Save Search

Note: Where available, the PDF/Word icon below is provided to view the complete and fully formatted document
Commonwealth Government Securities Legislation Amendment (Retail Trading) Bill 2012

Bill home page  


Download WordDownload Word


Download PDFDownload PDF

2010-2011-2012

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

 

 

 

SUPPLEMENTARY EXPLANATORY MEMORANDUM

 

Amendments to be moved on Behalf of the Government

 

 

 

 

(Circulated by the authority of the

Assistant Treasurer, the Hon David Bradbury MP)



Table of contents

Glossary.............................................................................................................. v

General outline and financial impact............................................................ 1

Chapter 1               Explanation of Amendments............................................. 3

Chapter 2               Statement of Compatibility with Human Rights.............. 7

 

Do not remove section break.



The following abbreviations and acronyms are used throughout this explanatory memorandum.

Abbreviation

Definition

AOFM

Australian Office of Financial Management

ASX

Australian Securities Exchange

Bill

Commonwealth Government Securities Legislation Amendment (Retail Trading) Bill 2012

Amending Bill

The amendments being moved by the Government to the Bill.

CGS

Commonwealth Government Securities

CIS Act

Commonwealth Inscribed Stock Act 1911

Corporations Act

Corporations Act 2001

DI

Depository interest

DN

Depository nominee

Williams case

Ronald Williams v The Commonwealth of Australia & Ors [2012] HCA 23



Outline

On 27 June 2012, the Assistant Treasurer, the Hon David Bradbury MP introduced the Commonwealth Government Securities Legislation Amendment (Retail Trading) Bill 2012 into Parliament.

The Commonwealth Government Securities Legislation Amendment (Retail Trading) Bill 2012 (the Bill) amends the Commonwealth Inscribed Stock Act 1911 (the CIS Act) to facilitate trading of beneficial interests in Commonwealth Government Securities (CGS) on financial markets in Australia that are accessible to retail investors.  The Bill also contains amendments to the Corporations Act 2001 (the Corporations Act) requiring financial advisers to provide a prescribed information statement to retail clients when they give them personal advice about investing in CGS.  Finally, a number of minor amendments are made to the CIS Act to facilitate the Australian Office of Financial Management’s (AOFM) daily administrative work and to remove some redundant provisions.

The Amending Bill inserts a provision in the Bill (and therefore in the CIS Act) authorising the Treasurer to enter into arrangements necessary for the issue, trading and management of CGS, including depository interests (DIs) in CGS.  This provision addresses the issues raised by the decision of the High Court in Ronald Williams v the Commonwealth of Australia & Ors [2012] HCA 23 (the Williams case).

The Amending Bill also corrects an error in the proposed definition in the Bill of a ‘depository nominee’ to ensure that an entity will not fall outside of the definition merely as a result of retaining a residual beneficial interest in CGS subsequent to issuing DIs in relation to those CGS. 

Date of effect The amendments will take effect on the day after the Act receives the Royal Assent.

Proposal announced The reforms effected by the Bill were announced in a media release titled ‘A competitive and sustainable banking system’ by the Deputy Prime Minister and Treasurer dated 12 December 2010 and included in the 2011-12 Budget.



 

Financial impact :  The Amending Bill has no financial impact.  Total f unding of $11.2 million for implementing the whole measure was provided to the AOFM in the 2011-12 Budget and the costs have been included in the forward estimates as follows: 

2010-11

2011-12

2012-13

2013-14

2014-15

nil

$0.9 million

$3.5 million

$3.4 million

$3.4 million

Human rights implications :  The Amending Bill does not raise any human rights issues.  See Statement of Compatibility with Human Rights — Chapter 2.

Compliance cost impact The Bill has a minor compliance cost impact on financial advisers due to the requirement to provide the prescribed information statement for retail CGS when giving personal advice.  The Amending Bill is considered to have no impact on business or the not-for-profit sector.

Summary of regulation impact statement

Regulation impact on business

Impact The Office of Best Practice Regulation has confirmed that the Amending Bill does not require a regulation impact statement because it only has a minor impact on business (Office of Best Practice Regulation reference ID 13950).

Do not remove section break.



Chapter 1          

Explanation of Amendments

Outline of chapter

1.1                   The Bill amends the CIS Act to facilitate the trading of beneficial interests in CGS on financial markets in Australia that are accessible to retail investors. 

1.2                   The Amending Bill corrects an error in the proposed definition of ‘depository nominee’ in the Bill.  It also inserts a provision authorising the Treasurer to enter into arrangements necessary for the issue, trading and management of CGS, including CGS DIs.  This provision addresses issues raised by the decision of the High Court in the Williams case.

Context of amendments

Definition of ‘depository nominee’

1.3                   It is intended that beneficial interests in CGS will be traded and settled by retail investors in a manner that is different from the practices in the wholesale market.  In particular, CGS traded in the wholesale market are currently registered and settled through the Austraclear System, which is the Australian Securities Exchange’s (ASX) clearing and settlement facility for debt securities traded in the over-the-counter market and on professional financial markets.  The Austraclear System is not equipped to deal with retail investors, and it is therefore necessary to use a different system for the settlement of trading by retail investors.

1.4                   Following consultation with potential market operators, the Government has decided to consider proposals based on an ‘indirect’ or ‘beneficial ownership’ type of trading model.  Beneficial ownership models are already in place for trading CGS on wholesale markets, and are used on retail financial markets for financial products that cannot be directly traded on a financial market.  Examples are bearer securities, securities held in another settlement and depository system or foreign-listed shares.

1.5                   Under this model, retail investors will not acquire the legal ownership of the CGS.  Instead, a new financial product called a Depository Interest (DI) will be created which is linked to the CGS.  Ownership of DIs will provide retail investors with beneficial ownership of the underlying CGS which will provide them with the right to receive periodic interest and principal payments due on the underlying CGS.  DIs will be governed by the financial market operator operating rules and not the CIS Act. 

1.6                   Legal ownership of the underlying CGS will remain with the wholesale securities depository.  In a second step, DIs will be created by a depository nominee (see below) and issued over some of the underlying CGS.  The DIs will be able to be traded by retail investors on a financial market in a manner similar to shares, with the trades settled through clearance and settlement facilities.  There will be a Registry showing ownership of DIs which will be updated whenever a transfer of DIs occurs.

1.7                   The DIs will be issued by a legal entity known as a depository nominee (DN).  The DN is a nominee company with the function of issuing the DIs to the beneficial owners, that is, the retail investors. 

1.8                   Item 3 in Schedule 1 of the Bill inserts a new definition of ‘depository nominee’ into subsection 3(1) of the CIS Act.  The Amending Bill seeks to correct an error in this definition.

1.9                   As originally contained in the Bill, the definition of ‘depository nominee’ limits the DN to an entity that either:

•                is the holder of the legal title to CGS and had transferred the entirety of the beneficial interest to the DI holders; or

•                was the holder of a beneficial interest in CGS (with a third party holding the legal title), but had issued the entirety of that beneficial interest to the DI holders. 

1.10               This does not account for circumstances where an entity transfers most but not all of its beneficial interest to DI holders.  In such circumstances a DN retaining certain residual beneficial interests in CGS, for example to assert payment of coupon and interest amounts on behalf of the DI holders, would fall outside the definition.  The Amending Bill expands the definition of ‘depository nominee’ in the Bill to account for circumstances where a DN retains residual beneficial interests in CGS.

Williams case and consequences

1.11               In the Williams case a majority of the High Court held that legislative authority is necessary for certain spending.  The authority previously sought in the Bill extends mainly to the making of payments in relation to CGS DIs.  It has become clear that in order to commence retail CGS trading, the Commonwealth will have to enter into a range of arrangements with the ASX, registry operators and other parties.

1.12               The Amending Bill ensures that expenditure in connection with arrangements entered into by the Commonwealth in relation to the issue, trading and management of CGS, including CGS DIs, is legislatively authorised.

Detailed explanation of new law

Commonwealth Government Securities Legislation Amendment (Retail Trading) Bill 2012

1.13               The definition of ‘depository nominee’ in Item 3 of the Bill is amended to include persons who retain a beneficial interest in CGS in which they have issued other beneficial interests.  This allows a DN to issue beneficial interests in CGS in the form of DIs to retail investors, while still retaining certain residual beneficial interests in the same CGS.  [Item 1]

1.14               The Treasurer acting on behalf of the Commonwealth is given the authority to enter into arrangements that relate to a range of matters, including the issue, management or transfer of CGS and CGS DIs, trading of CGS and CGS DIs on financial markets, and a number of necessary support services such as registry or clearing and settlement services.  [Item 2]

1.15               It is desirable as a practical matter that the Treasurer should be able to delegate this authority to officials in the Department to facilitate the day-to-day handling of the work arising in relation to these arrangements.

1.16               Section 51JA in the CIS Act, as amended by the Bill, allows the Treasurer to delegate certain powers as specifically listed to designated classes of persons within the Department.  The power to enter into the arrangements described in paragraph 1.14 is inserted into the list of powers the Treasurer can delegate under amended section 51JA.  [Item 3]

Do not remove section break.





Chapter 2          

Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Commonwealth Government Securities Legislation Amendment (Retail Trading) Bill 2012

2.1                   The Bill and the Amending Bill are compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview

2.2                   The Commonwealth Government Securities Legislation Amendment (Retail Trading) Bill 2012 (the Bill) amends the Commonwealth Inscribed Stock Act 1911 (the CIS Act) to facilitate  trading of beneficial interests in Commonwealth Government Securities (CGS) on financial markets in Australia that are accessible to financial investors.  The Bill also contains amendments to the Corporations Act 2001 requiring financial advisers to provide a prescribed information statement to retail clients when they give them personal advice about investing in CGS.  Finally, a number of minor amendments are made to the CIS Act to facilitate the Australian Office of Financial Management’s daily administrative work and to remove some redundant provisions.

2.3                   The Amending Bill inserts a provision in the Bill (and therefore in the CIS Act) authorising the Treasurer to enter into arrangements necessary for the issue, trading and management of CGS.  This provision addresses the issues raised by the decision of the High Court in the Williams case.  The Amending Bill also corrects an error in the definition of ‘depository nominee’ in the Bill to ensure that an entity will not fall outside the definition merely due to retaining some residual beneficial interest subsequent to issuing DIs in relation to CGS. 

Human rights implications

2.4                   The Bill may raise human rights issues because it contains a number of offences where the evidentiary burden is reversed.  However, to the extent that it may limit those rights, those limitations are reasonable, necessary and proportionate.  The Amending Bill does not affect these provisions.

Conclusion

2.5                   The Amending Bill is compatible with human rights as it does not affect any provisions in the Bill that may affect human rights.