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Wednesday, 4 June 2008
Page: 4382

Mr BOWEN (Minister for Competition Policy and Consumer Affairs, and Assistant Treasurer) (9:08 AM) —I move:

That this bill be now read a second time.

The Commonwealth Securities and Investment Legislation Amendment Bill 2008 will strengthen the efficient operation of the Treasury bond market by increasing Treasury bond issuance and extending the collateral accepted for securities lending of these bonds.

It also provides for the safe investment of the proceeds of increased issuance in conjunction with management of the government’s cash balances, using a wider range of high quality investment instruments than at present.

These measures will help maintain the role played by Treasury bonds in the smooth functioning of Australia’s financial markets.

Issuance of Treasury bonds

The government’s commitment to strong fiscal discipline means that there is no need to issue debt securities to finance spending.

However, a liquid Treasury bond market plays an important role in the Australian financial market.

The Treasury bond and Treasury bond futures markets are used in the pricing and hedging of a wide range of financial instruments and in the management of interest rate risks by market participants.

They thereby contribute to a lower cost of capital in Australia.

Without these markets, the financial system would also be less diverse and less resilient to the shocks that can emerge from time to time.

This has been demonstrated over recent months, when these markets provided important anchors for Australia’s financial system as it responded to the impact of credit and liquidity concerns sparked off by the subprime housing crisis in the United States.

The government is committed to ensuring that the Treasury bond market continues to operate effectively and therefore play this important role in the Australian financial market.

Following consultations with market participants about the adequacy of the volume of Treasury bonds on issue, the government has decided to increase Treasury bond issuance.

The volume of fixed coupon Treasury bonds on issue is currently around $50 billion.

It has been around this level for the past five years.

Other Australian financial markets have grown substantially over this period, as has the size of the Australian economy.

Reflecting these trends, the demand for Treasury bonds has also grown.

Over recent months, demand for the bonds has intensified due to the strength of the Australian economy and exchange rate, together with global credit concerns that have increased the demand for high-quality securities.

As a result, the Treasury bonds available on issue have become more tightly held and it has become more difficult for dealers to obtain some lines of stock and maintain an active market in them.

Some increase in their issuance is needed for the market to continue to operate effectively.

This bill provides a new standing authority for borrowing by the issue of Commonwealth government securities, subject to a limit on the total volume of securities on issue at any time not exceeding $75 billion.

This will allow an increase in the volume of fixed coupon Treasury bonds on issue by around $25 billion over their current level.

The amount and timing of future issuance will depend on market needs.

In 2008-09 the government will add around $5 billion to the Treasury bond issuance of $5.3 billion that was already planned and detailed in the 2008-09 budget.

The additional issuance will be targeted at bond lines that are in the shortest supply in the market.

The government will continue to monitor market conditions to determine whether further issuance is required.

Any future increases within the overall $75 billion ceiling will be announced by the government and implemented by a direction tabled in both houses of parliament.

The government’s decision to increase Treasury bond issuance at this time is consistent with the decision of the previous government, announced in the 2003-04 budget, to maintain the market for Commonwealth government securities.

In announcing that decision, the previous government noted that this would entail ensuring sufficient securities remain on issue to support the Treasury bond futures market.

The increased issuance of Treasury bonds will not adversely affect the government’s overall financial position since the increase in bonds on issue will be offset by an increase in financial assets on the government’s balance sheet from the proceeds of the additional issuance.

The returns on these assets will also offset the interest costs from the increased issuance.


The proceeds from the increased issuance will be managed and invested by the Australian Office of Financial Management in conjunction with its present cash management activities.

The office has experience and expertise in managing fixed interest financial assets.

At present the office invests surplus Commonwealth cash in term deposits with the Reserve Bank of Australia.

The bill will extend the range of eligible investments that the Treasurer can make under the Financial Management and Accountability Act to include investment grade debt securities, and provide for the Treasurer to give directions to delegates on classes of authorised investments and matters of risk and return.

However, the bill provides that the Treasurer must not give a direction that has the purpose, or is likely to have the effect, of requiring delegates to invest in a particular company, business or entity.

This is to ensure that investment decisions are based on sound financial criteria.

Securities lending

The Australian Office of Financial Management operates a securities lending facility to facilitate the efficient operation of the Treasury bond market.

This facility allows financial market participants to borrow particular Treasury bonds for short periods when they are not readily available from other sources.

It thereby helps bond market intermediaries to trade and make two-way prices for all Treasury bonds. Collateral is required, and a fee is charged.

Currently, when seeking to borrow, other CGS is required as collateral.

This has constrained access to the facility when such securities have been in short supply.

Following consultations with financial market participants the government has decided to allow a wider range of collateral to be accepted by the facility.

At present, the securities lending facility operates using the Treasurer’s investment powers under the Financial Management and Accountability Act.

The bill provides a separate authority for the Treasurer to enter into securities lending arrangements for the loan of CGS.

The bill requires that collateral must be received for any securities lending and lists collateral that may be accepted, including cash and investment grade securities.

The bill requires the Treasurer to give a direction on the kinds of collateral that may be taken from within the categories listed in the bill.

The list is sufficiently wide to cover the same assets as the Reserve Bank of Australia currently accepts as collateral in its market operations.


These various measures will strengthen the markets for Treasury bonds and the futures contracts that depend on them.

They will thereby contribute to the effectiveness and efficiency of Australia’s financial markets more broadly and to the resilience and robustness of our financial system.

These measures demonstrate the government’s determination to ensure the efficient operation of Australia’s financial markets.

Further details on the changes outlined in the bill are contained in the explanatory memorandum.

I commend this bill to the House.

Debate (on motion by Mrs Bronwyn Bishop) adjourned.