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Monday, 29 October 2012
Page: 12289


Ms O'NEILL (Robertson) (18:43): I note the very lovely manners there of the member for North Sydney, with his pleading request for a determination of ASIC and APRA to make sure they do not overregulate. Perhaps it is very timely at this point that I identify to the House that this matter is arising because there was a failure in regulation that was so profound that it led to the collapse now known as the GFC. So this delicate balance between careful regulation and overregulation is a midway point that we must seek with great endeavour to ensure the integrity of the market and people's trust in the market.

Following the collapse of the subprime mortgage market in the United States in August 2007, the IMF reported that the world economy was entering a major downturn. The GFC, which followed, prompted calls for financial regulators to seriously look at and review the sort of framework that existed at the time and which underpinned both domestic and global economies. We know that one of the main causes of the GFC was the rapid growth of a highly unregulated derivatives market.

It is in that context that this legislation comes, as our national response to a request from an international body, to make sure that we pull our weight in terms of cleaning up that unregulated space. The International Organisation of Securities Commissions noted that the GFC was a moment that highlighted a severe lack of transparency in the over-the-counter derivatives market. Improving this lack of transparency has been the focus of OTC derivative reforms since that time.

In response to the GFC, the G20—an extremely important gathering that happens on an irregular basis, but ensures that we have conversations at the highest level, through advanced economies, to make sure that we maintain probity—noted the potential for trade repositories to reduce the opacity of the over-the-counter derivatives market. In 2009 the G20 agreed to progress measures to strengthen the international financial regulatory system. The measures they included were intended to increase the transparency, to reduce the risk attached to the OTC derivatives market.

The G20 continues to agitate in this space, to reaffirm and refine its commitment to its over-the-counter market reforms and it has encouraged all countries in the G20 grouping to put in place the very much required legislation and subsequent regulation that will enable each country or group of countries to meet the G20 commitment to central clearing. This has been a commitment that Australia has undertaken, and with determination to fulfil our international obligations, and we have indeed begun the journey. This piece of legislation is a very good example of how we are attempting to honour that commitment.

As a G20 member Australia is absolutely committed to implementing the derivative market reforms and since the G20 announcement in 2009 Australia's implementation has been under consideration by Australian regulators. The Council of Financial Regulators issued its final report in March 2012 and recommended that Australia do three things. The first was trade repositories. The council recommended that the introduction of a legislative framework would enable the imposition of mandatory reporting requirements for certain projects. The council also recommended reporting entities be authorised to report to offshore trade repositories, provided that certain conditions were met. Conditions would include that Australian regulators should access relevant data collected by offshore trade repositories. It was also concluded that cross-border activity poses significant jurisdictional oversight challenges, which need to be given careful consideration in the developing of reform proposals. This last comment about cross-border activity is quite significant in the debate and I will put forward some of the views regarding the electricity sector, which was the focus of our inquiry in the recent PJC inquiry held in Sydney.

On clearing arrangements, the Council of Financial Regulators noted that moving to central clearing is a significant change for current market participants and signalled their preference for the transition to CCP to be driven by economic factors rather than mandatory requirements. To ensure the transition occurred within an appropriate time frame the council concluded that it was appropriate there be a capacity to mandate central clearing, if necessary. The council concluded that not all OTC derivatives would be centrally cleared but transactions should be robustly risk managed. That was their assessment and certainly that is where we are moving with this legislation. On trade execution, the council recommended that primary legislation allow for rules regarding trade execution to be developed through subordinate legislation. In essence, the legislation that is before the House meets all of those requirements, both on an international level and on a practical, local level in response to the advice from the Council of Financial Regulators.

In addition to addressing Australia's G20 commitments regarding the reporting of over-the-counter derivatives, the amendments we are putting forward also provide a high degree of flexibility to facilitate the adjustment of Australia's over-the-counter derivative requirements in response to the international regulatory developments. The bill will amend the Corporations Act 2001 to implement a legislative framework that would allow the operational detail of the new over-the-counter derivatives scheme to be largely established by subordinate legislation—that is, the bill would not introduce new over-the-counter derivative transactions but would introduce a framework under which obligations may be imposed through subordinate legislation and regulatory rules. This was cause for considerable debate at our hearing in Sydney, when the electricity sector was particularly well represented and people put forward views about their particular industry and how these rules might impact on them.

Schedule 1 of the bill amends the Corporations Act to promote graduated measures, to respond proportionally to managing risk in Australian OTC markets, and delegates the authority for such rule-making powers to the responsible minister and ASIC. As the member for North Sydney said in his closing comments, the committee, the PJC, recommended in particular that, in response to the energy sector, the Minister for Resources and Energy be consulted prior to the making of regulations, the mandating of derivatives or the consent to an ASIC rule. This is critical differentiation and acknowledgement of the particular concerns that were raised by the energy sector during our hearing. I am very pleased that we were responsive to this sector while, at the same time, genuinely honouring, with integrity, our commitment to the G20 reforms.

Another important item in the bill is the restrictions and the requirements that rules may impose. Proposed subsection 901A(8) will effectively prevent derivative transaction rules from applying retrospectively. In the explanatory memorandum of the bill that is made extremely clear—the derivative transaction rules do not impose requirements retrospectively and they are limited in the obligations they can impose prospectively in relation to transactions entered into prior to their creation.

In particular, with regard to the electricity sector, I think it is important to acknowledge the significant input from that sector. I would like to summarise some of the views regarding the provision of this bill and explain the recommendations that have now formed part of the consideration by the government and, I understand, the amendment that is before us today.

Three areas of concern were identified by the participants, firstly, exercise of the delegated power by the minister, secondly, the safeguards to ensure proper exercise of delegated authority and, thirdly, arguments put by the electricity sector that they should be exempted from the over-the-counter regulatory framework. I can say that the submitters generally and genuinely approved of the objectives of the G20 over-the-counter derivatives reforms. One particular submitter, d-cyphaTrade, commended the introduction of the legislation to implement the G20 reforms in the Australian market. The Australian Financial Markets Association, AFMA, submitted that industry supports international regulatory coordination and endorsed the passage of the bill. While they were not particularly supportive of the proposed application of OTC reforms to the national electricity market, representatives of the electricity sector certainly acknowledged that the bill does, indeed, satisfy Australia's requirements to provide a framework for Australia to fulfil our G20 commitments to improve the operation of the derivatives market. Importantly the submissions to the committee supported the timeframe in which this is being implemented. It was acknowledged that a commencement date at the end of 2012 is necessary to ensure that Australia fulfils its G20 obligations. Further, AFMA submitted that the draft legislation was required to promote parity between Australian markets and international markets and, therefore, vital in creating a level playing field for Australian based businesses.

In terms of the nature of the electricity sector's concerns with the bill, when pressed, we received pretty clear evidence from the National Generators Forum about their concerns. They said:

The nature of the legislation provides the power to the minister to direct ASIC to inquire into the need for regulation of a particular type of derivative and see that as a fairly quick response to result in ASIC concluding that there may be a need for regulation of that particular derivative and see at this stage that legislation being drafted is far broader than the policy it was intended to achieve. So we would like to see that this legislation has minimal effective regulation for the policy principles it is seeking to achieve, without any concern having been raised around electricity derivatives specifically. It would not seem appropriate that legislation covering electricity derivatives would be introduced and passed by parliament.

They were very clear that they had some concern about things moving forward. ESAA also gave a response, when pressed, about the nature of their concern with the bill. Importantly they put the historical framework in place in the evidence when they said:

... we are subject to a whole range of inquiries at the moment, some of which may lead to further regulations being imposed on the industry and our experience has often been that many such inquiries and many such subsequent regulations have been carried out possibly in response to political issues, rather than sound underlying policy drivers, and that from time to time they have been carried out with limited or insufficient consultation. So we are perhaps predisposed to be very wary of even the possibility of additional regulation on the sector. I would also observe that the matter could be equally well considered in reverse, and that if the government has no plans to regulate the sector there would seem to be little harm to be done by exempting the sector.

While those points were put on the record, I need to acknowledge that not all of the submitters shared that view. Certainly it was clear in evidence before the committee that the government does not intend to prescribe the electricity sector as a class of derivatives to which to the new OTC derivatives framework would apply. Indeed we made a recommendation, which I am pleased to see the government has taken up, to indicate that any plan to approach the electricity sector would involve the express engagement and deliberation by the relevant minister.

In conclusion, I think that Treasury made very, very clear argument about why it is important that this framework is adopted and that the energy sector remains within it, albeit with the overriding observation of the minister. The bill establishes the legislative underpinnings of what will be an ongoing process. Over time reassessments may occur in response to a changing regulatory or marketing environment. The appropriateness of any regulatory approach that has to be adopted may be reassessed and adjusted accordingly. This bill sets up a regime that does not merely reflect industry practice or regulatory arrangements at a point in time. Although the electricity derivative market, based on information currently available, is traded largely between electricity generation transmission and retailing entities, this may change in the future. It is therefore important to have the capacity to better understand and respond to any change in the market for electricity derivatives.

I conclude my comments by saying that this is a sound piece of legislation which provides a framework upon which regulation will build in consultation with the sector.