Commonwealth Government Securities Legislation Amendment (Retail Trading) Bill 2012

Bills Digest no. 13 2012–13

PDF version  [648KB]

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.

Robert Dolamore, Economics Section
Paula Pyburne, Law and Bills Digests Section
23 August 2012

Contents
Purpose
Background
Financial implications
Main issues
Key provisions
Concluding comments

 

Date introduced:  27 June 2012
House:  House of Representatives
Portfolio:  Treasury
Commencement:  On the day after 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

The purpose of the Commonwealth Government Securities Legislation Amendment (Retail Trading) Bill 2012 (the Bill) is to:

  • amend the Commonwealth Inscribed Stock Act 1911 (CIS Act) to facilitate the trading of Commonwealth Government Securities on financial markets that can be readily accessed by retail investors[1]
  • amend the Corporations Act 2001 (Corporations Act) to ensure that the investor protection and market integrity provisions in the Corporations Act apply to the CGS retail market and
  • make a number of relatively minor amendments to the CIS Act to facilitate the day‑to‑day administrative work of the Australian Office of Financial Management (AOFM) and remove provisions that are now redundant.

Background

Commonwealth Government Securities (CGS) are a way for the Australian Government to raise debt finance and offer investors effectively a risk‑free form of investment. These securities pay a specific amount of interest (the coupon) for a given period of time (the term), with the principal being repaid on maturity.

Currently, retail investors can invest in CGS through the Reserve Bank of Australia’s (RBA’s) Small Investor Bond Facility or through intermediaries.[2] However, retail investors cannot directly trade in CGS because there is no central place or exchange for trading CGS, as there is for publicly listed shares. Rather, CGS are traded on wholesale bond markets, predominantly over‑the-counter or on professional markets that are not directly accessible to retail investors.

The Government’s decision to facilitate retail CGS trading is part of a broader reform agenda intended to foster a deep and liquid corporate bond market in Australia, promote Australia as a leading financial services hub and boost Australia’s reputation as one of the most attractive investment destinations in the world.[3] Announcing the decision, the Treasurer, Wayne Swan, explained that the reform would ‘build on the Government’s action during the global financial crisis to secure our financial system and preserve the competitive foundations of Australia’s banking sector’.[4]

The case for fostering the development of Australia’s corporate bond market

Australia’s corporate bond market is relatively underdeveloped, with the Government observing that compared to Australia, Europe, the United States, and to a lesser extent New Zealand and the United Kingdom all have thriving corporate bond markets.[5] The lack of a developed corporate bond market has been described as the glaring deficiency in Australia’s otherwise highly sophisticated financial system.[6]

The Australian Financial Centre Forum’s[7] report Australia as a Financial Centre: Building on our Strengths (the Johnson review), identified a number of benefits for Australia of developing a deeper and more liquid corporate bond market.[8] Internationally, the Johnson review argued the need for non-bank corporate debt financing within the Asia-Pacific region would increase over time and Australia could potentially play a role in facilitating the issuance of this type of debt and in managing Asia-Pacific corporate debt portfolios.[9]

Domestically, the Johnson review considered that the global financial crisis had highlighted the need for the corporate sector to have access to more diversified funding sources. Further, it argued that a more developed corporate bond market was desirable in the interests of competition and efficiency, with a deeper and more liquid corporate bond market putting increased competitive pressure on Australia’s banks as a source of corporate debt finance. The Johnson review also saw the corporate bond market as having an important role to play in financing Australia’s ongoing need for substantial infrastructure development.[10]

There are a number of other potential benefits of developing a deeper and more liquid corporate bond market in Australia. First, to the extent that a more developed corporate bond market reduces the call of the corporate sector on Australian bank debt finance, it may reduce the need for Australia’s banks to access overseas debt markets. Second, it may free up some Australian bank debt finance for those medium and small businesses that traditionally do not have the same level of access to capital markets as larger corporate entities.

A third potential benefit of developing Australia’s corporate bond market is that it may encourage institutional and retail investors in Australia to consider diversifying their investment portfolios, which tend to be heavily weighted towards equity and property investments and have much less exposure to fixed income products like government and corporate bonds.[11]

Recently, the potential for a deeper corporate bond market to give the corporate sector access to an expanded funding base was reinforced by an ANZ estimate that up to $40 billion is readily accessible from the retail market.[12]

Developing a retail CGS market is likely to support the development of Australia’s corporate bond market in a number of ways:

  • a CGS retail market would provide investors with a risk-free price benchmark when assessing the attractiveness of corporate bonds issues[13]
  • being able to trade in CGS may raise retail investor interest and confidence in the retail bond market and over time they may become more willing to move up the risk curve and invest in corporate bonds and
  • CGS would add depth, range and volume to the retail bond market thereby providing a foundation stone for the development of a larger and more active corporate bond market.[14]

Basis of policy commitment

The Treasurer, Wayne Swan, announced that the Government would facilitate trading of CGS on a securities exchange in Australia on 12 December 2010, as part of its Competitive and Sustainable Banking System reform package.[15] In the second reading speech for the Bill, the Assistant Treasurer, David Bradbury, said that the overall objectives of the package are to ‘improve consumer protection in banking services, to support smaller lenders in increasing competitive pressure on the big banks, and to secure the long term safety and sustainability of the Australian financial system by reducing the reliance on offshore wholesale funding markets’.[16]

This reform package has three broad streams:

  • empower consumers to get a better deal
  • support smaller lenders to compete with big banks and
  • secure the long term safety and sustainability of the Australian financial system.[17]

Facilitating retail CGS trading is an element of the third stream.

Committee consideration

At its meeting of 27 June 2012, the Senate Selection of Bills Committee resolved that the Bill not be referred to any Committee for inquiry and report.[18]

The Senate Standing Committee for the Scrutiny of Bills (Scrutiny of Bills Committee) commented on the standing appropriations (items 5 and 6) and the strict liability (item 14) provisions of the Bill in its report of 15 August 2012.[19] The detail of those comments is outlined in the Key Provisions section of this Bills Digest.

Policy position of non-government parties

The Coalition appears to support the development of Australia’s corporate bond market. In a speech to the Australian Industry Group annual national forum on 25 October 2010, the Shadow Treasurer, Joe Hockey, put forward a nine point plan for banking reform.[20] Following the announcement of the Government’s intention to facilitate retail CGS trading, the Shadow Treasurer stated that:

Developing a deep and liquid corporate bond market by launching the trading of Commonwealth government securities on a securities exchange was also part of my October banking reforms. And once again the Treasurer adopted it in his plan last December.[21]

Position of major interest groups

The Australian Securities Exchange (ASX) has supported the development of a retail CGS market for some time, arguing in 2010 that:

ASX believes that the development of a retail CGS market is a vital pre-requisite for establishing a vibrant corporate bond market in Australia. Such a market will provide a transparent risk-free benchmark for retail investors to assist them in assessing the attractiveness of corporate issues, and provide them with access to fixed interest securities across the risk/return spectrum.[22]

While not specifically commenting on this measure, a number of industry stakeholders have indicated they support the Government’s objective of fostering the development of Australia’s corporate bond market. The Australian Bankers’ Association has indicated that:

The ABA supports the Government’s efforts to build a retail corporate bond market in Australia. Currently, the corporate bond market in Australia is essentially a wholesale market.[23]

Abacus Australian Mutuals, the industry body for credit unions, building societies, mutual banks and friendly societies has said that:

Abacus supports the development of a high-quality and liquid retail corporate bond market in Australia. As noted recently by APRA [the Australian Prudential Regulation Authority] , unlike many overseas jurisdictions Australia lacks a large stock of government paper, well-rated corporate bonds and other non-bank assets, from which institutions may build a liquid asset pool. Our members welcome new opportunities to diversify their funding sources and investment options.[24]

Similarly, the Australian Financial Markets Association has indicated that it ‘supports the Government’s policy objective to develop a vibrant domestic corporate bond market in Australia’.[25]

Financial implications

According to the Explanatory Memorandum, the total funding of $11.2 million for implementing this measure was provided to the AOFM in the 2011­–12 Budget and the costs have been included in the forward estimates as follows[26]:

2010–11

2011–12

2012–13

2013–14

2014–15

nil

$0.9 million

$3.5 million

$3.4 million

$3.4 million

Main issues

How will the proposed retail CGS market work?

Following consultations with potential market operators, the Government has decided to consider proposals for an ‘indirect’ or ‘beneficial ownership’[27] trading model for the retail CGS market.[28] Under this approach ownership of CGSs will remain with the wholesale securities depository (that is, Austraclear, which is the ASX’s clearing and settlement facility for debt securities traded on wholesale bond markets) and a new type of financial product, a ‘depository interest’, will be created that is linked to the underlying CGS. It will be CGS depository interests that will be bought and sold on the retail CGS market.

CGS depository interests will be issued to retail investors by a ‘depository nominee’, which will be the legal vehicle for issuing the depository interests to retail investors. Ownership of depository interests will give retail investors beneficial ownership of the underlying CGS and the right to receive the periodic interest and principal payments due on the underlying CGS. According to the Explanatory Memorandum, the AOFM will select a commercial registry operator, which will provide a registry showing ownership of depository interests that will be updated whenever a transfer of ownership occurs.[29] The Registry will be expected to have the functionality to support electronic trading and provide on‑line services to retail investors.[30]

Retail investors will be able to trade in CGS depository interests in a way which is similar to trading in shares, with trades settled through clearance and settlement facilities. However, as the Austraclear System is not equipped to deal with retail investors, the retail CGS market will be supported by a different market exchange platform. To this end, the AOFM has recently issued a Request for Proposals for the delivery of services (including clearance and settlement facilities) for a retail CGS market.[31] The Request for Proposals leaves open the door for competition in the provision of these trading services by noting that more than one proposal may be accepted, meaning that CGS depository interests could be traded on more than one financial market accessible to retail investors.[32]

The AOFM will make payments of interest and principal on CGS to Austraclear as the legal owner of these securities. For those CGS that have a depository interest linked to them, Austraclear will pass these payments on to the depository nominee for payment to the beneficial owners, that is, retail investors. However, as depository nominees are a legal vehicle and not an operating entity, it will be the commercial registry operator who will be responsible for arranging payment of these monies to retail investors.[33] The Bill allows the AOFM to have a high level of control and scrutiny over payments to depository interest holders.[34]

Beneficial ownership models are already used for trading CGS on wholesale bond markets and on retail financial markets for financial products that for some reason cannot be directly traded on a financial market (for example, foreign‑listed shares).[35] Further, the Government has revealed that its discussions with potential market operators indicate that the beneficial ownership model would be the most efficient, cost-effective and timely method for facilitating retail CGS trading.[36]

On 21 July 2012 the Australian Securities and Investments Commission (ASIC) released a public consultation paper Retail trading in Commonwealth Government Securities to help implement the Government’s decision to facilitate retail CGS trading.[37] The proposed market integrity rules are intended to provide for fair, orderly and transparent trading of CGS depository interests on retail markets. The consultation paper notes that the proposed rules can accommodate a range of market operators, as well as the situation where the AOFM accepts a proposal from only one market operator. Among other things, ASIC is seeking feedback on specific regulatory proposals for CGS depository interests relating to:

  • extreme price movements
  • best execution
  • pre- and post-trade transparency
  • regulatory data for market surveillance
  • market operator obligations in a multi-market environment and
  • market participant obligations.[38]

ASIC is seeking comments on the proposed regulatory framework for CGS depository interests by 31 August 2012 with the intention of finalising these arrangements in the last quarter of 2012.

Overall, the Government’s proposed approach has the advantage of leveraging off the functionality of Austraclear in the wholesale CGS market and will not involve any changes to the primary issuance of CGS by the Commonwealth. It also ensures that payments of interest and principal on CGS will be able to be paid to retail investors who are the beneficial owners of CGSs in an efficient and timely way.

Will the beneficial ownership model for the retail CGS market increase the amount of Commonwealth debt or the interest paid on this debt?

The Explanatory Memorandum states that the creation of beneficial interests in CGS will not increase the amount of Commonwealth debt nor the amount of interest and principal the Commonwealth has to pay on this debt.[39]

What protections will there be for retail investors?

The Bill makes a number of amendments to the Corporations Act to ensure investors participating in the retail CGS market are appropriately protected.

By defining CGS depository interests as securities, the Bill removes any uncertainty about how CGS depository interests should be classified for the purposes of the investor protection and market integrity measures applying to financial service providers contained in Chapter 7 of the Corporations Act.[40] As a result, most of the investor protection provisions contained in Chapter 7 will apply to financial service providers in the retail CGS market, including:

  • the need for them to be licensed and supervised by ASIC and
  • a wide range of conduct and disclosure requirements.

The Explanatory Memorandum states that the Bill ensures important rules applying to products quoted and traded on financial markets will also apply to CGS depository interests.[41]

Product disclosure statements

The product disclosure information requirements for CGS depository interests will not be the same as for other financial products. Depository nominees, as issuers of CGS depository interests will be exempt from having to provide a Product Disclosure Statement (PDS). Instead, the AOFM will be solely responsible for preparing a disclosure document for retail investors in CGS depository interests.

Further, the Government has decided that the AOFM will not have to provide a full PDS but will instead produce a tailored information statement, giving investors general information on retail CGS and specific information on the maturity date and interest coupon rate of a particular class of CGS issuance. The rationale for this approach is that:

  • retail CGS are a relatively safe and simple investment and
  • the Commonwealth Government already publishes a wealth of information on its financial situation through the Budget process.[42]

To what extent will facilitating a retail CGS market encourage the development of the corporate bond market?

While facilitating a retail CGS market supports the development of the Australian corporate bond market, it does not guarantee that a deeper and more liquid market will eventuate. The Treasurer has observed that:

Creating a large and liquid corporate bond market is a long‑term project with no quick fixes, but the Government is committed to work with the industry to encourage the development of this important market over time.[43]

To further support the development of the Australian corporate bond market, the Government is looking at ways of reducing the regulatory burdens and barriers that may impede corporate entities issuing bonds to retail investors, particularly in the areas of streamlining disclosure and liability requirements.[44] In December 2011 the Government released a discussion paper canvassing possible reforms in this area.[45]

In the absence of any regulatory burdens or barriers that may be making corporate bonds less attractive to the corporate sector as a source of funding, the development of the corporate bond market will ultimately be driven by market forces. That is, there will need to be the right mix of issuer supply and investor demand. On the supply side, a key factor will be the cost of raising corporate debt finance through the corporate bond market relative to the cost of other potential sources of funding such as raising capital in equity markets, borrowing domestically or borrowing overseas.

On the demand side, much will depend on the level of retail and institutional investor interest in corporate bonds. It has been pointed out that for retail investors, bank term deposits may already be meeting their needs for a fixed interest financial product.[46] However, the corporate bond market may become more attractive to retail investors if it can offer investors greater diversification in risk and returns in the fixed income market.

Generally, greater interest from institutional investors (such as superannuation funds) is seen as critical to developing the Australian corporate bond market. Recently there have been calls for superannuation funds to consider increasing their exposure to debt securities, reflecting concerns about the degree to which their investment portfolios are weighted towards equities.[47] Regardless of how superannuation funds may respond in the short-term, Australia’s ageing population is likely to result in greater demand for debt securities as the focus of the retirement income strategies of Australia’s baby boomers shifts from asset accumulation to wanting a secure income stream. This development is also likely to spur greater retail demand for debt securities from Australia’s growing self-managed superannuation market.

That said, commentary since the Government announced its intention to facilitate a retail CGS market suggests that generally this measure is seen as providing a necessary foundation stone for the development of a larger and more vibrant corporate bond market in Australia.[48]

Key provisions

Schedule 1—retail trade in Commonwealth Government securities

Amendments to the CIS Act

Items 1–3 of Schedule 1 to the Bill insert new definitions of ‘depository interest’, ‘depository interest registry operator’ and ‘depository nominee’ into existing subsection 3(1) to assist with the interpretation of the CIS Act as follows:

  • ‘depository interest’ means a beneficial interest in stock[49] issued by a depository nominee with the agreement of the Commonwealth
  • depository interest registry operator’ means a person who has been engaged by the depository nominee to provide key services, such as arranging payments of interest and principal to retail investors and
  • depository nominee’ means a person who, with agreement of the Commonwealth, issues to someone else beneficial interests in stock (including Treasury bonds). The depository nominee will be able to own the stock outright in which the beneficial interests are issued, or own beneficial interest in the stock and issue further beneficial interests based on those holdings.

Item 4 repeals existing section 6, which is one of two standing appropriations in the CIS Act that allows the AOFM to issue Commonwealth stocks and make necessary payments relating to this debt (such as interest and principal payments). According to the Explanatory Memorandum, section 6 is being repealed because the wording of this section is out of date.[50] In its place proposed section 13AA will be inserted by item 5. This will be the new standing appropriation in the CIS Act to allow the AOFM to issue Commonwealth stock and make payments of interest and principal on this debt. Proposed section 13AA incorporates the content of the existing standing appropriation in section 6 but expands it to include payments of principal and interest by the Commonwealth to holders of CGS depository interests.

Item 6 repeals and replaces the existing heading of section 13A so that it is clear that the section deals with ‘Costs and expenses relating to issue, sale and management of stock and depository interests’.

Item 7 adds proposed paragraphs 13A(c) and 13A(d) into section 13A of the CIS Act. This expands the scope of the existing standing appropriation in section 13A so that the Consolidated Revenue Fund is appropriated to the extent necessary for the payment of the costs and expenses incurred by the Commonwealth in issuing, selling, managing and transferring CGS depository interests. For example, it will give the AOFM the authority to pay clearing and settlement fees as well as fees charged by depository nominees and registry operators.

According to the Scrutiny of Bills Committee:

The appropriation of money from Commonwealth revenue is a legislative function. The committee considers that, by allowing the executive government to spend unspecified amounts of money for an indefinite time into the future, provisions which establish standing appropriations may, depending on the circumstances of the legislation, infringe upon the committee’s terms of reference relating to the delegation and exercise of legislative power.[51]

The Scrutiny of Bills Committee ‘expects that the explanatory memorandum to a bill establishing a standing appropriation will include an explanation of the reason the standing appropriation was considered necessary’.[52]

The Scrutiny of Bills Committee acknowledged that the explanatory memorandum did indicate that the debt issued by the Commonwealth or the payments of interest and principal for which the Commonwealth is liable, will not be increased; and that the provisions replace longstanding existing standing provisions.

Having raised those matters, the Scrutiny of Bills Committee has left the question of whether the proposed approach is appropriate to the consideration of the Senate as a whole.

Amendments to the Corporations Act

Item 8 of Schedule 1 to the Bill amends existing subsection 700(1) of the Corporations Act to exempt CGS depository interests from the scope of the definition of ‘securities’ that applies to the fundraising and disclosure requirements regulating the offer of securities in Australia under Chapter 6D of the Corporations Act. This amendment will exempt depository nominees from having to provide a prospectus when issuing CGS depository interests to retail investors.

Item 9 inserts a definition of ‘CGS depository interest’ into existing section 761A of the Corporations Act, which links the definition of CGS depository interest in the Corporations Act, to the definition contained in the CIS Act. As a result, the amendments to the Corporations Act made in the Bill will only apply to CGS depository interests issued by a depository nominee with the agreement of the Commonwealth.

Items 10 and 11 amend the definition of ‘security’ in existing section 761A of the Corporations Act to extend the scope of the definition to include CGS depository interests. These changes will ensure that retail investors in CGS depository interests will benefit from the market integrity and consumer protection provisions of Chapter 7 of the Corporations Act.

Item 12 repeals and replaces paragraph 949A(2)(c) of the Corporations Act, to ensure that when a financial adviser is giving retail investors general advice, rather than personal advice[53], concerning CGS depository interests, the adviser must warn the client to obtain a copy of each of the relevant information statements relating to the CGS depository interests before taking any final decision.

Item 13 amends subsection 1010A(1) of the Corporations Act to ensure that the relevant investor protection provisions of Part 7.9 (that is, those not relating to the PDS regime) apply to CGS depository interests including proposed Division 5C.

Item 14 inserts proposed Division 5C, containing proposed sections 1020AG–1020AL, into Part 7.9 of the Corporations Act. The new Division 5C contains the provisions about the information which must be given to clients by a ‘regulated person’ in relation to a CGS depository interest.[54] Importantly proposed section 1020AI introduces three new offences.

Proposed subsection 1020AI(1) requires a regulated person to give an information statement for a class of CGS depository interests if:

  • they provide financial product advice to a client which includes or consists of a recommendation that the client acquire a CGS depository interest of that class
  • the financial product advice is provided to the client as a retail client and
  • the financial product advice is personal advice to the client.

The first of the offences is a strict liability offence created under proposed subsections 1020AI(3)‑(4) and applies where a regulated person is required, but fails, to give a CGS information statement. The imposition of strict liability means that a fault element does not need to be satisfied, but the offence will not criminalise honest errors and a person cannot be held liable if he, or she, had an honest and reasonable belief that they were complying with relevant obligations.  A regulated person is not required to give the client a CGS information statement if the client has already received the statement or the regulated person reasonable believes that the client has received the statement (proposed subsection 1020AI(2)). The note to proposed subsection 1020AI(3) clarifies that if the defendant seeks to rely on the matters set out at proposed subsection 1020AI(2) he or she bears the evidential burden in relation to those matters. The rationale for this is that where a matter is peculiarly within the defendant’s knowledge and not available to the prosecution, it is legitimate to cast the matter as a defence. The matters in proposed subsection 1020AI(2) fall into this category. Item 17 is a related amendment, which provides that an offence against subsection 1020AI(3) is subject to a penalty of 50 penalty units.[55]

The second of the offences is an ordinary offence created under proposed subsection 1020AI(5) and applies where a regulated person is required, but fails, to give a CGS information statement as required by subsection 1020AI(1). Item 17 amends Schedule 3 of the Corporations Act so that the offence is subject to a penalty of 100 penalty units, or imprisonment for two years, or both.[56] It is appropriate for a higher maximum penalty to attach to this offence, as, in contrast to the strict liability offence under subsection 1020A(3), it will require the prosecution to prove a fault element (that is, that the defendant intended to commit the offence).

The third of the offences is an ordinary offence created under proposed subsection 1020AI(7) if a ‘financial services licensee’[57] does not take reasonable steps to ensure that an ‘authorised representative’[58] of the licensee complies with the representative’s obligations to give an information statement for a class of CGS depository interests. Item 17 amends Schedule 3 of the Corporations Act so that the offence is subject to a penalty of 200 penalty units, or imprisonment for five years, or both.[59]

Proposed subsection 1020AI(6) provides that in any proceedings against an authorised representative for an offence under subsections 1020AI(3) or 1020AI(5), it is a defence if all three of the following conditions are satisfied:

  • the licensee had provided the representative with information or instructions about the giving of information statements
  • the failure to give an information statement occurred because the representative was acting in reliance on that information or those instructions and
  • the representative’s reliance on that information or those instructions was reasonable.

As with the defence available under subsection 1020AI(2), a defendant who wishes to rely on proposed subsection 1020AI(6) bears the evidential burden in relation to those matters. Again, this is based on the fact that these matters are peculiarly within the defendant’s knowledge.

A further offence arises under proposed section 1020AJ, which provides that a regulated person must not provide an information statement about a class of CSG depository interests which is not up to date. Item 17 amends Schedule 3 of the Corporations Act so that the offence is subject to a penalty of 100 penalty units, or imprisonment for two years, or both.[60]

There is provision for retail investors to take civil action for loss or damage if they did not receive an information statement or received a different information statement from their financial adviser than the one they should have been given (see proposed section 1020AL).

In its report, the Scrutiny of Bills Committee noted that the proposed strict liability offence in subsections 1020AI(3) and (4) ‘is modelled on corresponding existing provisions in the legislation’ and that ‘the explanatory memorandum provides a detailed justification of the approach’.

In addition, the Scrutiny of Bills Committee noted that defendant bears an evidential burden in relation to the matters set out in proposed subsection 1020AI(2) and that, according to the explanatory memorandum, ‘in most circumstances it will be relatively straightforward for the defendant to prove the relevant matters’.[61]

That being the case, the Scrutiny of Bills Committee determined to make no further comment on the provisions.

Item 15 inserts proposed paragraph 1073A(1)(da) into Division 3 of Chapter 7 of the Corporations Act. This will ensure that the provisions of the Corporations Act regulating the transfer of title of certain designated securities apply to CGS depository interests. The Explanatory Memorandum notes that because of the way the law in this part of the Corporations Act is drafted an additional regulation will have to be made to ensure that Division 4 of Part 7.11, which also regulates the transfer of title of designated securities, applies to CGS depository interests.[62] Item 16 amends the note to subsection 1073E(1) to pick up the proposed expanded list of securities in subsection 1073A(1). Section 1073E allows ASIC to extend regulation to securities not otherwise covered.

Schedule 2 – Minor amendments to the CIS Act

The proposed minor amendments to the CIS Act are not related to facilitating a retail CGS market but rather are intended to streamline the day‑to‑day work of the AOFM and remove provisions that are now redundant.

Concluding comments

The Bill proposes the facilitation of trading in CGS on markets that are readily accessible to retail investors. This measure is widely seen as supporting the development of a deeper and more liquid corporate bond market in Australia.

Importantly, the creation of depository interests in CGS will not increase the amount of Commonwealth debt nor the amount of interest and principal the Commonwealth has to pay on this debt.

Members, Senators and Parliamentary staff can obtain further information from the Parliamentary Library on (02) 6277 2455 or (02) 6277 2434.



[1].       A retail investor is an individual who purchases small amounts of securities for him/herself, as opposed to an institutional investor.

[2].       Information about the Reserve Bank of Australia Small Investor Bond Facility can be viewed at: http://www.rba.gov.au/fin-services/bond-facility/

[3].      Australian Government, Competitive and sustainable banking system, Commonwealth of Australia, Canberra, 12 December 2010, p. 24, viewed 16 July 2012, http://banking.treasury.gov.au/banking/content/reports/announcement/downloads/competitive_and_sustainable_banking.pdf

[4].       W Swan (Treasurer), A competitive and sustainable banking system, media release, 12 December 2010, viewed 24 July 2012, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressrel%2F428999%22

[5].      Australian Government, Development of the retail corporate bond market: streamlining disclosure and liability requirements, Discussion paper, December 2011, p. 2, viewed 16 July 2012, http://archive.treasury.gov.au/documents/2266/PDF/Retail_Corporate%20Bonds_DP.pdf

[6].       S Bartholomeusz, ‘High time for corporate bond action’, Business Spectator, 14 December 2011, viewed 10 July 2012, http://www.businessspectator.com.au/bs.nsf/Article/Wayne-Swan-corporate-bonds-banks-debt-markets-pd20111213-PH3CX?OpenDocument

[7].       The Australian Financial Centre Forum (AFCF) was established 26 September 2008 to progress the Government’s initiative to position Australia as a leading financial services centre in the region. The AFCF is a government and industry partnership comprising: a Chairman; a panel of experts consisting of six senior financial sector representatives; the Treasury taskforce; and a reference group, which is the main consultative body and includes representatives from the peak financial sector industry associations, the state governments and Austrade.  Information about the AFCF can be viewed at: http://afcf.treasury.gov.au/afcf/content/default.asp

[8].      Australian Financial Centre Forum, Australia as a financial centre: building on our strengths, Commonwealth of Australia, Canberra, November 2009, viewed 16 July 2012, http://www.mercari.com.au/media/AFCF.pdf

[9].       Ibid., p. 39.

[10].      Ibid., p. 40.

[11].    Australian Securities Exchange, Capital raising in Australia: experiences and lessons from the global financial crisis, ASX information paper, 29 January 2010, p. 36, viewed 16 July 2012, http://www.asxgroup.com.au/media/PDFs/20100129_asx_information_paper_capital_raising_in_australia.pdf

[12].    ANZ Banking Group, Submission to Treasury, Inquiry into the Development of the retail corporate bond market: streamlining disclosure and liability requirements, 27 February 2012, p. 1, viewed 16 July 2012, http://archive.treasury.gov.au/documents/2349/PDF/ANZ.pdf

[13].      Australian Securities Exchange, Capital raising in Australia: experiences and lessons from the global financial crisis, op. cit., p. 37.

[14].      Australian Securities Exchange, ‘Greater interest in debt products’, ASX investor update, February 2012, viewed 16 July 2012, http://www.asx.com.au/resources/investor-update-newsletter/201202-greater-interest-in-debt-products.htm

[15].      W Swan (Treasurer), A competitive and sustainable banking system, media release, op. cit.

[16].    D Bradbury (Assistant Treasurer), ‘Second reading speech: Commonwealth Government Securities Legislation Amendment (Retail Trading) Bill 2012’, House of Representatives, Debates, 27 June 2012, p. 8153, viewed 18 July 2012, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22chamber%2Fhansardr%2F3e4e9532-bf3c-4623-bc6b-c0e926ad7cec%2F0027%22

[17].      Competitive and Sustainable Banking System website, viewed 24 July 2012, http://banking.treasury.gov.au/banking/content/default.asp

[18].      Selection of Bills Committee, Report No. 8 of 2012, Senate, Canberra, 28 June 2012, viewed 24 July 2012, http://www.aph.gov.au/Parliamentary_Business/Committees/Senate_Committees?url=selectionbills_ctte/index.htm

[19].      Senate Standing Committee for the Scrutiny of Bills, Alert Digest No. 8, 15 August 2012, pp. 3–5, viewed 23 July 2012, http://www.aph.gov.au/Parliamentary_Business/Committees/Senate_Committees?url=scrutiny/alerts/2012/index.htm

[20].    J Hockey (Shadow Treasurer), Address to the Australian Industry Group Annual National Forum, Canberra, 25 October 2010, viewed 23 July 2012, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressrel%2F314578%22

[21].    J Hockey (Shadow Treasurer), ‘Half shielded by covered bonds’, Business Spectator, 14 October 2011, viewed 23 July 2012, http://www.businessspectator.com.au/bs.nsf/Article/Joe-Hockey-covered-bonds-Coalition-banks-reform-pd20111014-MLQF4?OpenDocument

[22].     Australian Securities Exchange, Capital raising in Australia: experiences and lessons from the global financial crisis, op. cit., p. 37.

[23].    Australian Bankers’ Association, Submission to Treasury, Inquiry into the development of the retail corporate bond market: streamlining disclosure and liability requirements’, 15 February 2012, p. 1, viewed 23 July 2012, http://archive.treasury.gov.au/documents/2349/PDF/Australian_Bankers_Association.pdf

[24].    Abacus Australian Mutuals, Submission to Treasury, Inquiry into the development of the retail corporate bond market: streamlining disclosure and liability requirements, 14 February 2012, p. 1, viewed 23 July 2012, http://archive.treasury.gov.au/documents/2349/PDF/Abacus.pdf

[25].    Australian Financial Markets Association, Submission to Treasury, Inquiry into the development of the retail corporate bond market: streamlining disclosure and liability requirements, February 2012, p. 2, viewed 23 July 2012, http://archive.treasury.gov.au/documents/2349/PDF/Australian_Financial_Markets_Association.pdf

[26].    Explanatory Memorandum, Commonwealth Government Securities Legislation Amendment (Retail Trading) Bill 2012, p. 3.

[27].      A beneficial owner is a person recognised in equity as being the owner of shares, but who does not hold the legal title because the shares are registered in the name of another. Butterworths Concise Australian Legal Dictionary, LexisNexis Butterworths, Australia, 2004, p. 47.

[28].    W Swan (Treasurer), Developing the retail corporate bond market, media release, 13 December 2011, viewed 16 July 2012,
http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressrel%2F1292965%22

[29].      Explanatory Memorandum, p. 7.

[30].    Australian Office of Financial Management, Request for proposals: trading of Commonwealth Government Securities on financial markets in Australia, 26 June 2012, p. 5, viewed 17 July 2012, http://www.aofm.gov.au/content/request/downloads/rfp.pdf

[31].    Ibid., p. 4.

[32].    Ibid.

[33].      Explanatory Memorandum, p. 7.

[34].      Ibid., p. 12.

[35].      Ibid., p. 6.

[36].    W Swan (Treasurer), Developing the retail corporate bond market, op. cit., p. 2.

[37].    Australian Securities and Investments Commission, Retail trading in Commonwealth Government securities, Consultation paper 181, July 2012, viewed 23 July 2012, http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/CP181-published-20-July-2012.pdf/$file/CP181-published-20-July-2012.pdf

[38].      Ibid., p. 15.

[39].      Explanatory Memorandum, p. 7.

[40].    Ibid.

[41].      Ibid.

[42].      Ibid., p. 8.

[43].    W Swan (Treasurer), Developing the retail corporate bond market, op. cit., p. 1.

[44].      Ibid.

[45].      Australian Government, Development of the retail corporate bond market: streamlining disclosure and liability requirements, Discussion paper, December 2011, viewed 18 July 2012, http://www.treasury.gov.au/~/media/Treasury/Consultations%20and%20Reviews/2011/Development%20of%20the%20Retail%20Corporate%20Bond%20Market%20Streamlining%20Disclosure%20and%20Liability%20Requirements/Key%20Documents/PDF/Retail_Corporate%20Bonds_DP.ashx

[46].    J Shapiro, ‘Retail bonds: a good idea fails to fire’, The Australian Financial Review, 4 May 2011, p. 29, viewed 23 July 2012, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressclp%2F738875%22

[47].    J Kehoe, ‘Oldies’ super risk’, The Australian Financial Review, 19 March 2012, p. 1, viewed 23 July 2012, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressclp%2F1507238%22

[48].      D Ciampa and J Shapiro, ‘Tapping investors for “deep and liquid” market’, The Australian Financial Review, 13 December 2010, p. 23, viewed 23 July 2012, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressclp%2F427613%22

J Durie, ‘Good start’, The Australian, 14 December 2011, p. 40, viewed 23 July 2012, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressclp%2F1293549%22

and E Johnston, ‘Government bonds to go retail’, The Age, 29 May 2012, p. 3, viewed 23 July 2012, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressclp%2F1676198%22

[49].      ‘Stock’ is defined in subsection 3(1) of the CIS Act as: (a) stock, Treasury Bonds, Treasury Notes or other prescribed securities created under subsection 4(1), (b) stock created under subsection 4(1) as in force at any time before the commencement of Schedule 1 to the Commonwealth Inscribed Stock Amendment Act 2002, and (c) Treasury Bonds, debentures or other prescribed securities made out under subsection 51A(1) at any time before the commencement of subsection 51A(3).

[50].      Explanatory Memorandum, p. 12.

[51].      Senate Standing Committee for the Scrutiny of Bills, op. cit., p. 3.

[52].      Ibid., p. 4.

[53].      Under subsection 766B(3) of the Corporations Act, ‘personal advice’, for the purposes of Chapter 7, is financial product advice that is given or directed to a person (including by electronic means) in circumstances where (a) the provider of the advice has considered one or more of the person’s objectives, financial situation and needs (otherwise than for the purposes of compliance with the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 or with regulations, or AML/CTF Rules, under that Act), or (b) a reasonable person might expect the provider to have considered one or more of those matters.

[54].      Proposed section 1020AH provides that a ‘regulated person’ in relation to a CGS depository interest, means (a)  an issuer of the CGS depository interest, or (b) any financial services licensee, or (c) any authorised representative of a financial services licensee, or (d) any person who is not required to hold an Australian financial services licence because the person is covered by paragraph 911A(2)(j), or an exemption under paragraph 911A(2)(k) or 911A(2)(l), or (e) any person who is required to hold an Australian financial services licence but who does not hold such a licence.

[55].      Section 4AA of the Crimes Act 1914 provides that a penalty unit means $110. The maximum fine for the offence is
$5500.

[56].      The maximum fine for the offence is $11 000.

[57].      Section 761A of the Corporations Act defines a ‘financial services licensee’ as a person who holds an Australian financial services licensee under section 913B that authorises a person who carries on a financial services business to provide financial services.

[58].      Section 761A of the Corporations Act defines an ‘authorised representative’ of a financial services licensee as a person who is authorised in accordance with section 916A or 916B of the Corporations Act to provide a financial service or financial services on behalf of the licensee.

[59].      The maximum fine for the offence is $22 000.

[60].      The maximum fine for the offence is $11 000.

[61].      Senate Standing Committee for the Scrutiny of Bills, op. cit., p. 5.

[62].      Explanatory Memorandum, p. 19.

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