Commonwealth Numbered Regulations - Explanatory Statements

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CORPORATIONS AMENDMENT REGULATIONS 1999 (NO. 1) 1999 NO. 38

STATUTORY RULES 1999 NO. 38

Issued by the authority of the Minister for Financial Services and Regulation

Corporations Act 1989

Corporations Amendment Regulations 1999 (No. 1)

Section 22 of the Corporations Act 1989 (the Act) empowers the Governor-General to make regulations not inconsistent with the Act or the Corporations Law (the Law), prescribing matters which are required or permitted by the Law to by prescribed by regulations, or are necessary or convenient to be prescribed by regulations for carrying out or giving effect to the Law.

Section 30 of the Act provides that the regulations may provide that Chapter 7 or 8, or specified provisions of Chapter 7 or 8, of the Law do not have effect in relation to a specified person or class of persons or in relation to a specified transaction or class of transactions.

Sections 842 and 1206 of the Law require securities dealers and futures brokers to provide contract notes to a client once a transaction to purchase or sell securities, or to acquire or dispose of futures contracts has been entered into. The requirement to issue contract notes ensures that the parties are informed of the obligations which legally bind them.

Section 1207 of the Law requires futures brokers to provide clients with monthly statements where money or property is held on their behalf.

The purpose of the regulations is to modify the application of some of the requirements found in the contract note and monthly statement provisions.

The regulations clarify the Law by allowing contract notes and monthly statements to be provided in electronic form, where prior client consent has been obtained.

The regulations will allow securities dealers or futures brokers who are members of an exchange to accumulate trades relating to an order and to provide one contract note in relation to those transactions at the end of each day, or otherwise as permitted by the Business Rules of the exchange, where prior client consent has been obtained. The reference in the regulations to securities dealers and futures brokers are implied under general law principles to extend to their agents unless express provision is made otherwise. In addition, the contract note being provided may stipulate the average price at which the securities were purchased or sold, or the average contract price of the futures contracts acquire or disposed of, where prior client consent has been obtained.

The regulations will also enable securities dealers to charge brokerage for transactions they enter into as principal with a non-dealer, where prior client consent has been obtained. The purpose of this proposed regulation is to enable securities dealers who enter into transactions as principals to fulfill orders for large volume trades made on behalf of professional investors to charge brokerage for this service.

Details of the regulations are in Attachment A. A Regulation Impact Statement is enclosed at Attachment B.

The regulations commence on gazettal.

ATTACHMENT A

Details of Proposed Regulations

Regulation 1

Regulation 1 provides that these regulations are the-Corporations Amendment Regulations 1999 (No. 1).

Regulation 2

Regulation 2 provides that these regulations commence on gazettal.

Regulation 3

Regulation 3 provides that Schedule 1 amends the Corporations Regulations 1990.

Schedule 1

Item [1]

New regulation 7.4.01A is inserted to modify the application of section 842 of the Corporations Law (the Law).

Sending a contract note electronically

Section 842(2) of the Law requires. a contract note to be given immediately to a client by a securities dealer. Sub-regulation 7.4.01A(3) enables a securities dealer to electronically deliver a contract note, where prior client consent has been obtained.

Giving a single contract note for multiple transactions

Section 842(2) of the Law requires a contract note to be given once a transaction to purchase or sell securities has been entered into. Sub-regulation 7.4.01A(4) enables a securities dealer who is a member of a stock exchange to accumulate trades relating to an order and to issue a single contract note in relation to those transactions before the end of the business day on which that series of transactions was carried out, or otherwise as permitted by the Business Rules of the exchange, where prior client consent has been obtained.

Price Averaging

Section 842(3)(g) of the Law requires a contract note to list the price per unit relating to a transaction of sale or purchase of securities. Sub-regulation 7.4.01A(5) modifies this requirement by enabling securities dealers who give a single contract note for multiple transactions to stipulate the average price at which those securities were purchased or sold, where prior client consent has been obtained.

As an additional protection, the sub-regulation will permit a client who has consented to the price per unit of securities being given as an average on the contract note to require the dealer to provide a document which lists the price per unit at which those securities were purchased or sold

Authorisations

Sub-regulations 7.4.0 1A(6) and (7) provide that for the purposes of this regulation an authorisation may be given either orally or in writing and is effective until it is revoked. Where the authorisation or revocation is given orally, the dealer must send a written record to the client as confirmation.

Item [2]

New regulation 7.4.04A is inserted permitting brokerage to be charged on principal transactions.

Charging brokerage on principal transactions

Sub-section 843(4) of the Law provides that a dealer is prohibited from charging a client brokerage where the dealer enters into the transaction as a principal. New regulation 7.4.04A provides that this prohibition has no effect where the client authorises the securities dealer to charge such a commission. For the purposes of this regulation an authorisation may be given either orally or in writing and is effective until it is revoked. Where the authorisation or revocation is given orally, the dealer must send a written record to the client as confirmation.

Item [3]

New regulation 8.4.01B is to be inserted to modify the application of section 1206 of the Law.

Sending a contract note electronically

Section 1206 of the Law requires a contract note be given as soon as practicable to a client by a futures broker. Sub-regulation 8.4.01B(3) enables a futures broker to electronically deliver a contract note, where prior client consent has been obtained.

Giving a single contract note for multiple transactions

Section 1206 of the Law requires a contract note to be given once a transaction to purchase or sell futures contracts has been entered into. Sub-regulation 8.4.01B(4) enables a futures broker who is a member of a futures exchange to accumulate trades relating to an order and to issue a single contract note in relation to those transactions before the end of the business day on which that series of transactions was carried out or otherwise as permitted by the Business Rules of the exchange, where prior client consent has been obtained.

Price Averaging

Sub-section 1206(3) of the Law requires a contract note to list the contract price relating to an acquisition or disposal of a futures contract. Sub-regulation 8.4.01B(5) modifies this requirement by enabling futures brokers who give a single contract note for multiple transactions to stipulate the average contract price of the futures contracts acquired or disposed, where prior client consent has been obtained.

As an additional protection, the sub-regulation will permit a client who has consented to the contract price of the futures contracts acquired or disposed of being given as an average on the contract note to require the broker to provide a document which lists the contract price of each futures contract acquired or disposed of.

Authorisations

Sub-regulations 8.4.01B(6) and (7) provide that for the purposes of this regulation an authorisation may be given either orally or in writing and is effective until it is revoked. Where the authorisation or revocation is given orally, the broker must send a written record to the client as confirmation.

Item [4]

New regulation 8.4.03B permits monthly statements to be sent electronically.

Sending a monthly statement electronically

Section 1207 of the Law requires futures brokers to provide clients with monthly statements where money or property is held on their behalf. New regulation 8.4.03B enables a futures broker to electronically deliver a monthly statement, where prior client consent has been obtained. For the purposes of this regulation an authorisation may be given either orally or in writing and is effective until it is revoked. Where the authorisation or revocation is given orally, the broker must send a written record to the client as confirmation. ATTACHMENT B

REGULATION IMPACT STATEMENT

Problem Identification Statement

The problems addressed by these amendments are:

a)       The uncertainty as to whether the Law ´permits contract notes and monthly statements to be delivered through electronic transmission.

b)       The inability of securities dealers in some circumstances to charge brokerage for transactions they enter into as principal.

c)       Lower efficiency through the necessity under the Law for securities dealers and futures brokers who are exchange members to provide a single contract note for each transaction in relation to the sale or purchase of securities, or the acquisition or disposal of futures contracts.

Specification Of Regulatory Objectives -

The objectives of the proposed amendments are to increase the efficiency of the Australian Stock Exchange (ASX) and the Sydney Futures Exchange (SFE), through a reduction in the regulatory burden placed on exchange members by allowing the accumulation of trades into one contract note and increased facilitation of the use of technology in financial markets. It is also an objective to allow securities dealers to charge brokerage where appropriate, if they are acting as principal in the transaction, where prior client consent has been obtained.

Identification of Alternatives

Option 1: No Specific Action

Under this option, no amendments would be introduced to the Corporations Law and all contract notes and monthly statements would still have to be hand produced and physically delivered to the client. Securities dealers will not be allowed to charge brokerage on transactions in which they act as principal- If no action is taken, the operation of the exchanges will be significantly impaired and continuing high operating costs associated with manual preparation of physical contract notes will be required.

Option 2. Implement amendments to Regulations in the Corporations Law

Introduce amendments to the Law in relation to electronic contract notes and monthly statements, accumulation and price averaging and brokerage as outlined in the Explanatory Statement.

Impact Analysis

Impact Group Identification

Groups likely to be affected by the proposed amendments include the Australian Stock Exchange, the Securities Clearing House of the Australian Stock Exchange, security registries, securities dealers, the Sydney Futures Exchange, the Sydney Futures Exchange Clearing House, futures brokers, securities and futures market investors, other associated exchange members and the Australian Transaction Reports and Analysis Centre.

Assessment of Costs and Benefits

An assessment of the costs and benefits of Options 1 and 2 above is outlined below.

Option 1: No specific action

There would be no real benefits from retaining the status quo. Securities dealers and futures brokers would continue to physically deliver contract notes and futures brokers physically deliver monthly statements, with a separate contract note for each transaction undertaken. This is more time consuming than electronic delivery, as well as being an inefficient use of paper resources. It is in the interests of the exchanges and the community for the markets to operate in the most efficient and effective manner possible.

Option 2: Implement Amendments to Regulations in the Corporations Law

The amendments would enhance the efficiency of the markets by reducing the regulatory and administrative burden on ASX and SFE members and increasing timeliness of delivery of contract notes and monthly statements. There would be no addition to compliance costs for exchange members, or in administrative costs for regulators from the proposed amendments. The brokerage industry have indicated through their strong support for these amendments the significant cost, efficiency and practical benefits that would flow from making the amendments.

In addition, securities dealers would be able to charge brokerage for transactions in which they enter into as principal. This would benefit members of the exchanges, by allowing them to charge for services which they are providing to their clients, but presently are unable to charge for. By allowing brokerage to be charged, it is more likely that exchange members will be willing to provide these services to their clients. Protection of clients will be maintained, in that they have to give approval to the broker for these types of transactions beforehand.

'The proposed amendments would strongly benefit the exchanges and therefore indirectly the economy by enhancing market efficiency. There are no foreseeable downsides to their introduction. Both members of the exchanges and their clients are likely to benefit through faster and more timely trading arrangements.

Other Requirements

Consultation

The amendments outlined have been developed as a result - of considerable consultation with the ASX, the SFE and the Australian Securities and Investment Commission (ASIC). There is a clear consensus amongst these bodies supporting the proposed amendments, with particularly strong support from the ASX.

Conclusion and Recommended Option

Due to the positive benefits of the proposed amendments, the adoption of Option 2 is recommended. Option 2 will bring forth more timely and efficient trading arrangements between brokers, dealers and clients than Option 1, which is the status quo. The technology now exists to successfully facilitate the electronic delivery of contract notes and monthly statements, so should be utilised accordingly, because it is more resource efficient.

Implementation and Review

The amendments proposed have been drafted. The ASX and SFE will have responsibility for giving operational effect to these regulations. The operation of the exchanges and clearing houses are subject to continuing oversight by the Australian Securities and Investment Commission and the responsible Minister. When changing circumstances or market innovation necessitates revision of regulations, revisions are made in close consultation with the affected parties.