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Wednesday, 25 February 1987
Page: 683

Mr ROBERT BROWN(12.04) —The Australian Stock Exchange and National Guarantee Fund Bill 1987 that we are considering has two essential purposes. The first is to provide legislative support for a reorganisation of stock exchanges in Australia to establish a single national stock exchange which will be known as the Australian Stock Exchange Ltd-or as the abbreviation `ASX Ltd'-with each of the six current capital city exchanges as its subsidiaries. The second purpose is to create a national guarantee fund which will consist of the pooled assets of the existing fidelity funds operated by the separate capital city exchanges and will provide, in the process, greater protection to investors in respect of failure of contracting parties to meet their transaction obligations or in respect of dealer insolvency.

The Attorney-General (Mr Lionel Bowen) has indicated that the Bill has met with the approval of the Ministerial Council for Companies and Securities. In addition, I think it is important to understand that the initiative for these changes came from the stock exchange itself and from participants in stock exchanges throughout Australia. I will have more to say about that shortly.

In general, the advantages of these proposals are that the share market investors will benefit from the contract guarantee and the insolvency provision of the Guarantee Fund. The capital market is expected to become more efficient; it almost certainly will. It will become more co-ordinated, it will become more centralised and it will become more capable of doing, at a national level, the types of things that are expected of a highly organised, efficient, integrated, co-ordinated stock exchange system of the kind that this legislation will put into place. It will also ensure the allocation of excess funds from the Guarantee Fund to national development purposes of the kind that have been outlined. The Australian Stock Exchange Ltd will be incorporated in the Australian Capital Territory by this Bill and will be deemed to be a body corporate limited by guarantee under the Companies Act 1981. The existing capital city exchanges will become its wholly owned subsidiaries and the members of those exchanges will cease their membership and become members of this new national body. ASX Ltd will be responsible for listing, and all listing on the main board will be a listing on ASX Ltd. Accordingly, listing agreements will be between ASX Ltd and the listed company. It has been indicated by other honourable members as well that the State subsidiaries will remain wholly responsible for their second board, options and futures markets.

The second main provision of the legislation is the establishment of the National Guarantee Fund. The main features of that aspect of the Bill are to establish the National Guarantee Fund to replace existing fidelity funds maintained by each capital city stock exchange and to transfer all the assets and liabilities of those existing fidelity funds to the new National Guarantee Fund. The essential differences between the protection under the National Guarantee Fund and that which is available under the existing fidelity fund arrangements are that a person's right to make a claim on the Guarantee Fund will not depend on proof of defalcation or fraud by a broker, there will be one central fund rather than six separate funds, and a person will be able to claim directly against the Guarantee Fund in respect of a dealer insolvency. I think this legislation and the purposes to which it seeks to give effect will probably be the most important changes that have taken place in the capacity of the Australian Stock Exchange mechanisms since the stock exchanges first started to operate in the original Australian colonies.

In December 1985 a very historic meeting took place in Sydney at which the boards and the committees of all six Australian stock exchanges agreed to the formation of a single national exchange. This agreement was subsequently ratified by the membership of all exchanges and, as I have indicated, it was subsequently endorsed by the Ministerial Council-the representatives of the Attorneys-General of each of the six Australian States, together with the Attorney-General of the Commonwealth. This legislation now gives effect to those background developments. The proposals, once accepted by the exchanges, were then strongly supported by the regulatory authorities, whose ready co-operation has made it possible to plan with confidence for the establishment of ASX early in this current year.

It is confidently expected that the establishment of ASX will gradually eliminate parochial rivalries that have hampered effective decision making in the securities industry for many years. The new structure is also expected to operate more efficiently and to provide a strong and unified presence in an effort to develop essential new systems and to ensure that the market for Australian securities remains, as far as possible, within this country. The honourable member for North Sydney (Mr Spender), in leading for the Opposition, drew attention to the tremendous importance that that has for Australia's role in world financial, stock and security trading arrangements and the necessity for Australia to claw back into its own mechanisms those transactions which have been lost to Australia-I think the figure that was given was something between 30 per cent and 50 per cent of the transactions that are now being conducted through the exchanges of London and New York in particular-and which can and should be conducted through the exchanges in Australia.

The Bill is essentially the same as the one which the Attorney-General introduced at the end of the last session of Parliament. The Australian Associated Stock Exchanges approved the introduction of the previous Bill into this Parliament at the earliest possible opportunity. Its primary concern in pressing for an early introduction and passage of the Bill in the current session is that the Trade Practices Commission's authorisation for a number of the existing stock exchange practices expires on 31 March 1987. So there is relatively very little time left for this legislation to be put into place. The Commission identified these practices as being anti-competitive and refused to authorise them beyond 31 March this year. The new articles of association for the single national exchange to be established by the Bill address these areas of Trade Practices Commission concern.

The background to that issue is that in September 1982 the Trade Practices Commission denied authorisation to rules of the Australian Associated Stock Exchanges which fixed brokerage rates, restricted entry to membership of the stock exchanges, prevented incorporation of stock brokers and otherwise restricted their activities. To enable the Australian Associated Stock Exchanges, the AASE, to make the necessary changes to its arrangements with the minimum of dislocation to the industry, interim authorisation was granted until 1 April 1984. That was subsequently extended for another three years and, of course, that time lapses at the end of March this year.

The amended rules for which the AASE sought authorisation were amendments to its articles of association providing for the incorporation of stock brokers, providing for a non-member shareholding of 50 per cent, and allowing other financial intermediaries to hold shares in stockbroking companies. On 4 October 1984 the Commission, granted final authorisation. I quote from the eleventh annual report, that for 1984-85:

The authorisation of the amended Article is to run until 1 April 1987, when it will lapse.

The Commission went on to say:

The Commission accepted that there was public benefit in a staged removal of restrictions and found that the AASE had taken a substantial step towards removing barriers to entry to the stockbroking industry. The Commission noted that the removal of fixed commission rates in April 1984 had already resulted in a substantial increase in competition, and that since corporate membership had become possible in July 1984, a number of stock broking firms had become incorporated and several had announced links with other financial intermediaries, particularly banks.

That is representative of some of the more important changes which are taking place within the structure, the operation and the administration of the stock exchange system in Australia. The impetus for change to the structure of the major Australian stock exchanges, as I indicated earlier, came from the stock exchanges themselves.

One of the major developments in Australia and throughout the world's capital and securities markets has been the trend towards the internationalisation of securities markets. This has been stimulated by technological advances in communication and by the increasing sophistication of investors in the management of their financial risks. In addition, a matter of more local and domestic concern was this Government's initiative in abolishing exchange controls. All of these changes have brought about greater competition from overseas exchanges. The point has been made that all of these proposed changes will have the effect of making the Australian stock exchange machinery more capable of holding that trade and bring it back from those other countries to which it has tended to gravitate far too quickly.

Transactions have been going off-shore due to some of the difficulties that have existed in Australia in relation to the operation of our stock exchange structure. The fragmentation of the stock exchange between the six States has meant that they have not been co-ordinated, they have not been integrated. There has been an incapacity on their part to act nationally. It is obvious in light of the circumstances which exist internationally in relation to security trading that significantly enlarged resources are available for stock exchanges to do the types of things that are required of them. Increasingly those transactions have been going overseas. They have been going overseas because overseas exchanges are more efficient. Overseas exchanges generally are organised and operate on a national basis. Unfortunately, those transactions which have been going overseas have tended to be the larger transactions, those which we should be proving ourselves capable of handling here in Australia.

Some transactions will always be conducted overseas. One of the main reasons for this is that we are in the southern hemisphere and, of course, the main market for securities is in the northern hemisphere. In addition, there are particular reasons why it is important that Australian stock exchanges go national, why they need a national structure. The first is a need to establish an automated trading mechanism to enable all brokers to deal in the same market and at the same time. Hitherto this has not been possible in Australia. As that becomes more integrated, better organised, better co-ordinated and more efficient it will also allow Australian security trading mechanisms to become linked into overseas mechanisms. That is all part of the internationalisation of these processes and it is all reflective of the need for Australia, a major commercial and trading nation of the world, to become integrated in security transactions as we have in relation to banking and general exchange movements.

The second reason is that there is a need for the settlement and transfer system to be improved. Our system is simply old fashioned. I think some people have drawn attention to the fact that the worst system in the world is in Italy and the second worst is here. That is something to which we should be addressing our attention and concern. There is a need to speed up and to make more efficient the settlement and transfer system and this can be done only on a nationwide basis. Growing competition from overseas necessitates that those things be attended to.

I know that this legislation represents a very commendable, co-operative effort between the Commonwealth and the States-through the Ministerial Council, through the stock exchanges and through their organisations. As I indicated earlier, the initiative for these changes came from the stock exchanges because they were aware of the deficiencies within which they were trying to operate. They were concerned about not only the importance of those matters to their own operations and the efficiency with which they could do the job that they have to do for their clients. They also had a realisation that they have a responsibility to Australia as a nation in relation to some of the considerations to which the honourable member for North Sydney drew attention. It is commendable to see the extent to which those parochial considerations, which for too long have hindered and impeded the efficiency of the Australian stock exchange mechanisms, are gradually being overcome. It is not easy to overcome them because, to a very large extent, they are built into the system. They have been an inherent part of the system. They can be clawed out as a result of this nationalisation in the sense of establishing a national structure for stock exchanges in Australia.

In conclusion, I would like to mention something else. I hope that as a result of these changes the Commonwealth Government and the various State governments as well will do what they can to assist the national stock exchange body to improve the settlement and share registry system. There are a number of things that governments can do to assist the stock exchanges in this regard. Firstly, they can help the stock exchanges to achieve an understanding of and agreement about the best way to proceed. I know that the stock exchanges will be giving attention to that type of matter. Secondly, there is a need on the part of government to provide supporting legislation to give effect to changes of those kinds. Of course this legislation, which we are in the process of considering now, is an example of that. Thirdly, there is a need for the Government to encourage the parties to reach settlement quickly. These competing interests are hard to reconcile. One of the major difficulties at the present time is the operation of branch registries. All of these matters need to be given consideration by not only the industry but also government. We also need a continuation of the type of co-operative effort and concern which lies behind the legislation that we are in the process of considering.

I have no doubt that the innovations, the changes, the improvements that are now being brought about, will continue. I endorse absolutely the comments that were made by the honourable member for North Sydney. Australia has a responsibility not only in relation to matters of this kind but also more generally, more widely, to bring back into Australia those types of things that have been escaping Australia and moving overseas. We will do that only when we establish within Australia the type of sophisticated, modern, co-ordinated and integrated mechanisms which are necessary to achieve those purposes. This type of legislation goes a long way down the track towards doing that.