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Monday, 29 October 2012
Page: 12295

Mr RIPOLL (OxleyParliamentary Secretary to the Treasurer) (19:05): I present a supplementary explanatory memorandum to the bill. I would like to thank honourable members who took part in the debate on the Corporations Legislation Amendment (Derivatives Transactions) Bill 2012. Australia's financial system is robust and stable and has withstood the shocks of the global financial crisis far better than most other developed countries. However, that does not mean that we cannot take steps to further safeguard the safety of our financial markets. Improving the transparency and risk management of over-the-counter derivative markets is one way in which the government intends to achieve this. This bill implements the G20 commitments to reform the OTC derivatives market that Australia and other G20 nations agreed to in the wake of the global financial crisis. The commitments are intended to address the structural deficiencies in OTC derivatives markets that were revealed in the wake of the GFC and the systemic risks that those deficiencies can pose to wider financial markets and the real economy.

In most countries, these structural deficiencies contributed to the build-up of large and insufficiently risk managed counter party exposures between some market participants in advance of the global financial crisis and to the lack of transparency about those exposures for market participants and regulators. This bill allows for industry led solutions driven by appropriate regulatory incentives to be the primary method of increasing the use of centralised infrastructure with respect to derivatives transactions. However, the bill also establishes laws that allow for mandated outcomes where required to ensure the adoption of acceptable industry practices within a timeframe that is consistent with the international implementation of the G20 OTC commitments.

The framework in the bill is flexible enough to enable Australia's financial regulators to work with their international counterparts to ensure a unified approach to the regulation of global OTC derivative markets. The amendments introduced today address the concerns of the electricity wholesalers and retailers that limitations on the use of over-the-counter derivatives may impact the effective operation of the underlying national electricity market. While no final decision has been made about the classes of derivatives that must be centrally cleared, traded on a platform or reported to trade repositories, the government has no plans to make rules relating to the energy sector. However, it is important that electricity derivatives be included in the legislative framework. The terms of the bill do not pre-empt any decision regarding the application of any requirements to particular markets.

The amendments to the bill will ensure that the energy sector is fully consulted prior to any obligation being imposed on the sector. The consultation will involve the relevant minister, the equivalent regulatory agencies and regulatory bodies with responsibility for the underlying physical market in addition to the requirements for public consultation that are already contained in the bill.

Specifically, the amendments to the bill will create a requirement that both the minister and ASIC have regard to the effect on the underlying physical market prior to making a determination mandating a commodity derivative or making a derivative transaction rule. Under this process, non-Treasury ministers and agencies will be required to be consulted in relation to proposals that impact upon their portfolio responsibilities. Where appropriate, the agreement of the ministers whose portfolio responsibilities are impacted will need to be obtained—for example, the agreement of the Minister for Resources, Energy and Tourism in the case of the energy sector.

I want to take this opportunity to restate the government's earlier commitment to ensuring that any decision taken by the minister in relation to either the making of a regulation or consenting to an ASIC rule will also involve the Minister for Resources, Energy and Tourism where that decision relates to the energy sector. Furthermore, regulations under the legislative framework, which will be exposed for consultation shortly, will provide electricity regulators and bodies with a formal consultative role in the mandating of any possible requirements where appropriate.

Several processes are currently underway that are directly relevant to the use of OTC derivatives in the energy market. The Australian Energy Market Commission has been asked to provide advice to the Standing Council on Energy Resources on the resilience of the financial relationships and markets that underpin the operation of the national energy market. On 8 June 2012, the Australian Energy Market Commission published an issues paper initiating public consultation on the development of this advice. The derivatives market assessment, which is being conducted by the Council of Financial Regulators, will also inform any decisions in relation to electricity derivatives, not merely those in relation to clearing and execution requirements but also those in relation to trade reporting requirements. The first report from the council is expected shortly. No decision to impose mandates on the electricity sector will be made in relation to electricity derivatives prior to the conclusion of these processes.

In summary, this bill provides the framework to allow the government and financial regulators to implement requirements that improve risk management in the OTC derivatives market in a flexible way, taking account of ongoing analysis of market developments by Australia's financial regulators and in coordination with other countries. These measures are important to ensure the ongoing stability of Australia's financial system by creating the regulatory tools necessary to ensure transparency and efficiency in the OTC derivatives market. I commend this bill to the House.

Question agreed to.

Bill read a second time.