Commonwealth Numbered Regulations - Explanatory Statements

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Select Legislative Instrument 2005 No. 38

Issued by the Parliamentary Secretary to the Treasurer

Corporations Act 2001

Corporations Amendment Regulations 2005 (No. 2)

Subsection 1364(1) 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.

Section 888A of the Act allows compensation to be claimed in respect of a loss that is connected with a financial market (for example, if the loss is caused by a participant in the market) in situations as specified by the Corporations Regulations 2001 (the Principal Regulations). Sections 888B to 888E provide that the regulations determine the amount of compensation payable and other matters in connection with the payment of compensation.

The Regulations relate specifically to the operation of the National Guarantee Fund (NGF). The NGF is a compensation fund maintained by the Securities Exchanges Guarantee Corporation Limited (SEGC) in accordance with the Act and the Principal Regulations. The SEGCs purpose is to meet a range of claims that may arise out of conduct in relation to securities by participants on the market operated by the Australian Stock Exchange (ASX). When the six State stock exchanges merged in 1987 to form the national ASX, part of the assets of the fidelity funds of the State exchanges were also merged to form the NGF. The creation of the Australian Stock Exchange Limited and the National Guarantee Fund was facilitated by the Australian Stock Exchange and National Guarantee Fund Act 1987. The assets of the initial NGF have been invested and, as at
28 February 2005, the value of the NGF was approximately $165 million. Payments from the NGF may only be made in accordance with the legislation. The NGF does not contain or receive any Commonwealth funds.

The NGF has fulfilled two roles - investor protection and clearing support. However, this dual function arrangement is inconsistent with international practice and the Reserve Bank of Australias Financial Stability Standards (which address, among other things, responsibility for clearing support).

The NGFs two functions are therefore being separated, with effect on 31 March 2005. This is being achieved by a determination under section 891A of the Act, supported by the amended Regulations. Section 891A enables the Minister to direct that a payment be made from the NGF to a prescribed body, where that body has made adequate arrangements for clearing and settlement system support. The prescribed body concerned is the Australian Clearing House Pty Limited (ACH), a wholly owned subsidiary of the ASX. The Parliamentary Secretary to the Treasurer has now directed SEGC under section 891A to make a payment to ACH on 31 March 2005. This is the only determination necessary to separate the investor protection function of the NGF from the clearing support function.

After the Parliamentary Secretarys direction, it is appropriate that regulations be made so that the NGF will no longer be liable for claims made under certain contract guarantee heads of claim and claims in respect of net obligations. This is because ACH will have received a payment from the NGF to cover those claims relating to clearing support which it could previously make against the NGF. Sufficient funds have been kept in the NGF to provide for payments under the continuing heads of claim. However, funds in excess of this amount are being paid to ACH, which is responsible for clearing transactions entered into on the financial market operated by the ASX.

The purpose of the Regulations is to complement the Parliamentary Secretarys direction to make a payment to ACH for clearing support and to limit the activities of the NGF to investor protection.

Details of the Regulations are in the Attachment.

The Regulations commence on 31 March 2005, at the same time as ACH assumes the clearing support role.


Details of the Corporations Amendment Regulations 2005 (No. 2)

Regulation 1: Name of Regulations

Regulation 1 provides that the Regulations are to be known as the Corporations Amendment Regulations 2005 (No. 2).

Regulation 2: Commencement

Regulation 2 provides that the enabling regulations and Schedule 1 commence on
31 March 2005. The regulations need to commence on the same day as the new clearing support measures, rather than on registration.

Regulation 3: Amendment of Corporations Regulations 2001

Regulation 3 provides that Schedule 1 amends the Corporations Regulations 2001(the Principal Regulations). In particular, the amendments are made to Part 7.5 of the Principal Regulations, which deals with compensation regimes for financial markets.

Regulation 4: Transitional

Regulation 4 provides that the amendments made by Schedule 1 do not apply to a claim under Division 4 of Part 7.5 of the Act that:

                the claimant was entitled to make before 31 March 2005; and

                was not withdrawn or finally determined before 31 March 2005; and

                is made under certain regulations (which have been omitted); and

                is served before 30 September 2005.

The purpose of these transitional provisions is to ensure that any potential claims arising from circumstances prior to the splitting of the NGF, that would have been claimable but for the amending regulations, are still covered. The Australian CS Facility Licence of ACH has been varied to require an indemnity in favour of the NGF to cover any claims arising out of the transitional period.

Schedule 1: Amendments

The amendments are addressed in two groups:

1.             substantive amendments;

2.             consequential amendments.

Substantive amendments

Item [17] omission of certain contract guarantee provisions

Certain heads of claim against the NGF which fall within contract guarantees have been omitted. In particular, the amendments (Item [17]) omit:

                regulations 7.5.20 and 7.5.21 (claim by selling dealer in respect of default by buying dealer); and

                regulations 7.5.22 and 7.5.23 (claim by buying dealer in respect of default by selling dealer).

The rights of clients to claim under the contract guarantee provisions are unaltered.

Item [22] omission of Subdivisions 4.4 (securities loans guarantees) and 4.5 (claims in respect of net obligations)

Subdivisions 4.4 and 4.5 of the Principal Regulations have been omitted (Item [22]).

Subdivision 4.4, which relates to securities loans guarantees, has been omitted because the procedure is obsolete.

Subdivision 4.5, which provides for claims in respect of net obligations, has been omitted. Because the Minister has directed that a payment be made by SEGC to ACH (as the central counterparty) for the purpose of clearing support, it is no longer appropriate for ACH to retain the right to claim against the NGF in respect of net obligations.

Item [23] cap per insolvency

The regulations relating to claims on the NGF provide for a cap on total payments in connection with a particular insolvency. Subregulation 7.5.71(1) provided that the cap was 14% of the minimum amount of the NGF on the day of the insolvency. The minimum amount of the NGF was then $80 million. Therefore, 14% of that minimum was $11.2 million.

The minimum amount of the NGF has been reset at $76 million.

The cap on total payments per insolvency has therefore been changed to 15% of the minimum amount of the NGF (Item [23]). This means that the cap is the same in dollar terms as previously.

Consequential amendments

Items [1], [24], [25] settlement authority

The concept of settlement authority has been omitted from Part 7.5 of the Principal Regulations.

The definition has been omitted from regulation 1.0.02 (Item [1]) and consequential amendments have been made to regulation 7.5.74 (Items [24] and [25]).

Items [2] [6], [10], [13] other definitions and concepts omitted

The Regulations delete the following definitions because they no longer have a function once the remainder of the amendments commence:

                Borrower, claimable obligation, completion period, compliance period, excluded amount, guaranteed securities loan, lender (Item [3]);

                Replacement agreement (Item [5]);

                Security benefit (Item [6]);

                Guaranteed securities loan and related concepts (Item [10]); and

                The meaning of novation (Item [13]).

The phrase (other than a guaranteed securities loan) has been omitted from the definition of settlement documents (Item [2]).

The definition of purchase obligation in subregulation 7.5.01(1) has been reworded in the light of the omission of the definition of claimable obligation, without any change of meaning (Item [4]).

Regulation 7.5.12 gave regulatory backing to certain operating rules which attribute securities and payments to transactions. This regulation is no longer required following the amendments to omit the contract guarantee heads of claim and net obligations (as discussed above) and it has therefore been omitted by Item [13].

Items [7] [9] definition of dealer

Regulation 7.5.03 defines the meaning of dealer for Subdivision 4.5. Subdivision 4.5 has been omitted by Item [22].

The reference to Subdivision 4.5 and the definition for the purpose of that Subdivision have been omitted (Items [7] and [8]). This is consequential to the omission of Subdivision 4.5.

The meaning given to dealer for the purposes of Subdivision 4.9 has been extended to Parts 4.7 and 4.10 (Items [7] and [9]) to accommodate third party clearing arrangements.

Items [11] and [12] definition of securities business

Regulations 7.5.07 and 7.5.08 relate the meaning of securities business. Regulation 7.5.08 defines the term for the purpose of Subdivisions 4.5 and 4.9.

Item [22] of the Regulations (see above) omits Subdivision 4.5.

Consequentially, the references to Subdivision 4.5 in regulations 7.5.07 and 7.5.08 have been omitted.

Items [14] - [16], [18] - [21] and [26] minor consequential amendments

The following minor consequential amendments have been made:

                Correction of cross-references and omission of provisions which are no longer needed in regulations 7.5.19, 7.5.28, 7.5.29, 7.5.30, and 7.5.31 following omission of some of the contract guarantee provisions (Items [14], [16], [18] [21]);

                Clarification of the relevant rules in regulation 7.5.19 (Item [15]);

                Correction of the definition of cash settlement provision in regulation 7.5.81 so that it no longer refers to regulations which have been deleted (Item [26]).

Item [27] deadline for claims

A new subregulation has been added to regulations 10.2.26 and 10.2.27 so that claims under the provisions relating to contract guarantee and clearing support (the grounds for claiming which are proposed to be omitted) which accrued prior to 11 March 2002 must be made before
30 September 2005.

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