Hon LIANNE DALZIEL (Minister of Commerce) Link to this
I move, That the Settlement Systems, Futures, and Emissions Units Bill be now read a first time. At the appropriate time I intend to move that the bill be considered by the Commerce Committee. The Settlement Systems, Futures, and Emissions Units Bill is designed, first, to allow for trades in securities and other products to be cleared and settled through designated systems that meet the expectations of international and domestic participants in New Zealand’s financial sector; second, to align the regulation of exchanges seeking to operate in both the securities and futures markets, and to provide that a person approved by the operator of an authorised futures exchange is an authorised futures dealer; and, finally, to clarify the regulatory treatment of emissions units to support the development for the market for emissions units.
Settlement systems are used to give effect to transactions in our financial markets, and as such they contribute to a well-functioning capital market. Designation of a settlement system gives statutory backing to the systems rules to support finality of settlement, which in turn gives a designated settlement system protection against potential claims from the liquidator of any failed participant. International standards can be met without designation, which is why this is not being made mandatory. However, without an explicit regulator, it can be very difficult to convince participants that a settlement system meets international standards. At present, New Zealand’s legislation provides for the designation of payment systems under Part 5C of the Reserve Bank of New Zealand Act 1989. Settlement systems could also be designated under such provision, but such designation would provide protection only to the payment component of the transaction, not to the settlement of the property component of the transaction. Under the Settlement Systems, Futures, and Emissions Units Bill, the designation regime in Part 5C of the Reserve Bank of New Zealand Act will be extended to systems that clear and settle products as well as payments. This will be jointly overseen by the Reserve Bank and the Securities Commission.
The Settlement Systems, Futures, and Emissions Units Bill also aligns the regulatory environment for exchanges seeking to operate in both securities and futures markets, by amending the Securities Markets Act 1988, so that an exchange registered under Part 2B of that Act may be registered either in respect of securities markets only or in respect of both securities markets and futures markets. The bill also seeks to clarify the regulatory treatment of emissions units to support the development of the market for emissions units. This applies to both units issued under binding regulations, such as the New Zealand emissions trading scheme, and units issued in the voluntary market. And can I please make the point to the House, and for those who are listening and are interested, that none—none—of these technical amendments are necessary for the operation of the New Zealand emissions trading scheme. I want to make it clear that this is a facilitative measure. I actually had a feeling that some of the members of the Opposition may have misunderstood that point, which is why I wanted to make it crystal clear.
Hon LIANNE DALZIEL Link to this
Now that I have the acceptance of the other side that that is now crystal clear, we will not have any unnecessary debate on that matter. The bill amends the Securities Act 1978 to ensure that the issuance of emissions units will not need to meet the requirements of the regulatory regime for offers of securities or the relevant provisions of the Securities Markets Act, unless they are part of an investment scheme. In this regard, emissions units will be treated like other property.
The bill also extends the priority provided by section 97 of the Personal Property Securities Act in respect of shares and other securities to emissions units. Under this Act, emissions units will be defined as investment securities. Without this amendment, the benefits of anonymous exchange trading could be lost, because a purchaser would actually otherwise need to check the Personal Property Securities Register to ascertain whether anyone else had a registered security interest over the specific emissions units they were seeking to purchase. Finally, in order to make clear that the definition of futures contract extends to a futures contract for emissions units, the bill amends the Securities Markets Act to include emissions units in the definition of commodity, providing certainty that futures contracts in emissions units are regulated by that Act.
In conclusion, I record my appreciation of the participation of the financial sector throughout the consultation process on this bill, and I encourage the financial sector to remain actively involved in the refinement of the bill, through the select committee process. I also acknowledge the work of the officials, and I appreciate that other parties in the House are keen to see progress on this bill, as part of an overarching commitment to building a sound and effective regulatory environment. I commend the bill to the House.
SIMON POWER (National—Rangitikei) Link to this
Well, it would be nice to have a piece of legislation to speak on during urgency that was straightforward, like, maybe, a bill on aquaculture or something of that nature—something that was not as complicated, as specific, and as regulatory in nature as the Settlement Systems, Futures, and Emissions Units Bill. I put it on record now that the Minister has given an undertaking to the House that this matter relates only to emissions units in the general sense, rather than creating specific links to the legislation that has recently passed through the House.
The Settlement Systems, Futures, and Emissions Units Bill is designed to create a voluntary designated settlement system regime, similar to that currently operating in the Reserve Bank of New Zealand Act, for cash payment systems. Operators of settlement systems will be able to elect, but will not be required, to seek designated status. It is worth just spending a bit of time on that issue, because to the untrained eye it is somewhat complex—and I include my own eyes in that, actually. The rules of the system, to the extent that they relate to the calculation and discharge of obligations and to remedies on default, are enforceable regardless of any enactment or rule of law to the contrary. So it ensures that net settlements and default close-outs can be completed, notwithstanding legal uncertainties surrounding netting and set-offs.
I met with a representative—a regulatory guy—from NZX today to get a briefing on the issue of netting. I found out, actually, that the individual concerned had been a partner in a law firm I had previously been employed by. He asked me whether I could remember the work I had done on netting while I had been at that particular law firm and, no, I could not. But in any event, I will move on.
Settlements are irreversible, and that ensures that completed settlements cannot be unwound on the subsequent insolvency of a participant. I will come back to that, because to my mind, with the creation of the clearance process and the centralisation of risk at the hub of that process, it is probably the most important aspect of this bill. I will come back to that. The operator of the settlement system receives personal property free of security interests under the Personal Property Securities Act, and that enables the settlement system operator to complete settlements free of claims from secured creditors of participants. The security interest held by the system operator and the collateral provided by participants have priority over all other claims on that collateral.
No, no; they did not, I tell the Minister. These are my notes. It is also worth summarising the position in this way: if, when an equity is sold and purchased, a broker falls over, that transaction can be managed individually and isolated, and the clearance house takes the risk. In other words, there is no ripple effect for any potential systemic failure, in the same way that the Reserve Bank carries the risk in the banking sector. That is something we need to ensure, for the sake of the way these particular trades occur.
The idea behind that has been described to me as having the risk centralised to the clearing system, so that all obligations flow from that central part of the wheel of trade and obligations surrounding it—that is, they are owed to that clearing system. I am advised that that will allow more people into the trading space, because they can go to the wholesale clearing house instead of doing it themselves—which is exactly the same way that the Reserve Bank operates in the banking sector. I guess that in the bigger scheme of things, the idea behind the legislation is that it will create more confidence in investing in the capital markets, because potential investors will know that the clearing house systems are in place, and are at the middle of that proposal.
The establishment of a central counterpart clearing and settlement system, in which the system operator assumes the settlement risk of each participant and guarantees the performance of all obligations, occurs regardless of the performance by other parties to the transaction. As I said, in order to enable the central counterpart clearing and settlement system to do that, the operator manages its risk by applying minimum capital and other prudential standards to its participants, and by holding collateral from each participant to secure the performance of its obligations. The important thing about this particular proposal is that the system proposed complies fully with the recommendations of the Bank for International Settlements and the International Organization of Securities Commissions for settlement systems. It is intended to comply with the requirements of those standards in relation to being both insolvency remote, for want of a better phrase, and a true delivery.
The passage of the bill, which National will be supporting at this first reading, is a key element in addressing any systemic risk in the NZX’s capital markets. The passing of the bill will also enable the NZX, or, in fact, any other settlement system provider, to introduce an internationally compliant clearing and settlement system, which will align New Zealand with global best practice. I was fortunate enough to have a discussion with the chair of the Securities Commission 3 or 4 weeks ago, I think—maybe it was a bit longer ago—when Ms Diplock explained to me that this was useful legislation in that it provided for an international best-practice model, and that it was something we should look at carefully. I am grateful for that advice.
I do not intend to add any more at this stage, other than to note that in Business Day on Wednesday, 24 September, the head of Australia’s sharemarket warned that his country could go the way of New Zealand and become “internationally irrelevant” if its market is fragmented too much by new competitors. It is worth members who have an interest in this area reading that particular article in order to ensure that we cross off some of those more serious issues. I do not intend to quote from the release, but, because it is interesting in nature, I would recommend to members who have an interest in this area that they make sure they are aware of what the Australian Stock Exchange chairman, Maurice Newman, is saying about global market relevancy, and also about the importance of scale.
I am sure that is right, I say to the Minister. On that basis, when we are dealing with scale and investment in capital markets, it would be National’s view that this particular bill can only aid that increase in scale and size. Of course, we hope the task force that is looking into the capital markets will also be able to give us as a Parliament some guidance on how to achieve that goal, outside the reasonably narrow confines of the legislation that is currently before the House.
CRAIG FOSS (National—Tukituki) Link to this
As my colleague Mr Power just noted, we will be voting for the Settlement Systems, Futures, and Emissions Units Bill at its first reading and voting for it to be referred to the select committee—Commerce Committee or Finance and Expenditure Committee—
Nathan GuyThe Commerce Committee. That is very good.
This is good legislation, from what I can see at the moment, and it is a step-up. As Simon Power and the Minister of Commerce noted, it is a step-up to global best practice. I declare that I have operated and used futures exchanges in all sorts of jurisdictions, starting on the New Zealand exchange many, many years ago.
This bill helps the capital markets framework of New Zealand to remove some of the anomalies and weaknesses in the existing model. We have the Reserve Bank Austraclear model and the New Zealand Exchange’s model, and the emerging model through which it is hoped to develop a carbon trading scheme. As the Minister said, yes, that is not essential to this bill, but this legislation is very important to the creation of that.
I gave a speech on this bill this morning at a conference in Auckland. We talked about futures. It might be important for anyone who is listening to understand what the futures market is, because many people think it is the price of something in the future. Actually, it is not. It is the price today, plus or minus the opportunity cost of the delay in receiving or delivering that product—whatever it is—and the risk of settlement. That is actually all it is. When we hear about oil futures, gold futures, or anything like that, all that means is the price today and the cost of carrying, borrowing, or lending money until the day of the future settlement. That is all it is. It is not the price of something in the future.
I note that because when the Climate Change Response (Emissions Trading) Amendment Bill came through the Finance and Expenditure Committee, many people confused the futures price of carbon in Europe, or something like that, with the idea that that was the price it was going to be in the future. We can look at any analysis we like, but it is not that, at all. It is merely the price today, plus or minus the cost of carry, plus or minus any credit risk, and plus or minus any settlement risk, which, in fact, this bill before us aims to fix up.
We are talking here about settlements for the futures and emissions exchanges, etc., but it is a long way from the original futures markets, which were actually on the floor. We used to see these guys, and we still see them on the stock exchange, where they have all sorts of colours. All they seem to do on those floors is shout very, very loudly, and they are very tall. The tallest people and the ones who shouted the loudest on those particular exchanges in the old days were very successful. Now much of this stuff is on screen in the virtual world and across the Internet. Huge, huge volumes are traded.
As the Minister started to say, this is where many of the issues around the problems that are coming from the United States at the moment come from, because via futures we can have massive leverage. It is from massive leverage that we can create a very small operator that can have huge exposure. Sometimes, and there have been instances of this in the past, the exposure and losses those operators are incurring are more than what they can meet; thus, there is a settlement or payment risk. That is exactly what this bill is trying to make less harmful. The bill will never eliminate that.
There is an example that I remember from about 1988 or 1989, right here in New Zealand. The eyes of the world were upon New Zealand because there was a particular bank in New Zealand that had a massive short position on Government bonds at the time. Let us say there were a billion of those particular Government bonds in the market, issued by the Reserve Bank or the Debt Management Office. The particular futures contract was a deliverable contract, which meant that when it was settled it was not a payment risk. Someone actually had to front up with the particular bonds, if they had been sold short via the futures exchange, and had to deliver them. In this particular instance, the total number of short futures in the market was 1.1 or 1.2 billion. Someone had sold more bonds than there actually were. The New Zealand financial markets at that time were in crisis, and it was very interesting that what the Reserve Bank and Debt Management Office did, in the end, was to issue more bonds. Their first job was to try to save the market.
As my colleague noted, the Settlement Systems, Futures, and Emissions Units Bill picks up the payment and settlement system. There is still huge risk involved here, but it now takes away individual risk and puts risk only on the settlement, be it the Reserve Bank Austraclear model or the New Zealand Exchange emerging model, whatever that might be. We still do not know; it will be interesting to see. We will go through this at the select committee, and we will look at how this works for deliverables. For example, we will see whether the New Zealand Exchange’s carbon futures will be deliverable or cash settled and netted; Mr Power explained to us what netting was earlier on.
I will not talk for too much longer, to the relief of many. It is 10 to 12, we are in urgency, and one of the most urgent bills for the Government is this particular bill. I do wonder why this one has taken so long to come out, because it is actually an eminently sensible bill. Perhaps it was tied up because we have the Capital Markets Development Taskforce looking at things like this. If only the Government looked at the harder questions regarding how to help offer debt to our capital markets, it could start to reduce the risk premium on New Zealand’s capital markets, which it is fully to blame for, and for fiascos such as the Auckland airport sale—or non-sale. The political interference in that process had the effect of “shallowing” New Zealand’s capital markets, not deepening them. As many people agreed with us at a conference today—
As the Minister is now chipping in I could talk about something else that could be used to help. However, it is 10 minutes to 12 o’clock so I will let that go. I look forward to this bill going to the Commerce Committee, and I look forward to the more technical contributions of the next speaker. Thank you.
SIMON POWER (National—Rangitikei) Link to this
I raise a point of order, Mr Speaker. During my speech, when the Minister and I were exchanging views on a particular matter, she asked me whether NZX had written my speech. I said no, but that I was reading from notes. In the interests of making sure I am not misleading the House, I should say that I was provided with a briefing note from NZX, which I scribbled notes all over. On reflection, I wanted to clarify that matter before the proceedings.
Mr DEPUTY SPEAKER
TE URUROA FLAVELL (Māori Party—Waiariki) Link to this
Tēnā koutou katoa. At 10 minutes to 12 o’clock, almost near the end of business, when the debate on this particular bill is coming to a close, and in order to give my colleague Mr Groser a good shot, I want to make sure that the Māori Party maintains its record and speaks on every bill that has come into the House. I say that the Māori Party supports this bill at its first reading. Kia ora tātou.
TIM GROSER (National) Link to this
The member preceding me, Te Ururoa Flavell, is very gracious. I thought I was going to be on the morning watch as a consequence of his rising to take a call.
National supports the first reading of the Settlement Systems, Futures, and Emissions Units Bill, and I will focus for a few minutes on the emissions trading side of the bill. In the deeply unlikely event that people are listening to the debate at this very late stage, let me make it clear that National supports this bill’s setting up of a regulatory framework for emissions trading, although we still have the most serious reservations about the underlying substantive bill to which the emissions trading scheme relates. The reason we support this bill is that irrespective of the design of any emissions trading scheme, National recognises that we need a proper regulatory system in place that has domestic credibility, that has international credibility, that protects property rights, and that deepens the markets. That is neutral to the actual substantive concept of the emissions trading scheme it underwrites. Rather than reiterate the technical description my colleague Simon Power so ably put out about the features of this bill that lead us to—
No—I think there was benefit from the briefing, and I heard the Minister read a speech that I am sure she, herself, spent a great deal of time crafting personally.
We will support this bill, irrespective of an emissions trading scheme that National will introduce, and recently in a speech by our deputy leader there were set down six key principles on which we will base the construction of a more balanced emissions trading scheme. But we will need a framework, which this bill sets out, for the actual trading of the emissions units.
I think that most important for this bill, in terms of trying to understand what it will achieve, is to see that it is very much a work in progress. We are essentially trialling here an administrative system of great complexity and potentially enormously important economic effects. If ever the old phrase “the law of unintended effects” applies, I would argue it applies here. I think that it is a very commonplace observation but utterly correct to say, in relation to this regulatory change, that the two parts taken together—the substantive emissions trading scheme and this bill implementing the emissions trading process—are the most important reregulation of the New Zealand economy since the reforms of the 1980s and early 1990s. Although one could make an argument that at least those reforms were on well-trailed grounds in terms of international experience, this legislation is literally entering uncharted waters here, both in respect of the technical provisions of an emissions trading scheme and the substantive provisions of the emissions trading scheme it is intended to facilitate.
For that reason, the essential difference between the parties, not on this bill but on the underlying policy issue, is that we think the transition path that New Zealand is now undertaking for the very first time has many, many risks associated with it. Therefore, we think a much more prudential approach is utterly warranted. We see, essentially, when we step back from the technical substance of this paper to look at what it is actually trying to achieve, that there are two separate questions here. The first is whether we need to have policy frameworks such as provided for in this bill, which establish a response to the question: are anthropogenic greenhouse gases a serious problem that the international community needs to address? That is one question. The other question is: what is the right balanced policy response? People try to put those two together, but they are actually quite separate.
I believe that it is very clear the consensus has grown, not just in this country but internationally, on the first question—that we need to take this seriously, and that we need frameworks such as this bill to deal with the problem. We can see that with the change in the Australian Government, the Australians have come on board with ratification. The two United States presidential candidates are making very promising statements that the United States will also come on board, so the consensus is growing. Of course the big question about developing countries is still before us. So that is that side of the question. On the policy response side of the question this bill is addressing, again we can see a consensus emerging that we have to put a price on carbon and that it is probably better to do that via a trading system. The consensus has grown within New Zealand, and I think it is clear that the consensus is growing internationally.
But this is very much a work in progress. I will guarantee that a future Parliament will have to come back to this to make changes, in the light of practical experience, and, most important, in terms of international negotiations yet to occur. Given the hour, I will stop at this point, but I think it is very important that people understand that this is an issue of immense complexity, and that the deeply difficult transition issues in moving towards a decarbonised economy will take decades to address. Although I think we have the framework for a reasonable trading regime that will eventually establish an international market in emissions units, we must be prepared to revisit this issue in due course.