Commonwealth Numbered Regulations - Explanatory Statements

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CORPORATIONS REGULATIONS (AMENDMENT) 1996 NO. 26

EXPLANATORY STATEMENT

STATUTORY RULES 1996 No. 26

Issued by the Authority of the Attorney-General

Corporations Act 1989

Corporations Regulations (Amendment)

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, prescribing, inter alia, matters which are required by the Corporations Law to be prescribed by regulations, or necessary or convenient to be prescribed by regulations for carrying out or giving effect to the Corporations Law.

The regulations are in support of amendments made by the Corporations Law (Securities and Futures) Amendment Act 1995. The purpose of the regulations is to establish a regulatory regime under the Corporations Law for the trading of the Sydney Futures Exchange's new products--deliverable bond futures contracts and deliverable share futures contracts, and options over such contracts. A deliverable bond or share futures contract is an agreement to deliver bonds or futures at a particular future time at a price determined at the time the contract is made.

The regulations prescribe these products for the purposes of paragraph 72A(1)(b) of the Corporations Law, and modify the Corporations Law in its application to these prescribed products pursuant to subsection 72A(2).

Currently, deliverable share futures contracts would not fall within the definition of 'futures contract' in subsection 72(1) of the Corporations Law. The contract would fall within the definition of "security" in subsection 92(1). The regulations prescribe the product and modify provisions of the Corporations Law to permit the product to be traded on the Sydney Futures Exchange as if it were a futures contract.

There are doubts as to whether deliverable bond futures contracts would be classified as "futures contracts" under the Corporations Law. In order to remove these doubts and ensure that such contracts may be traded as futures contracts on the Sydney Futures Exchange pursuant to Chapter 8 of the Corporations Law, the regulations prescribe the product and the provisions of the Corporations Law that will apply to deliverable bond futures contracts.

Chapter 7 of the Corporations Law regulates the securities industry while Chapter 8 governs the futures industry. If a product is a security it must be traded on a securities exchange pursuant to Chapter 7, unless it is prescribed pursuant to subsection 72A(1)(b) to permit it to be traded on a futures exchange.

Details of the proposed regulations are contained in the Attachment.

The regulations commenced on the date of gazettal.

ATTACHMENT

Regulation 1

Regulation 1 provides that the regulations are amended as set out in these regulations.

Regulation 2

Regulation 2 inserts new Divisions 2, 3, 4 and 5 in Part 1.2 of Chapter 1 of the Corporations Regulations.

Division 2 -- Deliverable bond futures contracts

New Regulation 1.2.12

Regulation 1.2.12 defines a "deliverable bond futures contract" as an agreement under which a particular person will be under an obligation to transfer, or to accept a transfer of a particular quantity of 3 year or 10 year Treasury bonds at a particular future time or a chose in action representing such bonds.

The definition in regulation 1.2.12 provides for the transfer of chooses in action representing the Treasury bonds. This reflects the operation of the Reserve Bank Information and Transfer System (RITS), the proposed settlement system for deliverable bond futures contracts.

Subregulation 1.2.12(2) provides that an agreement is a deliverable bond futures contract whether or not the subject matter of the agreement is in existence, the agreement has any other effect or the agreement is capable of being varied or discharged before that future time, and where it appears likely at the time the agreement was entered into that the obligation to transfer bonds or accept transfer of bonds in accordance with the agreement will be discharged otherwise than by transfer of the bonds or by assuming an offsetting position under another agreement of the same kind.

These provisions reflect the nature of a "commodity agreement" and an "eligible commodity agreement" as defined in section 9 of the Corporations Law.

Subregulations 1.2.12(2)(e) to (g) further provide that the agreement is a deliverable bond futures contract whether or not the obligation to transfer bonds is discharged by another person effecting the transfer or the novation of a chose in action, or whether or not a person in the bought position receives a proprietary interest in a particular bond.

These subparagraphs give recognition to the nature of the proposed settlement of the contracts through the paperless Reserve Bank Information and Transfer System.

New Regulation 1.2.13

New regulation 1.2.13 prescribes a deliverable bond futures contract for the purposes of paragraph 72A(1)(b) of the Corporations Law.

New Regulation 1.2.14

New regulation 1.2.14 provides that Chapter 7 of the Corporations Law does not apply to deliverable bond futures contracts.

New Regulation 1.2.15

New regulation 1.2.15 provides that Chapter 8 of the Corporations Law applies to deliverable bond futures contracts as if they were futures contracts. This permits the agreements to be regulated under the Futures Industry provisions of the Corporations Law and to be traded on a futures exchange.

Subregulation 1.2.15(2) provides that where a member of the Reserve Bank Information and Transfer System transfers bonds which are the subject of a deliverable bond futures contract then, for the purposes of that dealing Part 8.3 (licensing provisions) and sections 1206, 1207, 1209 and 1210, 1234 and 1235 do not apply to that member. The mere transfer of bonds pursuant to a deliverable bond futures contract is, not to be taken as a dealing in a futures contract.

New Regulation 1.2.16

New regulation 1.2.16 modifies a number of definitions contained in section 9 of the Corporations Law in its application to deliverable bond futures contracts. The modifications are necessary as the present definitions do not encompass a deliverable bond futures contract. Accordingly a new definition of "bought position" and "sold position" is substituted in relation to deliverable bond futures contracts.

Division 3 -- Futures options over deliverable bond futures contracts

New Regulation 1.2.17

Regulation 1.2.17 defines a "futures option over a deliverable bond futures contract" as an option or a right to assume a bought position or a sold position in relation to the deliverable bond futures contract at a specified price or value and within a specified period.

New Regulation 1.2.18

New regulation 1.2.18 prescribes a futures option over a deliverable bond futures contract for the purposes of paragraph 72A(1)(b) of the Corporations Law.

New Regulation 1.2.19

Regulation 1.2.19 provides that Chapter 7 of the Corporations Law does not apply to a futures option over a deliverable bond futures contract.

New Regulation 1.2.20

Regulation 1.2.20 provides that Chapter 8 of the Corporations Law applies to a futures option over a deliverable bond futures contract as if it were a futures contract. This enables the agreement to be traded on a futures exchange and regulated under the Futures Industry Chapter of the Corporations Law.

Division 4 -- Deliverable share futures contracts

New Regulation 1.2.21

Regulation 1.2.21 defines a "deliverable share futures contract" as an agreement to transfer, or to accept a transfer of a particular quantity of shares of a listed corporation at a future time and for a future price or for a price to be calculated in a particular manner.

Subregulation 1.2.21(2)(d) provides that an agreement is a deliverable share futures contract whether or not the subject matter of the agreement is in existence, the agreement has any other effect or the agreement is capable of being varied or discharged before that future time, and where it appears likely at the time the agreement was entered into that the obligation to transfer shares or accept transfer of shares in accordance with the agreement will be discharged otherwise than by transfer of the shares or by assuming an offsetting position under another agreement of the same kind.

Subregulation 1.2.21(2)(e) provides that an agreement is a deliverable share futures contract where the obligation of the person to transfer shares is discharged by another person effecting the transfer.

These provisions reflect the definition of "commodity agreement' and "eligible commodity agreement" in section 9 of the Corporations Law.

New Regulation 1.2.22

Regulation 1.2.22 prescribes a deliverable share futures contract for the purposes of paragraph 72A(1)(b) of the Corporations Law.

New Regulation 1.2.23

Regulation 1.2.23 disapplies Chapter 7 of the Corporations Law other than Part 7.2A, sections 979(1), 995, 998 and 1114, Division 2A of Part 7.11 and Part 7.13 to deliverable share futures contracts. This ensures that the insider trading provisions of Chapter 7 and sections 995 and 998 and Part 7.13 will have application to deliverable share futures contracts. Part 7.13 governs the transfer of shares and will apply to a transfer of shares effected pursuant to a deliverable share futures contract. Part 7.2A provides for the operation of the Securities Clearing House. Section 1114 will preserve the Court powers in relation to those parts of Chapter 7 which continue to apply to DSF contracts.

The remaining provisions of Chapter 7 do not apply to deliverable share futures contracts (including a transfer of shares pursuant to a deliverable share futures contract). For example, the National Guarantee Fund (NGF) provisions does not apply to protect buyers (ie persons in the bought position) and sellers (ie persons in the sold position) of deliverable share futures contracts. The Fidelity Fund provisions of Part 8.6 apply to protect buyers and sellers of deliverable share futures contracts.

The disapplication of Part 7.10 is only in relation to an authorised transfer of shares pursuant to deliverable share futures contracts (the transfer process will be detailed in the Sydney Futures Exchange Business Rules). The NGF provisions will continue to apply where a default is not in relation to a transfer of shares between the buyer and seller of a deliverable share futures contract, even if the transfer is incidentally related to such a contract. For example, if a dealer fraudulently or negligently used shares held for a client to settle another client's deliverable share futures contract, the first client may claim against the NGF.

New Regulation 1.2.24

Subregulation 1.2.24(1) provides that Chapter 8 of the Corporations Law applies to deliverable share futures contracts as if they were futures contracts. This will permit the products to be traded on a futures exchange.

Subregulation 1.2.24(2) provides that where a SCH participant transfers shares which are the subject of a deliverable share futures contract then, for the purposes of that dealing Part 8.3 (licensing provisions) and sections 1206, 1207, 1209 and 1210, 1234 and 1235 do not apply to that participant. The mere transfer of shares pursuant to a deliverable share futures contract is not to be taken as a dealing in a futures contract.

New Regulation 1.2.25

New regulation 1.2.25 modifies the definitions of "bought position" and "sold position" in section 9 of the Corporations Law in respect of deliverable share futures.

New Regulation 1.2.26

New regulation 1.2.26 modifies the application of subsection 979(1) to deliverable share futures contracts. The effect of the modification is to permit the Board of the Securities Exchange Guarantee Corporation to seek the assistance of the Sydney Futures Exchange to determine whether a claim against the National Guarantee Fund relates to a deliverable share futures contract. If the claim relates to a loss pursuant to a deliverable share futures contract, the National Guarantee Fund will not apply (see regulation 1.2.23).

New Regulation 1.2.27

Regulation 1.2.27 provides that notwithstanding section 1251 of the Corporations Law the insider dealing provisions of the Law apply to the prescribed agreement. A deliverable share futures contract will concern a body corporate if the contract relates to shares of the body corporate.

Division 5 -- Futures options over deliverable share futures contracts

New Regulation 1.2.28

New regulation 1.2.28 defines a "futures option over a deliverable share futures contract" as an option or a right to assume a bought position or a sold position in relation to the contract at a specified price within a specified period.

New Regulation 1.2.29

Regulation 1.2.29 prescribes a futures option over a deliverable share futures contract for the purposes of paragraph 72A(1)(b) of the Corporations Law.

New Regulation 1.2.30

Regulation 1.2.30 provides that Chapter 7 of the Corporations Law, other than Division 2A of Part 7.11 (insider trading), does not apply to a futures option over a deliverable share futures contract.

New Regulation 1.2.31

New regulation 1.2.31 applies Chapter 8 of the Corporations Law to futures options over deliverable share futures contracts as if they were futures contracts. This permits the futures options to be traded on a futures exchange.

New Regulation 1.2.32

New regulation 1.2.32 ensures the application of the Chapter 8 insider dealing provisions to futures options over deliverable share futures.


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