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Wednesday, 19 September 2001
Page: 31057


Mr KELVIN THOMSON (10:17 AM) —The Commonwealth Inscribed Stock Amendment Bill 2001 will create a legal framework for the electronic transfer of Commonwealth government securities, enable the Commonwealth to create equitable interests in Commonwealth government securities and enable a body corporate to be appointed as a registrar under the Commonwealth Inscribed Stock Amendment Bill instead of, or in addition to, the Reserve Bank of Australia. Unfortunately, both the explanatory memorandum and the second reading speech by Minister Abbott were not overly elaborate on the reasons for, and consequences of, this bill. Accordingly, I do have some questions that I want to ask the minister, and I will come back to these in due course.

I understand that certain initiatives in the bill stem from CLERP paper No. 5, which deals with electronic commerce. That paper was circulated in 1997 and a number of initiatives in that paper have already been implemented. The initiative relating to this bill is in part 6 of the CLERP paper. There it is explained that the Commonwealth Inscribed Stock Act of 1911 and the regulations under that act currently require the transactions and transfers of legal title in Commonwealth government securities be settled through a paper based system. The Commonwealth Inscribed Stock Act, therefore, does not allow Commonwealth government securities transactions to be settled electronically. That paper also discusses how the absence of an electronic system to settle transfers is being dealt with by the Reserve Bank. The paper states:

However, there is nothing in the CIS Act prohibiting the introduction of an electronic system for the transfer of beneficial interests in, or other choses in action—

that is, things—

relating to, CGS. In practice, the concept of granting a chose in action in relation to CGS has been developed to overcome the existing impediment to electronic transfers of the debt instruments themselves presented by the CIS Act.

This concept works as follows. Legal and beneficial ownership of securities lodged into the Reserve Bank Information and Transfer System ... by a member passes to the RBA. The RBA then grants to the member a chose in action. The chose in action is then transferred through RITS. The chose in action entitles the member to direct the RBA to deliver to the member securities of a specified description and face value.

The CLERP paper then concludes:

It would, however, be preferable to amend the CIS Act to allow the electronic transfer of the direct beneficial and legal interests in CGS—

that is, Commonwealth government securities. Accordingly, proposal No. 6 in CLERP paper No. 5 is that:

The Commonwealth Inscribed Stock Act 1911 and Regulations will be amended to enable the electronic transfer of the direct beneficial and legal interests in Commonwealth Government securities (CGS). This will enable transactions in CGS to be settled electronically, as well as through existing paper based means.

That proposal is implemented in the first two aspects of this bill that I described earlier— namely, the bill creates a legal framework for the electronic transfer of Commonwealth government securities and it enables the Commonwealth to create equitable interests in Commonwealth government securities. This is not controversial. However, the CLERP paper is silent on the third aspect of the bill: to enable a body corporate to be appointed as a registrar under the Commonwealth Inscribed Stock Amendment Bill instead of, or in addition to, the Reserve Bank of Australia.

The Reserve Bank is currently the registrar under the Commonwealth Inscribed Stock Amendment Bill. The most recent annual report of the Reserve Bank says that the bank provides registry services on behalf of the Commonwealth government, the South Australian Government Financing Authority and a number of other domestic and foreign institutions. The services provided by the Reserve Bank include the issuance of securities, maintenance of ownership records, payment of interest and redemption of securities at maturity. The Reserve Bank annual report from the previous year says that the cost to government through its agency, the Australian Office of Financial Management, for the operation of the registry declined by 19 per cent during that year. A further decline of around 20 per cent has been forecast for the year 2000-01.

One of the first questions that need to be asked of the minister is about the cost to the government if, as contemplated by this bill, a non-government entity performs the functions now performed by the Reserve Bank under the Commonwealth Inscribed Stock Act. This question needs to be asked because this government has an appalling record on outsourcing. The report by the Australian National Audit Office into the government's information technology outsourcing program was highly critical of the management and implementation of the information technology outsourcing program and sceptical of the savings to be realised.

When the information technology outsourcing program was launched by the Minister for Finance and Administration in 1997, the Hon. John Fahey stated:

The Government is committed to achieving the best value for its information technology dollar, to support the delivery of services at the lowest cost to the taxpayer.

Later, the minister said that the government estimated that the information technology outsourcing program would save taxpayers approximately $1 billion over seven years. Those savings have not been realised. They were spurious and the contracting of information technology has not been achieved at the lowest cost to the taxpayer. In fact, a vastly different outcome has occurred. I am aware, for example, that in the tax office, where information technology was outsourced to EDS, the number of staff involved in the tax office's information technology area fell only slightly but you had an information technology contract in the order of hundreds of millions of dollars going to EDS. The net result of information technology outsourcing there was that a great increase in resources—both tax office and outsourced resources—went into this area, a very poor outcome from the perspective of the taxpayer following information technology outsourcing in that area.

I am also concerned to ensure that there is confidence in the settlement, transfer and registration of Commonwealth government securities. Commonwealth government securities provide the benchmark yields from which the rest of the debt market prices its risk. It is essential that they maintain their characteristic of being `risk free securities.' I note that the Minister for Employment, Workplace Relations and Small Business, in his second reading speech, said:

These reforms will increase business confidence in the effectiveness and reliability of electronic transfers of Commonwealth government securities by providing a certain and secure framework for electronic transactions in the Commonwealth government securities market.

I would be very concerned if the Reserve Bank processes were not providing a certain and secure framework for transactions in Commonwealth government securities. Accordingly, another issue I wish to explore concerning this bill is how the registry service provided by the Reserve Bank in accordance with the Commonwealth Inscribed Stock Act interacts with the Reserve Bank information and transfer system.

According to the Reserve Bank's annual report in 2000, that system:

... provides its 143 members (representing 267 organisations) with facilities for the electronic settlement of transactions in Commonwealth Government securities (CGS). The system handles over 99 per cent of CGS turnover in the market ... The system also provides facilities for electronic tendering for CGS, automatic interest and maturity payments for securities lodged in the system and for settling the interbank component of equity transactions on CHESS, the Australian Stock Exchange's electronic settlement system. RITS is also Australia's real-time gross settlement system and is the means through which banks and other approved institutions access their Exchange Settlement accounts with the RBA.

According to the CLERP 5 paper, the financial system inquiry noted that the real time gross settlement system to be implemented, which has since been implemented, will represent world's best practice. I hope that the minister will be able to further explain these issues to me and also explain what consultation there has been on aspects of this bill dealing with the outsourcing of functions performed by the Reserve Bank.

I have indicated to you that there are a number of questions I would like to ask the minister and seek a response from him on, either in terms of consideration in detail or some way in which the minister can come back to the opposition and provide a formal response. I will indicate these questions now to give the government as much opportunity as I can to respond to them.

They are essentially: (1) what is the cost to government of the Reserve Bank providing the registry services required under the Commonwealth Inscribed Stock Act; (2) under what terms, including the cost, would another entity be appointed as a registrar under the Commonwealth Inscribed Stock Act; what measures would be put in place to ensure that the yield on Commonwealth government securities does not incorporate any risk stemming from a non-government entity providing the registry services; (3) what entities has it contemplated may be appointed to be a registrar under the Commonwealth Inscribed Stock Act; (4) what consultation was there on this bill; (5) what is the interaction currently between the Reserve Bank's registry system under the Commonwealth Inscribed Stock Act and the Reserve Bank's information and transfer system; (6) what would be the effect on the Reserve Bank's information transfer system if the Reserve Bank was no longer the registrar for Commonwealth government securities under the act; (7) are there any concerns that the Reserve Bank could not provide a certain and secure framework for electronic transactions in the Commonwealth government securities market; (8) could there be any effect on the risk attached to Commonwealth government securities from the changes proposed in this bill to the settlement and registration of Commonwealth government securities and what advice has been provided to the minister concerning this issue? The opposition is interested in seeking responses from the government to these important questions. I indicate, however, that on the information provided to us we are supportive of this bill.