EXPLANATORY STATEMENT Select Legislative Instrument 2013 No. 59 Issued by authority of the Minister for Financial Services and Superannuation Corporations Act 2001 Corporations Amendment Regulation 2013 (No. 1) The Corporations Act 2001 (the Act) provides for the regulation of corporations, financial markets and products and services, including in relation to licensing, conduct, financial product advice and disclosure. Subsection 1364(1) of the Act provides that the Governor-General may make regulations prescribing matters required or permitted by the Act to be prescribed, or necessary or convenient to be prescribed for carrying out or giving effect to the Act. The Corporations Amendment Regulation 2013 (No. 1) (the Regulation) makes a number of amendments to the Corporations Regulations 2001 (the Principal Regulations). These amendments support the proposed policies, procedures and rules in the draft Clean Energy (Auction of Carbon Units) Determination 2013 (the draft Determination). Section 111 of the Clean Energy Act 2011 (the Clean Energy Act) provides for the Clean Energy Regulator to auction carbon units as part of the operation of Australia's emissions trading scheme. Section 113 of the Clean Energy Act sets out that the policies, procedures and rules that apply to auctions of carbon units will be determined by the Minister in a Determination. The Department of Industry, Innovation, Climate Change, Science, Research and Tertiary Education (the Department of Climate Change) has released for public comment an exposure draft of the draft Determination. The draft Determination is intended to give effect to the Australian Government's policy on key carbon unit auction design features. It sets out the details of how the auctions will be conducted, with the general objective of implementing open and transparent processes that provide a clear price signal and channel carbon units to their highest value use in the economy. The draft Determination specifies time periods in which the Clean Energy Regulator must provide a range of important auction information to the market and to bidders, including the date and start time of the auction, the number of carbon units offered at the auction, and any technical requirements for participating in the auctions. It also provides details of the bidding process which will be used to arrive at the final price for the carbon units offered in a particular auction. Paragraph 764A(1)(k) of the Act states that carbon units are 'financial products'. Various provisions of the Act may therefore potentially apply to auctions of carbon units, including: Part 7.10 of the Act, which regulates certain conduct relating to misconduct on financial markets; and The Australian Financial Services Licensing (AFSL), Australian Market Licensing (AML) and Clearing and Settlement Facility Licensing (CSFL) regimes under Chapter 7 of the Act. In finalising the details of the carbon unit auction scheme as set out in the draft Determination, issues have arisen with respect to the application of various provisions in the Act with respect to carbon unit auctions and persons involved in the conduct of the auctions. The Regulation is intended to clarify these issues. The Regulation establishes auctions of carbon units under section 111 of the Clean Energy Act as financial markets for the purposes of the Act. This removes any doubt as to whether the auctions would be financial markets and make it clear that the Act's market misconduct and insider trading provisions apply to conduct at auctions. The Clean Energy Regulator proposes to engage the services of an auction service provider and a settlement service provider to assist with the conduct of auctions. The Regulation clarifies the manner in which the AFSL, AML and CSFL requirements in the Act apply to an auction service provider and a settlement service provider if engaged by the Clean Energy Regulator to assist with the conduct of auctions. In particular, it clarifies that in most circumstances, with the exception of a number of specified scenarios, such providers are not required to obtain any licences as prescribed in the AFSL, AML or CSFL regimes in exercising their duties. The Regulation was released for public consultation for a period of 3 weeks, closing on 12 April 2012. One submission was received as a result of this process. The Office of Best Practice Regulation has advised (reference number 14462) that a Regulation Impact Statement for the Regulation is not required. Details of the Regulation are set out in Attachment A. A statement of the Regulation's compatibility with human rights is set out in Attachment B. The Regulation is a legislative instrument for the purposes of the Legislative Instruments Act 2003. Under the Corporations Agreement 2002, the Commonwealth must consult with the Legislative and Governance Forum for Corporations before making amendments to certain provisions of the Corporations Regulations 2001. The Council has been consulted. No adverse views have been expressed. The Act specifies no other conditions that need to be satisfied before the power to make the Regulation may be exercised. The Regulation commences on the day after registration. ATTACHMENT A Details of the Corporations Amendment Regulation 2013 (No. 1) Section 1 - Name of Regulation Section 1 provides that the name of the Regulation is the Corporations Amendment Regulation 2013 (No. 1). Section 2 - Commencement Section 2 provides that the Regulation commences on the day after registration. Section 3 - Authority Section 3 provides that the Regulation is made under the Corporations Act 2001 (the Act). Section 4 - Schedule(s) Section 4 provides that each instrument specified in the Schedule is amended or repealed as set out in the applicable items in the Schedule. Schedule 1 - Amendments Item [1] While carbon units are 'financial products' under the Act, there is some uncertainty over whether an auction of carbon units would be a 'financial market' under the Act. The intent of this item is to remove doubt by establishing the particular circumstances which would constitute operating a financial market. This item adds a new Division to the end of Part 7.1 of the Principal Regulations. Subparagraph 767A(2)(a) of the Act states that the regulations may specify circumstances in which certain conduct constitutes operating a financial market. The inserted Regulation 7.1.50 'Operating a financial market' specifies two circumstances which constitute the operating of a financial market for the purposes of Chapter 7 of the Act. Firstly, the Clean Energy Regulator making or accepting offers or invitations to acquire or dispose of carbon units on its own behalf, or on behalf of the Commonwealth, in the course of conducting an auction of carbon units, constitutes operating a financial market. Secondly, a person making or accepting offers or invitations to acquire or dispose of carbon units on behalf of the Clean Energy Regulator, in the course of assisting the Clean Energy Regulator to conduct an auction of carbon units (such as the auction service provider), constitutes operating a financial market. The effect of this item is to clarify that the specified circumstances constitute operating a financial market under the Act, and that all relevant provisions in the Act apply, including the market misconduct and insider trading provisions. Item [2] This item inserts paragraph 7.6.01(1)(mb) after paragraph 7.6.01(1)(ma). Section 911A of the Act provides that a person who carries on a financial services business in this jurisdiction must hold an Australian Financial Services Licence (AFSL) covering the provision of the financial services. Paragraph 911A(2)(k) states that the regulations may provide for an exemption from this requirement. The inserted paragraph 7.6.01(1)(mb) provides that financial services that a person provides to the Clean Energy Regulator or on behalf of the Clean Energy Regulator, which relate to the conduct of an auction of carbon units, are exempt from the requirement to hold an AFSL. This exemption does not extend to financial services provided in the management of any deposit lodged to participate in an auction, or arising in the course of directly participating in an auction (whether on the person's own behalf or on behalf of a person other than the Clean Energy Regulator). It is considered that those activities should be subject to the obligations imposed on AFSL holders under the Act. The intent of paragraph 7.6.01(1)(mb) is to remove uncertainty over whether an auction service provider is required to hold an Australian Financial Services Licence (AFSL) under the Act. It is not considered necessary to require the auction service provider to hold an AFSL because its activities will be limited to assisting the Clean Energy Regulator in developing and managing the auction platform and its conduct will be governed by the contract established with the Clean Energy Regulator. Item [3] This item removes the quotation mark at the end of regulation 7.6.02AG to facilitate insertion of the new subregulation as described under Item [4]. Item [4] This item adds subregulation (2F) at the end of regulation 7.6.02AG. Section 766D of the Act says that regularly stating the prices at which a person is willing to acquire or dispose of financial products constitutes making a market, which is an activity for which an AFSL is required under the Act. This may have the unintended consequence that participating in an auction of carbon units in which a bidder will be required to regularly state the price at which they propose to acquire a quantity of carbon units may require obtaining an AFSL. This is considered to be an unnecessary requirement which may deter wider participation in the auctions if not addressed. The intention is therefore to provide an exemption for persons bidding in carbon unit auctions from the requirement to hold an AFSL. The exemption applies to persons bidding on their own behalf or on behalf of a related body corporate of the person or on behalf of an associated entity of the person. Item [5] This item makes a consequential amendment to regulation 7.6.02AH following the amendment in Item [4]. Regulation 7.6.02AH amends section 911B of the Act, which sets out certain situations in which a person may provide a financial service on behalf of a principal. Paragraph 1(e) of section 911B allows a person to provide a financial service on behalf of a principal if the principal is not required to hold an AFSL. Item [5] adds the exemption in Item [4] to the circumstances set out in paragraph 1(e) of section 911B in which a person may provide a financial service on behalf of a principal. Item [6] This item inserts regulation 9.12.04 at the end of Part 9.12 of the Principal Regulations. Section 1368 of the Act provides that the Regulations may specify provisions of Chapter 7 which do not have effect in relation to a specified person or class of persons. The inserted subregulation 9.12.04(1) means that section 791A of the Act, which relates to the requirement to hold an Australian Market Licence (AML), does not apply in relation to a person engaged to assist the Clean Energy Regulator in the auction of carbon units. As auctions of carbon units will be governed by the Clean Energy Act as well as the Clean Energy Regulator's standard operating procedures, it is considered unnecessary to apply the AML regulatory regime to a service provider in the circumstances specified. This regulation removes doubt over the licensing requirements for a service provider in its role in assisting the Clean Energy Regulator. The inserted subregulation 9.12.04(2) means that section 820A of the Act, which relates to the requirement to hold a Clearing and Settlement Facility Licence (CSFL), does not apply in relation to a person engaged to assist the Clean Energy Regulator in the auction of carbon units. While it is unlikely that a CSFL would be required for the provision of clearing and settlement services under auctions of carbon units, the insertion of subregulation 9.12.04(1) removes any doubt over the licensing requirements for a service provider. ATTACHMENT B Statement of Compatibility with Human Rights Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 Corporations Amendment Regulation 2013 (No. 1) This Legislative Instrument is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011. Overview of the Legislative Instrument The Corporations Amendment Regulation 2013 (No. 1) (the Regulation) makes a number of amendments to the Corporations Regulations 2001. The Regulation establishes auctions of carbon units under section 111 of the Clean Energy Act as financial markets for the purposes of the Corporations Act 2001 (the Act). This removes any doubt as to whether the auctions would be financial markets and make it clear that the Act's market misconduct and insider trading provisions apply to conduct at auctions. The Clean Energy Regulator proposes to engage the services of an auction service provider and a settlement service provider to assist with the conduct of auctions. The Regulation clarifies the manner in which the AFSL, AML and CSFL requirements in the Act apply to an auction service provider and a settlement service provider if engaged by the Clean Energy Regulator to assist with the conduct of auctions. In particular, it clarifies that in most circumstances, with the exception of a number of specified scenarios, such providers are not required to obtain an AFSL, AML or CSFL in exercising their duties. Human rights implications This Legislative Instrument does not engage any of the applicable rights or freedoms. Conclusion This Legislative Instrument is compatible with human rights as it does not raise any human rights issues. 2