions) Bill 2012 gave a detailed background to the work of the Council of Financial Regulators comprising the RBA, the Australian Prudential Regulation Authority (APRA), ASIC and the Australian Treasury in advising the Australian Government on how the G20 commitments could be met.

Financial implications

The Explanatory Memorandum to the Bill states that the financial impact of measures in this Bill is nil.[14]

Committee consideration

On 21 March 2013 the House of Representatives Selection Committee[15] referred the Bill to the Parliamentary Joint Committee on Corporations and Financial Services (the Committee) for inquiry and report. Five submissions were received. These were from ASX Group, RBA, King and Wood Mallesons, Australian Financial Markets Association and International Swaps and Derivatives Association, Inc. The Committee reported on 15 May 2013 and in Recommendation 2 recommended that the Bill be passed. [16]

However, in Recommendation 1 the Committee recommended that Treasury and ASIC update the Committee on Australia’s implementation of OTC derivatives market reforms. It added that this could take the form of a report to be made one month after the FSB publishes its sixth progress report on the implementation on of the OTC derivatives reforms agreed by the G20, which is expected in October 2013, and could include:

  • Australia's progress in implementing the framework established by the Corporations Legislation Amendment (Derivative Transactions) Act 2012
  • an assessment of how Australia's progress in implementing OTC derivatives market reforms compares to international efforts and
  • advice on any further reforms required to implement Australia's G20 commitments in relation to OTC derivatives.[17]

Briefly, the positions taken by the submitters, all of whom supported the proposed amendments to the PSN Act, were as follows.[18]

ASX Group

The ASX Group (ASX) strongly supported the amendments proposed to the PSN Act as they will:

  • enhance client protections by giving legal certainty to the ability of a CCP to transfer (or port) client positions and collateral of an insolvent clearing participant to a solvent clearing participant.
  • facilitate compliance by CCPs with new domestic and international regulatory standards and
  • promote resilience of CCPs by giving legal certainty to the enforcement of non-cash collateral held by a CCP.[19]

Reserve Bank of Australia

The RBA supported the proposed changes on the basis that they will:

  • bring Australia’s legal protections for clients of CCP participants into line with international standards
  • provide for appropriate prioritisation of Australian regulators’ oversight activities in relation to market licensees and clearing and settlement facilities and
  • allow for the RBA and ASIC to more effectively share information with other regulators.[20]

King and Wood Mallesons

King and Wood Mallesons, which limited its submissions to the amendments to the PSN Act, supported those amendments, considering that they would add certainty to Australian law. The submission added that similar protection is provided by the laws of other jurisdictions, such as those of the United States and England.[21]

Australian Financial Markets Association

The Australian Financial Markets Association supported the amendments to the PSN Act and made the point that the proposed amendments will override the insolvency provisions in the Corporations Act and, in doing so, will fall in line with similar laws in the United States and the United Kingdom.

Under Australian insolvency law legal problems can arise with the use of porting if the defaulting participant is insolvent. The rights of the defaulting participant can be regarded as its property to a certain extent. As a result dealing with that property, once insolvency proceedings have commenced can run counter to the objectives and operation of insolvency in this country. In the event of a default or insolvency rapid action is of the essence, and it is a particular concern to ensure that a central counterparty clearing house can act without having to obtain consents from external administrators that would otherwise be required under the insolvency provisions in the Corporations Act.

Shielding of porting from insolvency laws is already in place in other important financial centre jurisdictions, such as in the United States and the United Kingdom.[22]

International Swaps and Derivatives Association, Inc.

The International Swaps and Derivatives Association Inc. supported the amendments to the PSN Act and added that the proposed measures will improve the consistency of the legal protection of financial market infrastructure in Australia with other important jurisdictions.[23]

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.[24]

The Parliamentary Joint Committee on Human Rights has commented on the Bill and sought advice from the Parliamentary Secretary to the Treasurer on a number of matters, some of which are discussed in the Key issues and provisions section of this Digest.[25]

Key issues and provisions

Schedule 1 of the Bill has seven Parts. The key issues and provisions in relation to each Part will be considered separately.

Part 1 —Payment systems and netting

Key issues and provisions in Part 1—Amendments to the Payment Systems and Netting Act 1998 (Cth)

The PSN Act[26] currently includes measures for enhancing the effectiveness of multilateral netting arrangements and measures for improving the effectiveness of market netting arrangements in Parts 3 and 5 respectively.[27]

Netting as an effective risk management strategy

The Overview in the Explanatory Memorandum for the Payments System and Netting Bill 1998 (the PSN Bill 1998) stated that Part 3 was intended to enhance legal certainty for multilateral netting in the payment system and that Part 5 was intended to enhance legal certainty for netting undertaken in accordance with the rules governing stock and futures exchanges and the associated clearing houses.[28]

The regulation impact statement (RIS) to the PSN Bill 1998 gives an overview of the rationale for enacting the PSN Act. It indicates three reasons, stated below, why netting has been recognised as an effective strategy for reducing risk in the payment system. The main reason is that the liquidity required for meeting obligations of participants that are netted out will be less than the liquidity based on meeting gross obligations.

First, by replacing the need for meeting each obligation with the need to meet only net obligations, it significantly reduces the liquidity required to enable the financial system to operate efficiently.  The net obligations of an institution for the same day will, invariably, be considerably less than the sum of its gross exposures.  The total gross obligations for a particular day can easily exceed the capital and reserves of an institution.

Secondly, an institution need not wait until one transaction is settled in order to be in funds to meet another payment obligation.

Thirdly, multilateral netting significantly lessens the risk of systemic failure.  Because an institution’s net obligation will, invariably, be considerably less than the sum of its gross obligations, the resulting shortfall to the system, should that institution fail, will be less than the sum of its bilateral shortfalls to other parties.[29]

These netting arrangements currently in the PSN Act apply to CCPs, among other bodies. The extent of regulatory oversight and control of CCPs under the current provisions is set out in the Explanatory Memorandum to the Bill. Under netting arrangements, security is given to a CCP by the original parties to the transaction for accepting their obligations following novation of contracts.[30]

Outline of current law on relevant aspects of netting arrangements

Currently, subsection 16(1) of Part 5 of the PSN Act provides that obligations under market netting contracts may be terminated and all amounts owed under a contract may be netted and paid out.

Paragraph 16(2)(c) provides that if a party to a market netting contract goes into external administration, all amounts owed under the contract may be netted and paid out in accordance with the contract. The amounts so netted and paid out are to be disregarded in the external administration under paragraph 16(2)(d).

Paragraph 16(2)(e) provides that any net obligation owed by the party under the contract that has not been discharged is provable in the external administration. Paragraph 16(2)(f) provides that any net obligation owed to the party under the contract that has not been discharged may be recovered by the external administrator for the benefit of creditors.

Paragraph 16(2)(g) provides that that the netting or termination of obligations under the contract; or a payment by a party to discharge a net obligation under a contract; or a payment or transfer of property , whether absolutely or by way of security, by a party to meet an obligation under a contract to pay a deposit or margin call, shall not be void or voidable under the external administration.

Subsection 16(3) provides that subsections 16(1) and (2) have effect despite any other law including the provisions specified in section 5 of the PSN Act.

Enhancing ability of CCPs to act before commencement of external administration

The Explanatory Memorandum states that netting arrangements are mainly used by CCPs rather than by financial markets. It adds that although the protection offered by the PSN Act, as indicated above, is powerful, it is limited by the terms of the netting contract which must be entered in accordance with the operating rules of the market.[31]

The amendments made to subsection 16(1) by items 1 to 4 of Part 1 of Schedule 1 will enhance the ability of CCPs to take certain actions where a market participant defaults on its obligations but has not entered into external administration. These amendments will enable the CCP to take immediate action when a participant is experiencing financial difficulties but before formal external administration commences.[32]

The reader is referred to paragraphs 1.62 to 1.69 of the Explanatory Memorandum for a detailed explanation of the effect of the amendments proposed by items 1 to 4.

Strengthening actions CCPs may take when a participant enters external administration

The amendments made by items 5 to 7 of Part 1 address issues relating to the enforcement of certain types of security held by CCPs when a participant enters external administration, without the need to comply with sections 437D and 468 of the Corporations Act. Section 437D provides that only the administrator can deal with the property of a company that is under administration. Section 468 states that any disposition of the property of the company made after the commencement of the winding up by the Court is void, unless the Court orders otherwise.

Subsection 16(2) of the PSN Act sets out the actions a CCP can take when a party to a market netting contract goes into external administration. The Explanatory Memorandum in paragraphs 1.70 to 1.75 gives details of the proposed amendments.[33]

Application and commencement of amendments

According to item 2 in the table in proposed section 2 of the Bill, Schedule 1 commences on the 28th day after Royal Assent. This commencement time is referred to as ‘start time’ in subitem 8(1) of Schedule 1.

Subitem 8(2) provides that the amendments made by Part 1 apply in relation to market netting contracts entered into after the start time, or that are in existence immediately before the start time.

Subitem 8(3) provides that the amendments made by Part 1 do not apply in relation to external administration that commenced before the start time.

Subitem 8(4) provides that the amendments made by Part 1 apply in relation to the enforcement of a security after the start time, even if the security was given before the start time.

Subitem 8(5) provides that the amendments made by Part 1 apply in relation to a transfer of, or dealing, with rights, obligations or property after the start time, even if those rights, obligations or property were acquired before the start time.

Subitem 8(6) states that the amendments made by items 2, 3 and 4 do not apply to disposals of rights or property, or the creation or operation of encumbrances or interests, before the start time.

Subitem 8(7) provides that item 8 has effect subject to item 9.

Provisions amended by Part 1 do not have effect to the extent they result in acquisition of property

Subitem 9(2) states that item 9 applies, if because of an amendment made by Part 1, a provision of the PSN Act would result in an acquisition of property otherwise than on just terms. Subitem 9(3) states that the amended provision does not apply to the extent that it would result in that acquisition of property. Subitem 9(1) states that ‘acquisition of property’ and ‘just terms’ have the meanings in paragraph 51(xxxi) of the Constitution.

The Explanatory Memorandum in paragraphs 1.65 to 1.69, and 1.76 to 1.77 discusses the scenarios when there could be a possible breach of section 51(xxxi) of the Constitution and the intended impact of items 8 and 9.[34]

Part 2 —Review of licences

Key issues and provisions in Part 2 – Amendments to the Corporations Act 2001(Cth)

Currently, ASIC and the RBA are responsible for assessing compliance with the legal obligations of the holders of an Australian market licence (AML) or a clearing and settlement facility licence (CSFL).[35]

The key issue proposed to be dealt with by the amendments in Part 2 of Schedule 1 of the Bill is the appropriateness of the current arrangements for assessing compliance with the legal obligations annually, having regard to the optimal use of the resources available to ASIC and the RBA for their respective tasks. It is proposed that annual examinations will instead be restricted to AML holders and CS facilities prescribed by regulations. Assessment of compliance by AML holders and CS facilities not prescribed by regulations may be carried out at any time as deemed necessary by the respective authorities.[36]

Compliance of AML holders with certain obligations —Annual examination by ASIC to be limited to AML holders prescribed by regulations

Part 7.2 of the Corporations Act deals with the licensing of financial markets.

Subsection 794C(2) of the Corporations Act currently requires ASIC to do an assessment at least once a year to ensure that each AML holder complies with the obligation in paragraph 792A(c). This obligation requires each AML holder to ensure that adequate arrangements are in place for operating the market in a fair, orderly and transparent manner on the one hand and for handling conflicts between the achievement of that objective and its own commercial interests. The obligation also requires the AML holder to have arrangements in place to monitor and enforce compliance with the markets operating rules. An independent person, or a related entity of the AML holder, may be appointed to perform this task.

Currently, section 794C is headed ‘ASIC to assess licensee’s compliance’. Item 10 of Part 2 of Schedule 1 repeals this heading and substitutes heading it with ‘ASIC assessment of licensee’s compliance’. This reflects the proposed arrangements, under which ASIC will not be required to assess the compliance of every AML holder each year.

Item 11 of Part 2 repeals and replaces subsection 794C(2) of the Corporations Act. As set out above, that provision currently requires ASIC to assess the compliance of each AML holder with the requirement set out at paragraph 792A(c) of the Act at least once a year. Under proposed subsection 794C(2) ASIC will be required to undertake such an assessment at least once yearly only if the AML holder is prescribed by the regulations for the purpose of proposed subsection 794C(2).

Compliance of CS facility licensees with certain obligations —Annual examination by ASIC to be limited to licensees prescribed by regulations

Division 2 of Part 7.3 of the Corporations Act deals with the regulation of clearing and settlement facility (CS facility) licensees.

Subsection 823C(2) of the Corporations Act provides that ASIC must assess, at least once a year, whether each CS facility licensee has complied with the obligation imposed in paragraph 821A(c) (which is very similar to the obligation imposed on an AML licensee under paragraph 792A(c) of the Corporations Act, discussed above).

Item 13 of Part 2 of Schedule 1 repeals subsection 823C(2) and inserts proposed subsection 823C(2) to limit the need for annual assessments to the CS facility licensees prescribed by the regulations.

Compliance of CS facility licensees with certain obligations —Annual examination by the Reserve Bank to be limited to licensees prescribed by regulations

Subsection 823CA(1) of the Corporations Act requires the RBA to do an assessment at least once each year as to how well each CS facility licensee is complying with its obligation under paragraph 821A(aa).

Paragraph 821A(aa) provides that each CS facility must, to the extent that it is reasonably possible to do so, comply with the standards determined under section 827D and do all other things necessary to reduce systemic risk.[37]

Item 15 of Part 2 of Schedule 1 repeals existing subsection 823CA(1) and substitutes proposed subsections 823CA(1) and (1A). Under the proposed measures, the RBA may assess a CS facility licensee’s compliance with its obligations under paragraph 821A(aa). If a CS facility is prescribed by regulation, the examination of that CS facility must be made at least once a year as set out in proposed 823CA(1A).

Further, in doing the assessment , the RBA may take account of any information and reports it thinks appropriate, including information and reports from an overseas regulatory authority as set out in proposed subsection 823CA(1).

Part 3—International business regulators

Key issues and provisions in Part 2

Amendments to the Australian Securities and Investments Commission Act 2001 and the Mutual Assistance in Business Regulation Act 1992

The Explanatory Memorandum states that at present ASIC is unable to share information with certain international business regulators such as the European Securities Market Authority (ESMA) and the European Systemic Risk Board (ESRB) as they do not fall within the definition of foreign regulator in the ASIC Act and the Mutual Assistance in Business Regulation Act 1992 (MABR Act). [38] The Explanatory Memorandum adds that the need for exchange of information with international business regulators was emphasised by the Financial Sector Assessment Program Update (the FSAP report).[39]

The FSAP report observed that current legislation is hampering ASIC’s efforts for cooperation and information sharing with regulators in other jurisdictions.[40]

The purpose of the amendments proposed in Part 3 of Schedule 1 is to enable ASIC to pass relevant information to international business regulators such as the ESMA and the ESRB.[41]

Division 2 of Part 7 of the ASIC Act deals with the steps that ASIC must take to protect from unauthorised use or disclosure, information that is given to it in confidence or that is protected information.[42] Subsection 127(4) provides that where the Chairperson of ASIC is satisfied that an entity, which is an agency, government, foreign body or disciplinary body listed in paragraphs (a) to (d), will be assisted in performing its functions or powers, if particular information is supplied to that entity, the disclosure of such information is taken to be authorised use and disclosure of information.

Meaning of ‘foreign business law’

Item 16 of Part 3 of Schedule 1 inserts in subsection 5(1) of the ASIC Act a definition of ‘foreign business law’ with two components in paragraphs (a) and (b). Under the meaning in paragraph (a), a foreign business law means a law of a foreign country that regulates or relates to regulation of business or persons engaged in business. Under the meaning in paragraph (b), a foreign business law is a law or rules or regulations that an ‘international business regulator’ administers or enforces.

Meaning of ‘international business regulator’

Item 17 of Part 3 of Schedule 1 inserts a definition of ‘international business regulator’ into subsection 5(1) of the ASIC Act. International business regulator means a body with regulatory functions relating to the regulation of business or persons engaged in business in two or more countries. Further, those functions could be conferred on the body by a law or laws in force in those countries, or a treaty or other international agreement. In addition, those functions could be conferred on a body by a parliament or other body established by a treaty or other international agreement to which those countries are parties.

Item 18 of Part 3 of Schedule 1 inserts proposed paragraph 127(4)(cb) to the ASIC Act, to provide that the Chairperson of ASIC may supply information to an international business regulator to enable that regulator to perform its functions or exercise its powers.

Amendments to the Mutual Assistance in Business Regulation Act 1992

The purpose of the MABR Act is to allow certain Commonwealth business-regulating authorities to provide assistance to certain foreign business-regulating authorities or agencies and for related purposes.[43]

Item 23 of Part 3 of Schedule 1 expands the current definition of ‘foreign regulator’ in subsection 3(1) of the MABR Act by including an ‘international business regulator’ as well.

Item 24 of Part 3 of Schedule 1 inserts in subsection 3(1) of the MABR Act the definition of ‘international business regulator’ which is identical to the definition that will be inserted into subsection 5(1) of the ASIC Act by item 17 of Part 3 of Schedule 1, discussed above.

The current definition of ‘foreign business law’ in subsection 3(1) of the MABR ACT is to be repealed and substituted by item 22 of Part 3 of Schedule 1. This definition is similar to the definition inserted into subsection 5(1) of the ASIC Act by item 16 of Part 3 of Schedule 1 discussed above.

Part 4—Reporting on ASIC’s information gathering powers

Key issues and provisions

In 2010, questions were raised on ASIC’s use of compulsory information gathering powers at a hearing by the Senate Economics Legislation Committee.[44] ASIC thereafter undertook an internal review of its procedures and policies.[45] In consequence, ASIC undertook to report annually to Parliament on the use of its information gathering powers in its Annual Report each year.[46] A description of ASIC’s current information gathering powers, based on various provisions of the law, is set out in Information Sheet 145.[47]

Division 2 of Part 8 of the ASIC Act covers the reporting requirements of ASIC in its Annual Reports. Subsection 136(1) states that the Chairperson of ASIC must as soon as possible after the end of a financial year give to the Minister a report of ASIC’s operations during that financial year.

Subsection 136(2) in paragraphs (a) to (j) gives the various items of information that must be included in its Annual Reports. Item 25 of Part 4 of Schedule 1 adds proposed paragraph 136(2)(k) to require ASIC to additionally include details on the use of information gathering powers, referred to in proposed subsection 136(2A), in its Annual Report.

Item 26 of Part 4 of Schedule 1 inserts proposed subsection 136(2A) to provide for regulations to require a report to be prepared with prescribed information relating to the exercise of information gathering powers by ASIC, members of ASIC, or staff members. For this purpose proposed subsection 136(2A) states that ‘information gathering powers’ includes but is not limited to information gathered by answering questions, the production of documents and assistance. A Note to the proposed subsection 136(2A) states that information gathering powers that are prescribed may be powers conferred by the ASIC Act, or by other laws.

Item 2 of the table in proposed section 2 of the Bill provides that the amendments made by Schedule 1 of the Bill, including Part 4, will commence 28 days after this Act receives the Royal Assent.

Part 5—Disclosure of information by the Reserve Bank

Key issues and provisions

The Explanatory Memorandum states that financial regulators, namely, the RBA, ASIC and the Australian Prudential Regulatory Authority (APRA) are under increasing pressure to share information with other regulators and official bodies in Australia or overseas, and with private entities. As many regulated entities in the financial sector have significant cross-border activities, their international business activities bring them within the regulatory purview of regulators in different jurisdictions.

Further, the operations of the financial industry make it necessary to provide information to private sector entities such as external specialists providing data analysis services or IT firms which provide data storage facilities.[48]

Currently the ASIC Act and the APRA Act allow confidential information to be shared subject to conditions being imposed when information is shared with external entities.[49]

Section 79A of the Reserve Bank Act 1959 (the RB Act) regulates the sharing of information by RBA officers.[50] However, the RBA Act does not currently allow RBA officers to share protected information and documents with a person approved by the RBA Governor. APRA is able to share information on a similar basis under section 56 of the Australian Prudential Regulation Authority Act 1998 (APRA Act).[51]

The amendments in Part 5 of Schedule 1 of the Bill will enhance the RBA’s ability to collaborate with other regulators both domestically and internationally and are modelled on the powers and provisions in the APRA Act.[52]

Part 6—Consequential amendments relating to derivative trade repositories

Key issues and provisions

As mentioned above, the initial response of the Australian Government to the G20 commitments was to enact the Corporations Legislation Amendment (Derivative Transactions) Act 2012 (the DT Act) to provide a framework to regulate trading in OTC derivatives. One of the G20 commitments was that OTC derivative contracts should be reported to trade repositories (TRs) to make these transactions more transparent.

The Explanatory Memorandum states that following the enactment of the DT Act a number of consequential amendments to the Carbon Credits (Carbon Farming Initiative) Act 2011 (the CFI Act) and the Clean Energy Regulator Act 2011 (the CER Act) are necessary.[53]

The Clean Energy (Consequential Amendments) Act 2011 deems that carbon units are financial products for the purposes of the Corporations Act and the ASIC Act. Similarly, the Carbon Credits (Consequential Amendments) Act 2011 deems that Australian carbon credit units (ACCUs) and eligible international emissions units (EIEUs) are financial products. In consequence, there will be markets for these financial products and related derivatives.

Section 50 of the CER Act allows the Clean Energy Regulator to disclose protected information in relation to these financial products to certain specified financial market or CS facility operators.[54] Also, the CFI Act allows the Clean Energy Regulator to authorise CFI project auditors to disclose protected audit information to certain specified financial markets or CS facility operators.[55] In both instances the Clean Energy Regulator must be satisfied that the information disclosed will assist the operators carry out their monitoring and enforcement functions or exercise their powers.

The amendment made by item 33 of Part 6 of Schedule 1 to subparagraph 277(1)(a)(ii) of the CFI Act will include a body corporate that holds an Australian derivative trade repository licence, as a body to which protected audit information may be disclosed.

The amendment by item 36 of Part 6 of Schedule 1 to paragraph 50(1)(a)(ii) of the CER Act will include a body corporate that holds an Australian derivative trade repository licence as a body to which protected information may be disclosed.

Part 7—Other amendments

Key issues and provisions

Part 9.4B of the Corporations Act deals with the civil consequences of contravening civil penalty provisions. Subsection 1317E(1) of Part 9.4B lists those sections of the Corporations Act which are subject to the civil penalty provisions. The Explanatory Memorandum states that with several amendments made over time to subsection 1317E(1) it has become unwieldy to read.

Item 41 of Part 7 of Schedule 1 repeals subsection 1317E(1) and substitutes it with proposed subsection 1317E(1) written in the form of a table.

The Explanatory Memorandum states that there is no change to the contents of the subsection and the amendment is only intended to make the provision easier to read and use.[56]

Item 40 of Part 7 of Schedule 1 repeals and replaces section 1317DA to define ‘corporation/scheme civil penalty provision’ and ‘financial services civil penalty provision’ by reference to relevant items in the table set out in proposed subsection 1317E by item 41.

Members, Senators and Parliamentary staff can obtain further information from the Parliamentary Library on (02) 6277 2500.



[1].     A ‘derivative’ is a security whose price is dependent upon or derived from one or more underlying assets. ‘Over-The-Counter’ generally refers to transactions in relation to stocks that are traded through a dealer market rather than through a recognised stock exchange such as the Australian Securities Exchange (ASX). Investopedia, General ‘Definition of “derivative”’, Investopedia website, 2013, viewed 21 April 2013, http://www.investopedia.com/terms/d/derivative.asp; Corporations Act 2001 (Cth), section 761D and regulation 7.1.04 of the Corporations Regulations 2001 (Cth) define derivative for the purposes of Chapter 7 as an arrangement which satisfies the following conditions: a party to the arrangement must at a future time provide consideration of a particular kind; that future time is not less than the number of days prescribed by regulations which is currently three business days for a foreign exchange contract and one business day in any other case; the amount of the consideration is determined or derived by the value of something else including for example one or more of the following, namely, an asset, a rate (including an interest rate or exchange rate), an index , a commodity. See Corporations Act 2001, viewed 28 April 2013 http://www.comlaw.gov.au/Details/C2013C00003/Download and Corporations Regulations 2001, viewed 19 June 2013, http://www.comlaw.gov.au/Details/F2013C00293

[2].     Investopedia, ‘Definition of “central counterparty” clearing house’, viewed 19 June 2013, http://www.investopedia.com/terms/c/ccph.asp : There are two main functions that are carried out by CCPs: clearing and settlement of market transactions. Clearing relates to identifying the obligations of both parties on either side of a transaction. Settlement occurs when the final transfer of the securities and funds occur.

[3].     Explanatory Memorandum to the Corporations and Financial Sector Amendment Bill 2013, p. 3.

[4].     The International Monetary Fund and the Group of 20, ‘What is the G20?’, IMF and G20 website: The G20 brings together finance ministers and central bank governors from 19 countries: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, the Republic of Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom, the United States of America plus the European Union, which is represented by the President of the European Council and by Head of the European Central Bank, viewed 22 April 2013, http://www.g20.org/docs/about/about_G20.html

[5].     R Dodd, The Study of OTC Derivatives Markets, description of ‘Traditional dealer market – “bilateral negotiation”’: The OTC markets have traditionally been organized around one or more dealers who “make a market” by maintaining bid and offer quotes to market participants. The quotes and the negotiation of execution prices are generally conducted over the telephone, although the process may be enhanced through the use of electronic bulletin boards by the dealers for posting their quotes. The trading process of negotiating by phone, whether end-user-to-dealer or dealer-to-dealer, is known as bilateral trading because only the two market participants directly observe the quotes or execution, viewed 10 May 2013, http://www.financialpolicy.org/dscotcstructure.pdf

 

[6].     European Central Bank contribution to the Consultation of the Committee of European Securities Regulators on Trade Repositories in the European Union, viewed 21 April 2013 http://www.ecb.int/pub/pdf/other/cesrconsultationontraderepositoriesineu200910en.pdf

[7].     Financial Stability Board (FSB), ‘Charter of the Financial Stability Board’, viewed 25 April 2013, http://www.financialstabilityboard.org/publications/r_120809.pdf

[8].     OTC Derivatives Market Reforms, Third Progress Report on Implementation, 15 June 2012, viewed 21 April 2013, http://www.financialstabilityboard.org/publications/r_120615.pdf

[9].     Corporations Legislation Amendment (Derivative Transactions) Act 2012, viewed 19 June 2013, http://www.comlaw.gov.au/Details/C2012A00178 

[10].   K Sanyal and J Chowns, Corporations Legislation Amendment (Derivative Transactions)Bill 2012, Bills Digest, no. 49, 2012–13, Parliamentary Library, Canberra, 2012, viewed 21 April 2013, http://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/bd//Parliamentary_Business/Bills_Legislation/bd/bd1213a/13bd049

[11].   Subsection 901A(5) of the Corporations Act provides a definition of ‘execution requirements’ and they are requirements for derivative transactions not to be entered into otherwise than on a licensed market or a facility that is prescribed by regulations.

[12].   Subsection 901A(6) of the Corporations Act provides a definition of ‘reporting requirements’ and they are requirements for information about derivative transactions, or about positions about derivative transactions to be reported to a licensed derivative trade repository or a facility prescribed by regulations.

[13].   Subsection 901A(7) of the Corporations Act provides a definition of ‘clearing requirements’ and they are requirements for derivative transactions to be cleared through a licensed clearing and settlement facility (CS facility) or a facility that is prescribed by regulations.

[14].   Explanatory Memorandum, Corporations and Financial Sector Legislation Amendment Bill 2013, p. 3, viewed 20 June 2013, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query%3DId%3A%22legislation%2Fems%2Fr5023_ems_507df714-915a-41bc-9b04-2601b8862038%22

[15].   Selection Committee, Report No. 78: Private Members’ business and referral of bills to committees, House of Representatives, Canberra, 21 March 2013, p. 3, viewed 28 May 2013, http://www.aph.gov.au/Parliamentary_Business/Committees/House_of_Representatives_Committees?url=selc/reports.htm

[16].   Details of the terms of reference, submissions to the Committee and the final report are available at: Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into the Corporations and Financial Sector Legislation Amendment Bill 2013, viewed 16 May 2013, http://www.aph.gov.au/Parliamentary_Business/Committees/Senate_Committees?url=corporations_ctte/completed_inquiries/2010-13/corps_fin_sector_bill_2013/index.htm

[17].   Parliamentary Joint Committee on Corporations and Financial Services, Corporations and Financial Sector Legislation Amendment Bill 2013, Recommendations 1 and 2, p. xi, The Senate, Canberra, May 2013, viewed 16 May 2013, http://www.aph.gov.au/Parliamentary_Business/Committees/Senate_Committees?url=corporations_ctte/completed_inquiries/2010-13/corps_fin_sector_bill_2013/report/index.htm

[18].   Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into the Corporations and Financial Sector Legislation Amendment Bill 2013, submissions, viewed 8 May 2013, http://www.aph.gov.au/Parliamentary_Business/Committees/Senate_Committees?url=corporations_ctte/corps_fin_sector_bill_2013/submissions.htm

[19].   ASX Limited, Submission to the Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into the Corporations and Financial Sector Legislation Amendment Bill 2013, 18 April 2013, p. 1, viewed 28 May 2013, http://www.aph.gov.au/Parliamentary_Business/Committees/Senate_Committees?url=corporations_ctte/completed_inquiries/2010-13/corps_fin_sector_bill_2013/submissions.htm

[20].   Reserve Bank of Australia, Submission to the Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into the Corporations and Financial Sector Legislation Amendment Bill 2013, 19 April 2013, p. 1, viewed 28 May 2013, http://www.aph.gov.au/Parliamentary_Business/Committees/Senate_Committees?url=corporations_ctte/completed_inquiries/2010-13/corps_fin_sector_bill_2013/submissions.htm

[21].   King and Wood Mallesons, Submission to the Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into the Corporations and Financial Sector Legislation Amendment Bill 2013, 18 April 2013, viewed 28 May 2013, http://www.aph.gov.au/Parliamentary_Business/Committees/Senate_Committees?url=corporations_ctte/completed_inquiries/2010-13/corps_fin_sector_bill_2013/submissions.htm

[22].   Australian Financial Markets Association, Submission to the Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into the Corporations and Financial Sector Legislation Amendment Bill 2013, 19 April 2013, p. 2, viewed 28 May 2013, http://www.aph.gov.au/Parliamentary_Business/Committees/Senate_Committees?url=corporations_ctte/completed_inquiries/2010-13/corps_fin_sector_bill_2013/submissions.htm

[23].   International Swaps and Derivatives Association Inc., Submission to the Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into the Corporations and Financial Sector Legislation Amendment Bill 2013, 19 April 2013, viewed 28 May 2013, http://www.aph.gov.au/Parliamentary_Business/Committees/Senate_Committees?url=corporations_ctte/completed_inquiries/2010-13/corps_fin_sector_bill_2013/submissions.htm

[24].   Explanatory Memorandum, op. cit., pp. 31 and 32.

[25].   Parliamentary Joint Committee on Human Rights, Sixth Report of 2013, Commonwealth of Australia, Canberra, 15 May 2013, pp. 9–13, viewed 29 May 2013, http://www.aph.gov.au/Parliamentary_Business/Committees/Senate_Committees?url=humanrights_ctte/reports/index.htm

[26].   Payment Systems and Netting Act 1998, viewed 28 May 2013, http://www.comlaw.gov.au/Details/C2012C00339

[27].   Companies and Securities Advisory Committee, Netting Sub-Committee, Netting in financial market transactions, Final report (June 1997), Chapter 1, Netting Principles, paragraph 1.2, p. 1, viewed 8 May 2013, http://www.camac.gov.au/camac/camac.nsf/byHeadline/PDFFinal+Reports+1997/$file/Netting_in_Financial_Markets_Transactions,_June_1997.pdf ; ‘Market netting typically arises under the rules of a stock exchange, futures exchange or clearing house. These rules commonly provide for the novation to a clearing entity of contracts entered into by exchange members, and the setting off of obligations under those contracts in the event of default by the member and for the purposes of settlement. Again, it is extremely important that these arrangements are effective in the event of insolvency of a member’. Investopedia defines ‘novation’ as:

1. The act of replacing one participating member of a contract with another.

2. The exchange of new debts or obligations for older existing ones.

Investopedia, ‘Definition of “novation”’, Investopedia website, 2013, viewed 8 May 2013, http://www.investopedia.com/terms/n/novation.asp

[28].   Explanatory Memorandum, Payments System and Netting Bill 1998 , Overview and financial impact statement, p. 2, viewed 26 April 2013, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22legislation%2Fems%2Fr492_ems_ddab99a0-a81e-4db9-9ec7-3f115a3f07ff%22

[29].   Ibid., p. 4, paragraphs 2 to 4.

[30].   Explanatory Memorandum, Corporations and Financial Sector Legislation Amendment Bill 2013, op. cit., paragraphs 1.55 to 1.60, pp. 17–19.

[31].   Explanatory Memorandum, op. cit., paragraphs 1.56 to 1.59, p. 18.

[32].   Ibid., paragraph 1.61, p. 19.

[33].   Explanatory Memorandum, op. cit., paragraphs 1.70 to 1.75, pp. 21 to 23.

[34].   Explanatory Memorandum, op. cit., pp. 20 to 21.

[35].   The Corporations Act 2001 (Cth), section 768A explains ‘clearing and settlement facility ‘(CS facility) for the purposes of chapter 7 of that Act. Briefly, it is a facility that provides a regular mechanism for parties to enter into transactions relating to financial products and to meet obligations to each other that arise from those transactions and are of a kind prescribed by regulations, viewed 28 April 2013, http://www.comlaw.gov.au/Details/C2013C00003/Download; The relevant regulation is regulation 7.1.09 of the Corporations Regulations 2001 - ‘Obligations related to Clearing and Settlement Facility’, viewed 20 June 2013, http://www.comlaw.gov.au/Details/F2013C00293/Html/Volume_2

[36].   Explanatory Memorandum, paragraphs 1.27 to 1.29, pp. 10 and 11.

[37].   Section 827D of the Corporations Act allows the RBA to determine financial stability standards.

[38].   Explanatory Memorandum, paragraphs 1.30, p. 11.

[39].   International Monetary Fund (Country Report), Financial sector program update: Australia: report on the Observance of Standards and Codes (ROSC)summary assessments’, completed on 27 October 2012, viewed 1 May 2013, http://www.imf.org/external/pubs/ft/scr/2012/cr12307.pdf

[40].   Australia: report on the on Observance of Standards and Codes (ROSC)summary assessments; completed on 27 October 2012, paragraph 56, p. 34, viewed 1 May 2013, http://www.imf.org/external/pubs/ft/scr/2012/cr12307.pdf

[41].   Explanatory Memorandum, paragraph 1.30, p. 11.

[42].   Australian Securities and Investments Commission Act 2001, viewed 20 June 2013, http://www.comlaw.gov.au/Details/C2013C00002

[43].   Mutual Assistance in Business Regulations Act 1992, viewed 20 June 2013, http://www.comlaw.gov.au/Details/C2013C00084

[44].   Senate Economics Legislation Committee, Treasury Portfolio, Australian Securities and Investments Commission Estimates, 2010–11, 21 October 2010, viewed 6 May 2013, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22committees%2Festimate%2F13310%2F0003%22

[45].   Explanatory Memorandum, paragraph 1.33, p. 12.

[46].   Australian Securities and Investments Commission, Annual report 2011–12, Significant compulsory information‑gathering powers, p. 150, viewed 6 May 2013, http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/ASIC-Annual-Report--2011-12.pdf/$file/ASIC-Annual-Report--2011-12.pdf

[47].   Australian Securities and Investment Commission (ASIC), ASIC’s compulsory information-gathering powers, Information sheet 145, ASIC, viewed 6 May 2013, http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/info145-compulsory-information-1.pdf/$file/info145-compulsory-information-1.pdf

[48].   Explanatory Memorandum, paragraph 1.38, p. 13.

[49].   Ibid., paragraph 1.39, p. 13.

[50].   Reserve Bank Act 1959, viewed 20 June 2013, http://www.comlaw.gov.au/Details/C2013C00093

[51].   Ibid., paragraph 1.36, p. 12. Australian Prudential Regulation Authority Act 1998, viewed 20 June 2013, http://www.comlaw.gov.au/Details/C2013C00076

[52].   Ibid., paragraph 1.35, p. 12.

[53].   Ibid., paragraph 1.42, p. 14.

[54].     Clean Energy Regulator Act 2011 (the CER Act), section 50,viewed 7 May 2013, http://www.comlaw.gov.au/Details/C2012C00620/Download

[55].     Carbon Credits (Carbon Farming Initiative) Act 2011 (the CFI Act), section 277, viewed 7 My 2013, http://www.comlaw.gov.au/Details/C2012C00749/Download

[56].     Explanatory Memorandum, paragraph 1.110, p. 30.

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