Joe Hockey (North Sydney, Liberal Party, Shadow Treasurer) Share this | Link to this | Hansard source

The Corporations Legislation Amendment (Derivative Transactions) Bill 2012 has been brought before the House to provide a legislative framework to meet Australia's G20 obligations in relation to over-the-counter derivatives reforms. The bill amends five existing pieces of legislation: the Australian Prudential Regulation Authority Act 1998; the Australian Securities and Investments Commission Act 2001, which I introduced; the Corporations Act 2001, which I introduced; the Mutual Assistance in Business Regulation Act 1992; and the Reserve Bank Act 1959, which was introduced by the coalition.

As background to this legislation, I want to briefly run through the different types of markets in derivative products. Derivatives are financial contracts whose value is linked to the price of an underlying asset or financial transaction, or to the occurrence or magnitude of an event based on an underlying asset or financial transaction. These financial products are known as derivatives, for the very simple reason that the price of the contract is derived from the price of something else. Derivatives are traded in two kinds of markets: formalised markets and over-the-counter markets. Derivatives traded on exchanges are homogenous products with specified clearing and settlement arrangements and, usually, high trading volumes. In fact, back in my days when I was at university I used to trade the SPI contract, the share price index contract, which was a derivative. In Australia, exchange traded derivative products, such as future contracts on bank bills or Commonwealth securities, are traded on the Australian Securities Exchange.

Most derivative exchanges have adopted electronic trading platforms that automatically match bids and offers from market participants to execute trades. Volumes and prices are transparent. Over-the-counter markets have different mechanisms for trading, settling and clearing transactions in derivative products. They are used for less standardised or bespoke instruments.

Over-the-counter markets are organised along several different lines. The first is what is called a traditional dealer market, where quotes and negotiation of execution prices are generally conducted over the telephone. The second is an electronically brokered market, which automatically matches bids and offers to execute trades. The third is a proprietary trading platform market, where derivative dealers set up their own electronic trading platform. These markets are much less transparent than exchange traded markets in the sense that trading volumes and prices are not readily available outside of the dealing parties. These markets also tend not to use centralised clearing and settlement arrangements.

Rapid growth in over-the-counter derivatives markets over the past decade and longer has been accompanied by an increased awareness of the systemic importance of these markets and of potential risks inherent in market practices. One of the problems is the difficulty in assessing the size of the outstanding exposures in these markets and who is holding the risk. These risks were most starkly demonstrated during the financial crisis when regulators could not quickly assess the size and distribution of the outstanding positions on a range of derivative products linked to US sourced mortgage backed securities. As a result, authorities have been developing a global regulatory agenda to improve the functioning of OTC derivatives markets.

The G20 leaders summit held in September 2009 resolved to address the risks involved in the OTC market. The following extract from the communique outlined the improvements to be made:

All standardised OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest. OTC derivative contracts should be reported to trade repositories. Non-centrally cleared contracts should be subject to higher capital requirements. We ask the Financial Stability Board and its relevant members to assess regularly implementation and whether it is sufficient to improve transparency in the derivatives markets, mitigate systemic risk, and protect against market abuse.

As my colleagues here would well be aware, the three key G20 commitments this legislation seeks to focus on are: (1) the reporting of all OTC derivatives to trade repositories, (2) the clearing of all standardised OTC derivatives through central counterparties and (3) the execution of all standardised OTC derivatives on exchanges or electronic trading platforms where appropriate.

This bill implements the following framework. Firstly, the responsible minister will be empowered to prescribe a certain class of derivatives as warranting more formalised arrangements for trading, reporting or clearing. Secondly, a derivatives transaction rule may in turn be issued by ASIC to establish one or more mandatory obligations for reporting, clearing or execution for participants transacting. Thirdly, any rule must receive the consent of the minister before taking effect. The scope of the rules and other technical features of the scheme may be further limited by regulation. Finally, a new licensing regime will be introduced for a new kind of financial infrastructure entity—that is, trade repositories.

I note that the member for Moncrieff is here in the chamber. He is one of the few people in this chamber that would have any understanding of how the OTC derivatives markets work. As someone with a deep—and, some would suggest, liquid—understanding of the OTC derivatives market, I am sure he welcomes greater transparency and greater accountability in this process.

The establishment of the trade framework will not in itself introduce any trade reporting, central clearing or trade execution obligations for the transactions. Rather, the framework creates a mechanism by which such obligations may be implemented by the relevant regulatory authorities and the minister with supporting regulations and rules. So the rationale behind these changes is that reporting of trades will increase transparency to OTC derivatives markets and will improve risk management practices and that it will provide regulators and market participants with access to valuable data with which to assess the risks associated with the OTC market. It is further argued that the clearing of standardised OTC derivatives will reduce counterparty risk associated with the transactions.

Submissions to Treasury's inquiry into the framework for this bill show that it was generally well received by the banking sector. Major banks, including ANZ Global Markets, CBA Markets, Macquarie Bank, NAB and Westpac said:

In general, we are broadly supportive of the approach taken in the Consultation Paper and believe the course proposed will assist in meeting the G20 commitments. We have in subsequent pages provided responses to the questions asked. In approaching these questions the key themes remain ensuring the Australian framework is as consistent as possible with other international regulatory regimes, that requirements on the Australian market should not disadvantage or dislocate a functioning market.

Amen, I say: Amen. The threat is that regulation or overregulation is going to sap the liquidity of the market, and electricity and energy providers have expressed some concerns. This was the primary focus of the coalition for the Parliamentary Joint Committee on Corporations and Financial Services inquiry into this bill. Overall, coalition members of the committee inquiry were pleased that the majority report recognised that the electricity sector has a range of legitimate concerns in relation to the new regime. The Australian Energy Regulator offered in response:

The inclusion of electricity derivatives under the scheme would be a contentious issue, with the potential for both significant costs and benefits. The potential benefits include enhanced market transparency and a reduction in counterparty risk; for example, this may reduce the risk of a catastrophic event such as a cascading generator–retailer failure. Conversely, the inclusion of electricity derivatives under the scheme may impose compliance costs.

The AER has not yet reached a definitive view on the merits of this issue, but wishes to note its significance.

The National Generators Forum argued against regulating the market. It pointed to flexibility in current market practice that helps OTC derivatives to officially manage risk in the electricity industry. I understand that. It also observed that contracts in the energy OTC derivatives market differ between regions and are not speculative but are used predominantly as a risk management tool, which is the case with many derivatives—they are actually used as a risk management tool. In this environment, the NGF argued, the electricity OTC derivatives market does not have the economies of scale necessary to recoup costs of central clearing and trade execution. I would suggest it is not a particularly liquid market. The NGF argued that there was no reason to support the prescribing of trade reporting, central clearing or trade execution of electricity derivatives.

TRUenergy was also wary of the proposals, arguing:

We believe that policy makers should apply a detailed cost benefit analysis before enacting any of these changes to the OTC electricity trading market. The implementation of this policy framework, without demonstrated net benefits, would represent a poor policy outcome.

Whilst recognising these concerns, the coalition recognises that this new regime will increase transparency of OTC derivative markets and improve risk management practices. We are pleased that government members of the PJC inquiry into this bill recognised the real concerns of the electricity sector and adopted at least part of the Electricity Supply Association of Australia's proposed approach, which recommended a requirement that, for matters related to the energy sector, the Minister for Resources and Energy be consulted prior to the making of regulations, the mandating of derivatives or consenting to an ASIC rule. In this parliament, we are asked to trust the judgement there of the member for Batman, which I am quite prepared to do in his case, and obviously that would influence the Minister for Financial Services and Superannuation, who does need guidance on these sorts of issues—no doubt about it.

Today we have learned that the government will be moving an amendment to the bill before the House which seeks to address the concerns raised by the coalition, which were highlighted in the PJC inquiry. It will come as no surprise to you, Mr Deputy Speaker Lyons, that the coalition has offered a sensible amendment. Common sense prevails from time to time—just from time to time with this government—and on this occasion it has, and I say amen. This amendment seek to put in place measures which are a step towards ensuring that all the issues of the energy sector will be properly considered prior to the imposition of new obligations in relation to quantity based derivatives.

The coalition will support the bill and the government's amendment. The bill is a step forward in meeting our G20 obligations regarding the transparency of over-the-counter derivative markets. In our view, the bill does not impose onerous regulation and it should not lead to a massive amount of further regulation—and, if the government is not vigilant, we will be. Rather, the bill grants powers to the respective regulatory bodies to examine over-the-counter markets and to recommend actions to the minister to increase the transparency of market mechanisms should they deem that to be necessary to enhance the integrity and safety of the markets, in particular, and of the financial system more broadly. However, I issue this warning to ASIC and indeed to anyone else who might be involved. You cannot use this as a Trojan Horse for a vast amount of new regulation.

It is one of my enduring political regrets that, when I introduced the Financial Services Reform Act, I was not there to oversee the implementation of the vast amount of regulation, which was excessive and prescriptive, coming out of ASIC, in particular, at the time. I warn that we will be vigilant in relation to this area so that there is not the temptation for regulators and public servants, for ministers and parliamentary secretaries, to regulate away the liquidity of an important market. I do not want to see that. The coalition does not want to see that.

A market is a market. It should be transparent. It should also be liquid. The rule of law must prevail but we should not be in a position where we are constantly pushing against overregulation of markets to such an extent that effectively the lack of liquidity makes the market unattractive, and therefore what is a very important market, the OTC derivatives market, is of such an illiquid nature that people are tempted to carry out transactions overseas in a different jurisdiction, where there is the light hand of regulation but still a reasonable level of transparency and accountability in the marketplace. So please—it starts as a plea to ASIC, APRA and all other regulators that are involved—do not regulate away these important markets with overly prescriptive rules and regulations.

Deborah O'Neill (Robertson, Australian Labor Party) Share this | Link to this | Hansard source

I note the very lovely manners there of the member for North Sydney, with his pleading request for a determination of ASIC and APRA to make sure they do not overregulate. Perhaps it is very timely at this point that I identify to the House that this matter is arising because there was a failure in regulation that was so profound that it led to the collapse now known as the GFC. So this delicate balance between careful regulation and overregulation is a midway point that we must seek with great endeavour to ensure the integrity of the market and people's trust in the market.

Following the collapse of the subprime mortgage market in the United States in August 2007, the IMF reported that the world economy was entering a major downturn.

The GFC, which followed, prompted calls for financial regulators to seriously look at and review the sort of framework that existed at the time and which underpinned both domestic and global economies. We know that one of the main causes of the GFC was the rapid growth of a highly unregulated derivatives market.

It is in that context that this legislation comes, as our national response to a request from an international body, to make sure that we pull our weight in terms of cleaning up that unregulated space. The International Organisation of Securities Commissions noted that the GFC was a moment that highlighted a severe lack of transparency in the over-the-counter derivatives market. Improving this lack of transparency has been the focus of OTC derivative reforms since that time.

In response to the GFC, the G20—an extremely important gathering that happens on an irregular basis, but ensures that we have conversations at the highest level, through advanced economies, to make sure that we maintain probity—noted the potential for trade repositories to reduce the opacity of the over-the-counter derivatives market. In 2009 the G20 agreed to progress measures to strengthen the international financial regulatory system. The measures they included were intended to increase the transparency, to reduce the risk attached to the OTC derivatives market.

The G20 continues to agitate in this space, to reaffirm and refine its commitment to its over-the-counter market reforms and it has encouraged all countries in the G20 grouping to put in place the very much required legislation and subsequent regulation that will enable each country or group of countries to meet the G20 commitment to central clearing. This has been a commitment that Australia has undertaken, and with determination to fulfil our international obligations, and we have indeed begun the journey. This piece of legislation is a very good example of how we are attempting to honour that commitment.

As a G20 member Australia is absolutely committed to implementing the derivative market reforms and since the G20 announcement in 2009 Australia's implementation has been under consideration by Australian regulators. The Council of Financial Regulators issued its final report in March 2012 and recommended that Australia do three things. The first was trade repositories. The council recommended that the introduction of a legislative framework would enable the imposition of mandatory reporting requirements for certain projects. The council also recommended reporting entities be authorised to report to offshore trade repositories, provided that certain conditions were met. Conditions would include that Australian regulators should access relevant data collected by offshore trade repositories. It was also concluded that cross-border activity poses significant jurisdictional oversight challenges, which need to be given careful consideration in the developing of reform proposals. This last comment about cross-border activity is quite significant in the debate and I will put forward some of the views regarding the electricity sector, which was the focus of our inquiry in the recent PJC inquiry held in Sydney.

On clearing arrangements, the Council of Financial Regulators noted that moving to central clearing is a significant change for current market participants and signalled their preference for the transition to CCP to be driven by economic factors rather than mandatory requirements. To ensure the transition occurred within an appropriate time frame the council concluded that it was appropriate there be a capacity to mandate central clearing, if necessary. The council concluded that not all OTC derivatives would be centrally cleared but transactions should be robustly risk managed. That was their assessment and certainly that is where we are moving with this legislation. On trade execution, the council recommended that primary legislation allow for rules regarding trade execution to be developed through subordinate legislation. In essence, the legislation that is before the House meets all of those requirements, both on an international level and on a practical, local level in response to the advice from the Council of Financial Regulators.

In addition to addressing Australia's G20 commitments regarding the reporting of over-the-counter derivatives, the amendments we are putting forward also provide a high degree of flexibility to facilitate the adjustment of Australia's over-the-counter derivative requirements in response to the international regulatory developments. The bill will amend the Corporations Act 2001 to implement a legislative framework that would allow the operational detail of the new over-the-counter derivatives scheme to be largely established by subordinate legislation—that is, the bill would not introduce new over-the-counter derivative transactions but would introduce a framework under which obligations may be imposed through subordinate legislation and regulatory rules. This was cause for considerable debate at our hearing in Sydney, when the electricity sector was particularly well represented and people put forward views about their particular industry and how these rules might impact on them.

Schedule 1 of the bill amends the Corporations Act to promote graduated measures, to respond proportionally to managing risk in Australian OTC markets, and delegates the authority for such rule-making powers to the responsible minister and ASIC. As the member for North Sydney said in his closing comments, the committee, the PJC, recommended in particular that, in response to the energy sector, the Minister for Resources and Energy be consulted prior to the making of regulations, the mandating of derivatives or the consent to an ASIC rule. This is critical differentiation and acknowledgement of the particular concerns that were raised by the energy sector during our hearing. I am very pleased that we were responsive to this sector while, at the same time, genuinely honouring, with integrity, our commitment to the G20 reforms.

Another important item in the bill is the restrictions and the requirements that rules may impose. Proposed subsection 901A(8) will effectively prevent derivative transaction rules from applying retrospectively. In the explanatory memorandum of the bill that is made extremely clear—the derivative transaction rules do not impose requirements retrospectively and they are limited in the obligations they can impose prospectively in relation to transactions entered into prior to their creation.

In particular, with regard to the electricity sector, I think it is important to acknowledge the significant input from that sector. I would like to summarise some of the views regarding the provision of this bill and explain the recommendations that have now formed part of the consideration by the government and, I understand, the amendment that is before us today.

Three areas of concern were identified by the participants, firstly, exercise of the delegated power by the minister, secondly, the safeguards to ensure proper exercise of delegated authority and, thirdly, arguments put by the electricity sector that they should be exempted from the over-the-counter regulatory framework. I can say that the submitters generally and genuinely approved of the objectives of the G20 over-the-counter derivatives reforms. One particular submitter, d-cyphaTrade, commended the introduction of the legislation to implement the G20 reforms in the Australian market. The Australian Financial Markets Association, AFMA, submitted that industry supports international regulatory coordination and endorsed the passage of the bill. While they were not particularly supportive of the proposed application of OTC reforms to the national electricity market, representatives of the electricity sector certainly acknowledged that the bill does, indeed, satisfy Australia's requirements to provide a framework for Australia to fulfil our G20 commitments to improve the operation of the derivatives market. Importantly the submissions to the committee supported the timeframe in which this is being implemented. It was acknowledged that a commencement date at the end of 2012 is necessary to ensure that Australia fulfils its G20 obligations. Further, AFMA submitted that the draft legislation was required to promote parity between Australian markets and international markets and, therefore, vital in creating a level playing field for Australian based businesses.

In terms of the nature of the electricity sector's concerns with the bill, when pressed, we received pretty clear evidence from the National Generators Forum about their concerns. They said:

The nature of the legislation provides the power to the minister to direct ASIC to inquire into the need for regulation of a particular type of derivative and see that as a fairly quick response to result in ASIC concluding that there may be a need for regulation of that particular derivative and see at this stage that legislation being drafted is far broader than the policy it was intended to achieve. So we would like to see that this legislation has minimal effective regulation for the policy principles it is seeking to achieve, without any concern having been raised around electricity derivatives specifically. It would not seem appropriate that legislation covering electricity derivatives would be introduced and passed by parliament.

They were very clear that they had some concern about things moving forward. ESAA also gave a response, when pressed, about the nature of their concern with the bill. Importantly they put the historical framework in place in the evidence when they said:

... we are subject to a whole range of inquiries at the moment, some of which may lead to further regulations being imposed on the industry and our experience has often been that many such inquiries and many such subsequent regulations have been carried out possibly in response to political issues, rather than sound underlying policy drivers, and that from time to time they have been carried out with limited or insufficient consultation. So we are perhaps predisposed to be very wary of even the possibility of additional regulation on the sector. I would also observe that the matter could be equally well considered in reverse, and that if the government has no plans to regulate the sector there would seem to be little harm to be done by exempting the sector.

While those points were put on the record, I need to acknowledge that not all of the submitters shared that view. Certainly it was clear in evidence before the committee that the government does not intend to prescribe the electricity sector as a class of derivatives to which to the new OTC derivatives framework would apply. Indeed we made a recommendation, which I am pleased to see the government has taken up, to indicate that any plan to approach the electricity sector would involve the express engagement and deliberation by the relevant minister.

In conclusion, I think that Treasury made very, very clear argument about why it is important that this framework is adopted and that the energy sector remains within it, albeit with the overriding observation of the minister. The bill establishes the legislative underpinnings of what will be an ongoing process. Over time reassessments may occur in response to a changing regulatory or marketing environment. The appropriateness of any regulatory approach that has to be adopted may be reassessed and adjusted accordingly. This bill sets up a regime that does not merely reflect industry practice or regulatory arrangements at a point in time. Although the electricity derivative market, based on information currently available, is traded largely between electricity generation transmission and retailing entities, this may change in the future. It is therefore important to have the capacity to better understand and respond to any change in the market for electricity derivatives.

I conclude my comments by saying that this is a sound piece of legislation which provides a framework upon which regulation will build in consultation with the sector.

Steven Ciobo (Moncrieff, Liberal Party) Share this | Link to this | Hansard source

I rise to speak to the Corporations Legislation Amendment (Derivative Transactions) Bill 2012 and the government's amendment to it. Once again we find ourselves in the situation where the government is amending its own legislation. For members of the coalition, we are of course welcoming of the fact that the government has picked up on the very sound recommendations that were put forward by coalition members of the Parliamentary Joint Committee on Corporations and Financial Services. I am pleased that the Assistant Treasurer at the table has taken that advice on board and that the government is, once again, amending its own legislation to achieve a good coalition outcome.

Others in this debate have gone through at some length about what this particular bill and the amendment seek to do. In summary it deals with what is referred to as OTC, which stands for over-the-counter derivatives.

This is a specific financial class of asset whereby the value of a derivative is derived with reference to an underlying commodity price or to a multitude of different reference points. But, fundamentally, it comes to the issue that OTC derivatives can, in some respects, be fairly opaque. Because of their opaque nature, and in some instances their being a consequence of proprietary software and proprietary trading platforms, there is an inability for financial regulators to properly scope the extent to which derivatives are having an impact in the market or indeed the extent to which there may be liabilities or a degree of exposure surrounding OTC derivatives.

The shadow Treasurer very kindly made reference to some of my personal involvement in OTC derivatives and indeed that of my spouse. From my perspective, having had direct exposure to dealing with OTC derivatives, they are a financially risky tool. They are a tool that does require a fairly significant amount of background knowledge and experience and they certainly are not something that, I believe, should be readily available at a retail level. Having said that, they are yet another form of financial market operation. They are another product in the market place and, in many respects, I think it is a case, from my particular philosophical point of view, of caveat emptor. I believe that those that seek to be involved in all sorts of OTC derivative trading need to be aware of the pros and cons, the risks and rewards that are associated with it. If there is one clear fundamental point that can never be escaped, it is that there is a direct relationship between risk and reward.

I would like to pick up on some of the points the previous speaker made in this debate. The previous speaker commented that in many respects the predominant cause of the GFC was there was not an ability to measure the size of the derivatives market and that was in effect what gave rise to the need to have this legislation—in parallel obviously with the decisions of the G20. I think it is worth making very clear that that simply is an incorrect assertion, completely and utterly incorrect. To claim that the GFC was a consequence of financial derivatives really, in my view, betrays a complete ignorance about what actually occurred with the GFC and indeed the housing bubble that took place not to mention, in a capital flushed world as it was then, the fact that parties, counterparties and transactions lost complete sight of the underlying value of assets and indeed the very relationship I spoke of—that is, of risk and reward.

Certainly I support completely the notion that there ought to be greater transparency with respect to OTC derivatives. I certainly support the importance of making sure that there is as much as possible clarity around counterparty risk and about the risks of those involved in OTC derivatives. But to sheet home the GFC was in some way hanging upon this legislation and that had this legislation existed then the GFC would not have occurred, I think, is simply an incorrect statement to make and it is worth making that very clear.

This legislation does provide powers to regulators and to the responsible minister to prescribe certain classes of derivatives as warranting more formalised arrangements for trading or reporting or clearing. In addition, a derivatives transaction role may in turn be issued by ASIC to establish one or more mandatory obligations for reporting, clearing or execution for participants transacting in this prescribed class of derivatives. Any rule must receive the consent of the minister before taking effect. The rules and any other technical features of the scheme may be further limited by regulation and indeed the new licencing regime will be introduced for a new kind of financial infrastructure entity trade repositories.

What is clear is that this is not going to stymie, I believe, the creation of OTC derivatives. It is not going to stymie financial innovation when it comes to the various products that are embraced by the derivatives market because no doubt we are still finding them out. There are still new approaches that are being adopted. I think that this kind of financial innovation is to be applauded. Notwithstanding that, it is good that this provides a legislative framework to have greater clarity for specific prescribed classes of OTC derivatives where it is appropriate to do so in the minister's opinion.

Clearly there was a major problem with respect to the national electricity market and electricity derivatives. I am pleased we have got the situation now where the government is amending the legislation with respect to the electricity market. I want to congratulate the coalition members of the Parliamentary Joint Committee on Corporations and Financial Services who did great work in working with, for example, the National Generators Forum on that particular issue that arose as a consequence of this legislation.

As coalition members, we support the legislation and we support the amendment. We believe more work should have been done upfront to address some of the concerns that were raised by, for example, the National Generators Forum. It is important to not create too much regulation or compliance, which, ultimately, will stifle innovation for financial products. By the same token, more transparency and more awareness of risks, counterparty risks and reinforcing the need to understand there is always the relationship between risk and reward, which is perhaps even more highly pronounced in a highly leveraged transaction like an OTC derivative product, is therefore a step in the right direction.

Bernie Ripoll (Oxley, Australian Labor Party, Parliamentary Secretary to the Treasurer) Share this | Link to this | Hansard source

I present a supplementary explanatory memorandum to the bill. I would like to thank honourable members who took part in the debate on the Corporations Legislation Amendment (Derivatives Transactions) Bill 2012. Australia's financial system is robust and stable and has withstood the shocks of the global financial crisis far better than most other developed countries. However, that does not mean that we cannot take steps to further safeguard the safety of our financial markets. Improving the transparency and risk management of over-the-counter derivative markets is one way in which the government intends to achieve this. This bill implements the G20 commitments to reform the OTC derivatives market that Australia and other G20 nations agreed to in the wake of the global financial crisis. The commitments are intended to address the structural deficiencies in OTC derivatives markets that were revealed in the wake of the GFC and the systemic risks that those deficiencies can pose to wider financial markets and the real economy.

In most countries, these structural deficiencies contributed to the build-up of large and insufficiently risk managed counter party exposures between some market participants in advance of the global financial crisis and to the lack of transparency about those exposures for market participants and regulators. This bill allows for industry led solutions driven by appropriate regulatory incentives to be the primary method of increasing the use of centralised infrastructure with respect to derivatives transactions. However, the bill also establishes laws that allow for mandated outcomes where required to ensure the adoption of acceptable industry practices within a timeframe that is consistent with the international implementation of the G20 OTC commitments.

The framework in the bill is flexible enough to enable Australia's financial regulators to work with their international counterparts to ensure a unified approach to the regulation of global OTC derivative markets. The amendments introduced today address the concerns of the electricity wholesalers and retailers that limitations on the use of over-the-counter derivatives may impact the effective operation of the underlying national electricity market. While no final decision has been made about the classes of derivatives that must be centrally cleared, traded on a platform or reported to trade repositories, the government has no plans to make rules relating to the energy sector. However, it is important that electricity derivatives be included in the legislative framework. The terms of the bill do not pre-empt any decision regarding the application of any requirements to particular markets.

The amendments to the bill will ensure that the energy sector is fully consulted prior to any obligation being imposed on the sector. The consultation will involve the relevant minister, the equivalent regulatory agencies and regulatory bodies with responsibility for the underlying physical market in addition to the requirements for public consultation that are already contained in the bill.

Specifically, the amendments to the bill will create a requirement that both the minister and ASIC have regard to the effect on the underlying physical market prior to making a determination mandating a commodity derivative or making a derivative transaction rule. Under this process, non-Treasury ministers and agencies will be required to be consulted in relation to proposals that impact upon their portfolio responsibilities. Where appropriate, the agreement of the ministers whose portfolio responsibilities are impacted will need to be obtained—for example, the agreement of the Minister for Resources, Energy and Tourism in the case of the energy sector.

I want to take this opportunity to restate the government's earlier commitment to ensuring that any decision taken by the minister in relation to either the making of a regulation or consenting to an ASIC rule will also involve the Minister for Resources, Energy and Tourism where that decision relates to the energy sector. Furthermore, regulations under the legislative framework, which will be exposed for consultation shortly, will provide electricity regulators and bodies with a formal consultative role in the mandating of any possible requirements where appropriate.

Several processes are currently underway that are directly relevant to the use of OTC derivatives in the energy market. The Australian Energy Market Commission has been asked to provide advice to the Standing Council on Energy Resources on the resilience of the financial relationships and markets that underpin the operation of the national energy market. On 8 June 2012, the Australian Energy Market Commission published an issues paper initiating public consultation on the development of this advice. The derivatives market assessment, which is being conducted by the Council of Financial Regulators, will also inform any decisions in relation to electricity derivatives, not merely those in relation to clearing and execution requirements but also those in relation to trade reporting requirements. The first report from the council is expected shortly. No decision to impose mandates on the electricity sector will be made in relation to electricity derivatives prior to the conclusion of these processes.

In summary, this bill provides the framework to allow the government and financial regulators to implement requirements that improve risk management in the OTC derivatives market in a flexible way, taking account of ongoing analysis of market developments by Australia's financial regulators and in coordination with other countries. These measures are important to ensure the ongoing stability of Australia's financial system by creating the regulatory tools necessary to ensure transparency and efficiency in the OTC derivatives market. I commend this bill to the House.

Question agreed to.

Bill read a second time.