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Monday, 29 October 2012
Page: 12293


Mr CIOBO (Moncrieff) (18:58): I rise to speak to the Corporations Legislation Amendment (Derivative Transactions) Bill 2012 and the government's amendment to it. Once again we find ourselves in the situation where the government is amending its own legislation. For members of the coalition, we are of course welcoming of the fact that the government has picked up on the very sound recommendations that were put forward by coalition members of the Parliamentary Joint Committee on Corporations and Financial Services. I am pleased that the Assistant Treasurer at the table has taken that advice on board and that the government is, once again, amending its own legislation to achieve a good coalition outcome.

Others in this debate have gone through at some length about what this particular bill and the amendment seek to do. In summary it deals with what is referred to as OTC, which stands for over-the-counter derivatives.

This is a specific financial class of asset whereby the value of a derivative is derived with reference to an underlying commodity price or to a multitude of different reference points. But, fundamentally, it comes to the issue that OTC derivatives can, in some respects, be fairly opaque. Because of their opaque nature, and in some instances their being a consequence of proprietary software and proprietary trading platforms, there is an inability for financial regulators to properly scope the extent to which derivatives are having an impact in the market or indeed the extent to which there may be liabilities or a degree of exposure surrounding OTC derivatives.

The shadow Treasurer very kindly made reference to some of my personal involvement in OTC derivatives and indeed that of my spouse. From my perspective, having had direct exposure to dealing with OTC derivatives, they are a financially risky tool. They are a tool that does require a fairly significant amount of background knowledge and experience and they certainly are not something that, I believe, should be readily available at a retail level. Having said that, they are yet another form of financial market operation. They are another product in the market place and, in many respects, I think it is a case, from my particular philosophical point of view, of caveat emptor. I believe that those that seek to be involved in all sorts of OTC derivative trading need to be aware of the pros and cons, the risks and rewards that are associated with it. If there is one clear fundamental point that can never be escaped, it is that there is a direct relationship between risk and reward.

I would like to pick up on some of the points the previous speaker made in this debate. The previous speaker commented that in many respects the predominant cause of the GFC was there was not an ability to measure the size of the derivatives market and that was in effect what gave rise to the need to have this legislation—in parallel obviously with the decisions of the G20. I think it is worth making very clear that that simply is an incorrect assertion, completely and utterly incorrect. To claim that the GFC was a consequence of financial derivatives really, in my view, betrays a complete ignorance about what actually occurred with the GFC and indeed the housing bubble that took place not to mention, in a capital flushed world as it was then, the fact that parties, counterparties and transactions lost complete sight of the underlying value of assets and indeed the very relationship I spoke of—that is, of risk and reward.

Certainly I support completely the notion that there ought to be greater transparency with respect to OTC derivatives. I certainly support the importance of making sure that there is as much as possible clarity around counterparty risk and about the risks of those involved in OTC derivatives. But to sheet home the GFC was in some way hanging upon this legislation and that had this legislation existed then the GFC would not have occurred, I think, is simply an incorrect statement to make and it is worth making that very clear.

This legislation does provide powers to regulators and to the responsible minister to prescribe certain classes of derivatives as warranting more formalised arrangements for trading or reporting or clearing. In addition, a derivatives transaction role may in turn be issued by ASIC to establish one or more mandatory obligations for reporting, clearing or execution for participants transacting in this prescribed class of derivatives. Any rule must receive the consent of the minister before taking effect. The rules and any other technical features of the scheme may be further limited by regulation and indeed the new licencing regime will be introduced for a new kind of financial infrastructure entity trade repositories.

What is clear is that this is not going to stymie, I believe, the creation of OTC derivatives. It is not going to stymie financial innovation when it comes to the various products that are embraced by the derivatives market because no doubt we are still finding them out. There are still new approaches that are being adopted. I think that this kind of financial innovation is to be applauded. Notwithstanding that, it is good that this provides a legislative framework to have greater clarity for specific prescribed classes of OTC derivatives where it is appropriate to do so in the minister's opinion.

Clearly there was a major problem with respect to the national electricity market and electricity derivatives. I am pleased we have got the situation now where the government is amending the legislation with respect to the electricity market. I want to congratulate the coalition members of the Parliamentary Joint Committee on Corporations and Financial Services who did great work in working with, for example, the National Generators Forum on that particular issue that arose as a consequence of this legislation.

As coalition members, we support the legislation and we support the amendment. We believe more work should have been done upfront to address some of the concerns that were raised by, for example, the National Generators Forum. It is important to not create too much regulation or compliance, which, ultimately, will stifle innovation for financial products. By the same token, more transparency and more awareness of risks, counterparty risks and reinforcing the need to understand there is always the relationship between risk and reward, which is perhaps even more highly pronounced in a highly leveraged transaction like an OTC derivative product, is therefore a step in the right direction.