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CORPORATIONS AMENDMENT REGULATIONS 2002 (NO. 9) 2002 NO. 282
EXPLANATORY STATEMENTStatutory Rules 2002 No. 282
Issued by the Parliamentary Secretary to the Treasurer
Corporations Act 2001
Corporations Amendment Regulations 2002 (No. 9)
Section 1364 of the Corporations Act 2001 (the Act) provides that the Governor-General may make regulations prescribing matters required or permitted by the Act to be prescribed by regulations or necessary or convenient to be prescribed by such regulations for carrying out or giving effect to the Act.
Subsection 888A(1) of the Act provides that the situations in which compensation may be claimed in respect of a loss that is connected with a financial market to which Division 4 of Part 7.5 applies are as specified in the regulations.
Paragraph 1074E(2)(b) of the Act provides that the regulations may specify the rights, liabilities and obligations of a person in relation to the transfer of a financial product through a prescribed clearing and settlement facility.
The purpose of the Regulations is to support the proposed reforms to the clearing and settlement facilities of the Australian Stock Exchange. In particular, the proposed Regulations would accommodate these reforms by amending the Corporations Regulations relating to:
• the National Guarantee Fund, which is a statutory fund of approximately $160M which provides a source of compensation for investors when, for example, their stockbroker becomes insolvent, and also provides financial support for clearing transactions entered into on the Australian Stock Exchange; and
• transfer of title, in particular, the indemnities required in connection with electronic transfer of legal title to securities.
The proposed amendments do not reflect any change in policy.
Details of the Regulations are set out in the Attachment.
The Regulations will commence on 1 December 2002. This date has been chosen because it is important that the regulations commence at the same time as several other documents, including the variation of the clearing and settlement facility licence of the Options Clearing House Pty Limited and amendments to the operating rules of various subsidiaries of the Australian Stock Exchange Limited.
ATTACHMENT
1. INTRODUCTION
Overview
The Australian Stock Exchange (ASX) proposes to restructure its clearing and settlement arrangements.
To facilitate this, amendments have been made to the Corporations Regulations. The amendments relate only to:
• investor protection and the financial support provided to ASX entities by the National Guarantee Fund; and
• indemnities in connection with the transfer of title to securities.
There is no intention to change the policy inherent in the relevant regulations including the coverage of the National Guarantee Fund.
The current situation
The ASX group of companies operates both financial markets and clearing and settlement facilities.
The two markets it operates are:
• the Australian Stock Exchange - ie the main market for securities and options;
• ASX Futures - a small market for futures contracts.
The group also operates clearing and settlement facilities:
• a facility operated by the Options Clearing House Pty Limited (the Options Clearing House) for futures contracts and the initial processing of option contracts;
• a facility operated by ASX Settlement and Transfer Corporation Pty Limited for securities (including settlement following the exercise of options over shares).
In brief, clearing and settlement facilities calculate payment obligations and obligations to provide, for example, securities following transactions entered into on the ASX's markets, and provide the mechanisms for meeting those obligations.
They are required to have an Australian CS facility licence under Part 7.3 of the Corporations Act 2001.
Re-structuring in brief
The ASX is restructuring its clearing and settlement facilities and the services they provide.
The first stage of the restructuring involves:
• changing the central counterparty for securities transactions from TNS Clearing Pty Limited to the Options Clearing House;
• consolidating the Derivatives Clearing Rules (ie the Options Clearing House's operating rules) because some relevant rules are currently included in the Australian Stock Exchange's market operating rules;
• varying the CS facility licence of the Options Clearing House so that it refers to 'derivatives', rather than 'futures contracts'.
Further details of the first two dot points are provided below. The third dot point does not require regulations.
Subsequent stages in the restructuring are proposed for 2003.
Changing the central counterparty for securities transactions - further detail
Transactions on the ASX markets are novated and a central counterparty interposed by virtue of the operating rules. The obligations of each broker are then to that central counterparty. Thus, in the case of securities, the facility will calculate the net amount each dealer owes with respect to the particular day's transactions, and the net number of each company's securities (eg BHP) traded that day which are due.
Currently, there are two central counterparties in the ASX clearing and settlement arrangements:
• TNS Clearing Pty Limited is the central counterparty with respect to transactions for which ASX Settlement and Transfer Corporation Pty Limited provides services;
• the Options Clearing House is itself the central counterparty for transactions for which it provides services.
One element of the first stage in restructuring the ASX's clearing and settlement services will be to replace TNS Clearing Pty Limited with the Options Clearing House as the central counterparty for securities transactions.
Why consolidate the Derivatives Clearing Rules?
The Derivatives Clearing Rules need to be consolidated:
• to meet the terms of Part 7.3 of the Corporations Act 2001 which will need to be complied with in full when the conditions on the CS facility licence are amended as requested by the Options Clearing House;
- this is the result of the transitional provisions included in the Financial Services Reform Act 2001;
• to ensure compliance with the Trade Practices Act 1974 (for example, the requirements for membership will be included in the Options Clearing House's own rules, rather than in the operating rules of the Australian Stock Exchange's main market (tied membership)).
2. EXPLANATION OF AMENDMENTS
As indicated above, the amendments to the Corporations Regulations relate only to access to the National Guarantee Fund (Part 7.5) and indemnities arising in the transfer of title to securities (Part 7.11).
The amendments to the regulations commence on 1 December 2002 (regulation 1), the same date as the related changes to the business rules and conditions on the Options Clearing House's licence.
Regulation 3 provides that Schedule 1 amends the Corporations Regulations 2001.
A description of the items in Schedule 1 follows.
Schedule l
A. Amendments relating to the National Guarantee Fund
The National Guarantee Fund, which is administered by the Securities Exchanges Guarantee Corporation Limited, provides both:
• clearing support for transactions in securities (including options) on the Australian Stock Exchange;
• investor protection for clients of stockbrokers on the Australian Stock Exchange.
The amendments under this heading fall into two groups:
• to recognise the consolidation of the Derivatives Clearing Rules;
- with the omission of relevant rules from the Australian Stock Exchange Business Rules including the rules for participation in the Options Clearing House;
• recognising the change in central counterparty for securities;
- from TNS Clearing Pty Limited to the Options Clearing House.
Item [1] - subregulation 1.0.02(1) - definition of 'settlement authority'
The term 'settlement authority' was defined in Corporations Regulation 1.0.02 to mean:
(a) a participating market licensee; or
(b) a prescribed CS facility.
This definition refers to only two bodies currently because:
• the only participating market licensee is the Australian Stock Exchange Limited;
• ASX Settlement and Transfer Corporation Pty Limited is currently the only prescribed CS facility.
- The primary purpose of prescription of licensed CS facilities is access to Division 4 of Part 7.11 (which facilitates electronic transfer of legal title).
Consolidation of the Derivatives Clearing Rules as operating rules of the Options Clearing House will involve omitting the relevant option clearing rules from the Australian Stock Exchange market operating rules and including them in the Derivatives Clearing Rules (of the Options Clearing House).
In combination with the current definition of 'settlement authority' this will have the effect that access to the National Guarantee Fund will be lost in relation to the initial processing of option contracts unless the definition of 'settlement authority' is amended to encompass the Options Clearing House Pty Limited.
The term is used in about 15 regulations in Part 7.5. One example is Corporations Regulation 7.5.41, which relates to claims in respect of the failure to transfer a net number of securities in respect of transactions. It refers to the rules of the 'settlement authority'.
In order to encompass the restructured operations and maintain the National Guarantee Fund's current coverage, 'the licensed CS facility operated by Options Clearing House Pty Limited' is added to the definition of 'settlement authority'.
Items [2], [3], [22], [23], [38], [39] - Omission of transfer delivery service provisions
The transfer delivery service of the Australian Stock Exchange, which is referred to in Subdivision 4.6 of Part 7.5 of the Corporations Regulations, is now obsolete.
The following have therefore been deleted:
• in Corporations Regulation 1.0.02: the definitions of 'TDS nominee' and 'transfer delivery service provisions';
• in Corporations Regulation 7.5.01, the definition of 'clearing nominee';
• Corporations Regulations 7.5.32, 7.5.39, 7.5.47 and Subdivision 4.6.
Item [4] - Regulation 7.5.01 - definition of obligations
The previous definition of 'obligations' in Corporations Regulation 7.5.01 was drafted on the assumption that participants in the Options Clearing House are also participants in the Australian Stock Exchange main market, and that the relevant rules are included in the business rules of the Australian Stock Exchange's main market.
This definition has therefore been amended:
• so that it is not limited to 'a participant of a participating market licensee' but extends to participants of the Options Clearing House (because the rules for participation in the Options Clearing House will be moved into the Derivatives Clearing Rules); and
• to encompass obligations arising under the Options Clearing House operating rules as well as obligations arising under the operating rules of ASX Settlement and Transfer Pty Limited.
Item [5]-Regulation 7.5.01 - definition of 'reportable transaction'
In brief, Corporations Regulation 7.5.01 previously defined 'reportable transaction' as a sale or purchase of securities by a participant of a participating market licensee which is required by the operating rules of the market licensee to be reported.
The concept of a 'reportable transaction' is used in a number of regulations in Part 7.5, particularly those relating to claiming on the 'contract guarantee'. It brings in transactions which are off-market but which must be reported, in accordance with the operating rules. It thus encompasses 'crossings' in brokers' offices.
The definition worked satisfactorily in the case of the exercise of option contracts because:
• the rules requiring the reporting of the exercise of option contracts are included in the Australian Stock Exchange market operating rules; and
• all participants in the Options Clearing House are participants of the Australian Stock Exchange.
However, as indicated above:
• there will be separate membership of the Options Clearing House following the first stage of the re-structuring; and
• the rules relating to the exercise of options are being removed from the Australian Stock Exchange operating rules and included in the Derivative Clearing Rules (ie the operating rules of the Options Clearing House).
To maintain the current level of protection provided by the National Guarantee Fund, the definition was amended so that it encompasses the exercise of an option contract over securities where:
• the option contract was entered into on the financial market of a participating market licensee; and
• the exercise of the contract is required to be reported to the participating market licensee by the operating rules of the Options Clearing House Pty Limited.
The concept is not relevant to the initial entering into the option contract.
Item [6] - [9] - Corporations Regulation 7.5.03 - Definition of 'dealer'
The term 'dealer' was defined in Corporations Regulation 7.5.03 for two separate purposes:
• for Subdivision 4.5 (ie claims in respect of net obligations) (subregulation 7.5.03(2)), the term was defined to mean:
(a) a participating market licensee; or
(b) a participant of a participating market licensee.
• for other purposes, it was defined to mean a person who is, or has been at any time, a participant of a participating market licensee (subregulation 7.5.03(1)).
Once the criteria for becoming a participant in the Options Clearing House are moved into the Derivatives Clearing Rules, then a participant in the Options Clearing House Pty Limited will not necessarily be a participant in the Australian Stock Exchange market.
For these reasons:
• subregulation 7.5.03(2) has been amended to refer in addition to a 'participant of the licensed CS facility operated by Options Clearing House Pty Limited';
• a further specific definition of 'dealer' has been included in 7.5.03(3) for the purpose of Subdivision 4.9 (of Part 7.5);
- in this case the term 'dealer' encompasses participants of a participating market licensee and participants of the licensed CS facility operated by the Options Clearing House;
- (Subdivision 4.9 relates to the situation where property is entrusted and the dealer becomes insolvent.)
• consequential amendments have been made to subregulations 7.5.03(1) and (2).
The term 'dealer' is used in about 30 regulations under Part 7.5. An example is 7.5.67 which provides that there is no claim against the National Guarantee Fund for money lent to a dealer.
Item [10] - [13] -Corporations Regulation 7.5.04 - excluded person
Corporations Regulation 7.5.04 previously defined the term 'excluded person' which is used in four subsequent regulations.
The purpose of these provisions is to ensure that the participant (the broker), relatives and bodies controlled by them cannot claim from the National Guarantee Fund in the event of, for example, the participant's insolvency.
Corporations Regulation 7.5.04 has been amended so that, in the case of a claim under Subdivision 4.9 in relation to a participant of the licensed CS facility operated by the Options Clearing House, a comparable set of people are excluded. The amendment was needed because a participant in the Options Clearing House will no longer necessarily be a participant of the participating market licensee.
Item [14] - Corporations Regulation 7.5.06 - Meaning of sale and purchase of securities
Corporations Regulation 7.5.06 is another interpretive provision. It provides the meaning of 'sale and purchase of securities' which is used in about 7 other regulations.
For the sake of clarity, Corporations Regulation 7.5.06 has been amended so that the exercise of an option contract over securities is, in certain specified circumstances, taken to be a sale and purchase of securities.
Items [15] - [17] - Corporations Regulations 7.5.07 and 7.5.08 - Meaning of securities business
Corporations Regulations 7.5.07 and 7.5.08 provided two meanings of the term 'securities business', for separate purposes.
Corporations Regulation 7.5.08 has been amended so that the definition of 'securities business' in that regulation applies in relation to Subdivision 4.5, as well as Subdivision 4.9. This definition is considered more appropriate because it refers to option contracts.
(Subdivision 4.5 refers to claims in respect of net obligations and Subdivision 4.9 refers to claims in respect of insolvent participants.)
A consequential amendment has been made to Corporations Regulation 7.5.07.
The opportunity has been taken to update Corporations Regulation 7.5.07(4) so that it refers to the new Australian financial services licensees (and those exempt from holding such a licence) as well as dealers who have not transitioned into the new regime.
Items [18] - [19] - Corporations Regulation 7.5.12 - Attributing securities and payments to transactions
Corporations Regulation 7.5.12 provides backing for the operating rules in certain circumstances where it is otherwise impossible to tell the number of securities transferred to a participating market licensee or a participant of a participating market licensee.
The previous drafting assumed that the operating rules of the participating market licensee determine this and that the participants are of a participating market licensee.
In the light of the consolidation of the Derivatives Clearing Rules and the cessation of tied membership, this regulation has been amended to include a reference to the operating rules of the Options Clearing House and to encompass references to the Options Clearing House and its participants.
Items [20] - [21] - Corporations Regulation 7.5.19 - Third party clearing arrangements
Third party clearing involves:
• one broker (the transacting member) acting on behalf of the client in entering into the transaction;
• another broker (the clearing participant) having the obligation to complete the transaction.
It is recognised in relation to two heads of claim against the National Guarantee Fund:
• Subdivision 4.3 (contract guarantee); and
• Subdivision 4.9 (insolvency).
In each case, the previous Corporations Regulation 7.5.19 includes an assumption that it will be the Australian Stock Exchange market operating rules which impose the obligation on the clearing participant.
This will no longer work after the first stage of the restructuring process when:
• in the case of option contracts, the relevant rules are omitted from the Australian Stock Exchange market operating rules and included instead in the Derivatives Clearing Rules (ie the operating rules of the Options Clearing House);
• clearing participants will no longer necessarily be participants of the Australian Stock Exchange market.
This regulation has therefore been amended to allow for the possibility that:
• the participant may be a participant of the Options Clearing House or the Australian Stock Exchange; and
• that the relevant operating rules may be those of the Options Clearing House or the Australian Stock Exchange.
In addition, the cross reference in Corporations Regulation 7.5.19(2) has been corrected.
Items [24], [26], [28], [29], [31] - [37] - Corporations Regulations 7.5.40, 41 and 45 - 'Subsidiary of a settlement authority'
Corporations Regulations 7.5.40, 41 and 45 relate to claims in respect of net obligations. An example is a claim in respect of the failure to pay a net amount in respect of transactions.
They operated on the assumption that the central counter-party is the subsidiary of the 'settlement authority' and it is the settlement authority that has set the operating rules that determine the amounts due.
This worked appropriately while:
• the settlement authority rules which determined the amounts due in the case of securities (other than the initial processing of option contracts) were the rules of ASX Settlement and Transfer Corporation Pty Limited and the central counter-party was its subsidiary, TNS Clearing Pty Limited;
• the settlement authority rules which determined the amounts due when option contracts are entered into were the Australian Stock Exchange operating rules, and the central counter-party was its subsidiary, the Options Clearing House Pty Limited.
However, references to 'subsidiary of the settlement authority' and subsequent references to 'the subsidiary' will not work after the proposed changes in stage 1 of the restructuring:
• in the case of securities (other than option contracts) when the Options Clearing House Pty Limited takes over the central counter-party role for transactions in securities entered into on the main market of the Australian Stock Exchange, the references will not work because of the corporate structure of the ASX Group:
- Options Clearing House Pty Limited, although a subsidiary of Australian Stock Exchange Limited, is not a subsidiary of ASX Settlement and Transfer Corporation Pty Limited (which, under the new arrangements, will be the settlement authority).
• in the case of the initial processing of option contracts, the rules which determine the amounts due will be moved from the Australian Stock Exchange operating rules into Derivatives Clearing Rules (ie the operating rules of the Options Clearing House), and the Options Clearing House Pty Limited will be the central counter-party for this purpose.
- the central counterparty is the same entity as the settlement authority.
The references to subsidiary of a settlement authority (and subsequent references to 'the subsidiary' and 'its subsidiary') (in 7.5.40 and 41) and 'its subsidiary' (in 7.5.45) have therefore been amended to encompass the Options Clearing House Pty Limited. This is achieved through the use of the term 'central counterparty' and defining that term.
Item [25], [27], [31] - Corporations Regulations 7.5.40 - which transactions are covered?
Previously Corporations Regulation 7.5.40 indirectly limited to transactions in securities and option contracts because of the types of transactions in relation to which the relevant bodies provide services.
Following the restructuring, this is not clear because the Options Clearing House also provides services in relation to futures contracts.
In order to ensure that the status quo is retained, the amendment defines the word 'transaction' used in that regulation so that the outer limit is the concept of 'securities' in subsection 92(1) of the old Corporations Act. Within that limit, the kind or kinds of transactions covered are to be specified by the operating rules.
Item [30] - Corporations Regulation 7.5.40 - reference to 'participating market licensee'
Previously subregulation 7.5.40(2) provided that an entitlement to make a claim under Regulation 7.5.40 is not affected by a dealer ceasing to be a participant of a participating market licensee after the obligation arose. It therefore provides 'run-off cover'.
This subregulation has been amended so that it is clear that entitlement is not affected by the dealer ceasing to be a participant in the Options Clearing House
This is necessary because, following the first stage of the restructuring, a dealer may be a member of the Options Clearing House but not the Australian Stock Exchange's main market.
Item [40] - Corporations Regulation 7.5.64 - Claim in respect of property entrusted to, or received by, dealer before dealer became insolvent
Item [41] - Corporations Regulation 7.5.65 - Cash settlement of claims if property unobtainable
Corporations Regulations 7.5.64 and 7.5.65 relate to claims in respect of insolvent participants.
Both refer to the operating rules of a participating market licensee.
Following stage 1 of the restructuring outlined above, the relevant rules will be included in the consolidated Derivatives Clearing Rules.
These regulations have therefore been amended to include references to the operating rules of the Options Clearing House.
Item [42] - Corporations Regulation 7.5.68(a) - Nexus with Australia
Corporations Regulation 7.5.68 dictates the nexus with Australia that the dealer must have had for a claim under Subdivision 4.9 to be entertained. This Subdivision relates to claims in respect of insolvent participants.
The previous drafting assumes that the dealer was a participant of a participating market licensee at the time of the insolvency.
This regulation has been amended so that the dealer must have been, at that time:
• a participant of a participating market licensee; or
• a participant in the Options Clearing House;
whichever is appropriate to the particular transaction.
Once again, this amendment is needed because there will no longer be 'tied membership'.
Item [43] - [44] - Corporations Regulation 7.5.81-Arbitration of amount of cash settlement of certain claims
This regulation has been amended so that if the claim relates to a participant in the Options Clearing House in that capacity, the Options Clearing House makes the appointment of the arbitrators. In addition, the persons appointed may not be connected with the Options Clearing House.
B. Transfer of title
Items [45] - [47] - Corporations Regulations 7.11.30(2)(f), 31(2)(e) and 32(2)(f) - Indemnities in respect of warranted matters
Corporations Regulations 7.11.30, 7.11.31 and 7.11.32 all relate to indemnities given in the process of transfers effected through a prescribed CS facility. The provisions fall within Division 4 of Part 7.11, which facilitates the electronic transfer of legal title to securities.
An example of what the indemnities cover is the following situation (taken from Corporations Regulation 7.11.31):
• a participant is taken to have warranted that the transferor was legally entitled to transfer the relevant securities;
- and this was incorrect;
• the participant is liable to indemnify, among others, the issuer, the transferee and TNS Clearing Pty Limited against any loss arising from this.
Previously, Corporations Regulations 7.11.30(2)(f), 31(2)(e) and 32(2)(f) referred explicitly to TNS Clearing Pty Limited.
The intention in these regulations is to refer to the central counter-party for securities transactions.
As indicated above, these references are inappropriate when TNS Clearing Pty Limited ceases to perform this role and it is performed instead by Options Clearing House Pty Limited.
These references have therefore been amended so that they refer to both TNS Clearing Pty Limited and the Options Clearing House Pty Limited, when performing the role of central counter-party for securities. Both central counterparties need to be included because of the delay between execution and settlement - there will thus be a period of days when there will be outstanding transactions, some of which are novated to TNS Clearing Pty Limited and others novated to the Options Clearing House.