Sam Dastyari (NSW, Australian Labor Party) Share this | Link to this | Hansard source

I rise to speak on the Financial System Legislation Amendment (Resilience and Collateral Protection) Bill 2016 on behalf of the opposition.

Honourable Senators:

Honourable senators interjecting—

Glenn Sterle (WA, Australian Labor Party) Share this | Link to this | Hansard source

Senator Dastyari, ignore the interjections.

Sam Dastyari (NSW, Australian Labor Party) Share this | Link to this | Hansard source

They keep interjecting, Mr Acting Deputy President. This is an important bill and I want to have a serious discussion here. I thank the chamber for this opportunity to outline Labor's position on the Financial System Legislation Amendment (Resilience and Collateral Protection) Bill 2016, which we will be supporting.

In a week that will be dominated and has been dominated by some fairly willing and high-profile debates on economic policy, the very technical changes in this bill are unlikely to attract the same attention, but that does not mean that they are not very important for the stability of our financial system. Though we may find much to disagree on in this place and beyond in the final week of parliament and in the next two months if we head into an election campaign, I think it is important to mark that, when it comes to this bill and when it comes to financial resilience and living up to our international obligations, all sides of the chamber do agree in this instance.

The bill makes changes to the regulation of over-the-counter derivatives that come out of international agreements made after the global financial crisis. Clearly the global financial crisis made us rethink a whole host of regulatory measures in our financial system. The legislation being discussed today relating to over-the-counter derivatives is one such example.

Labor has always played a productive role in supporting the development and improvement of Australia's financial regulation. The float of the dollar, the sale of the Commonwealth Bank, deregulation of the banking system, ending centralised wage fixing, and the beginnings of Reserve Bank independence—all were key features of the legacy of the Hawke and Keating governments.

Of course the last Labor government took decisive action to keep Australia on the path of growth during the last financial crisis. It is extraordinary that we have had a quarter century of uninterrupted economic growth in this country when you consider that within that period there was the sharpest synchronised downturn in the global economy since the Great Depression of the 1930s. This is something we should all be proud of. Our decisive action during the global financial crisis included being instrumental in the development and elevation of the G20, which was key to the international responses to the crisis. I got to work on some of these issues in a previous staff role and I think that the part played by Australia is something that Australians should be very proud of. Certainly both sides of the parliament, the business community and all Australians have cause to be proud of what Australians achieved together during the global financial crisis, including the role that this nation played in the big international forums and principally the G20.

We are pleased now to be supporting this bill, which comes out of those international agreements—in this case, the one on margin requirements for derivatives. It was part of a process kicked off by the G20. The effect of this bill will be to improve the stability of the financial system and to bring Australia's derivative-trading sector into line with internationally agreed standards. It is expected that these measures will ease the financial burden of compliance with international standards by $3.9 million annually.

This bill implements the agreement between the Basel Committee on Banking Supervision and the board of the International Organization of Securities Commissions on margin requirements, which are being phased in internationally from 1 September this year. The agreement came out of several major pieces of work by the G20 and goes back to about 2009. With input from the then Treasurer, Mr Swan, the G20 committed to improving transparency, mitigating system risk and protecting against market abuse in derivatives markets.

By 2011 it was recognised that not all derivatives are suitable for central clearing, so the G20 called for uniform margin requirements for over-the-counter derivatives. Australia has already indicated its support for this international agreement, and that is a good thing. In November 2015 our own Council of Financial Regulators announced its intention to implement the Basel and International Organization of Securities Commissions framework for margining. Further, in February this year the Australian Prudential Regulation Authority released its proposed margining requirements, which will become effective by 1 September 2016 and be phased in over several years.

Participants in non-cleared derivatives markets have traditionally transferred margin, otherwise described as collateral or credit support, by way of absolute transfer rather than by way of security. The new requirements will mean that most participants transfer margin by way of security instead. The Australian Prudential Regulation Authority's margin requirements will only apply to institutions with significant activity in over-the-counter derivatives where the institution or the group it is a part of has average month-end notional outstanding over-the-counter derivatives of greater than A$3 billion. The Council of Financial Regulators has indicated that it will consider the approach for non Australian Prudential Regulation Authority regulated institutions this year. Several other developed countries, including the United Kingdom and European Union members, have enacted similar legislation to clarify their own securities laws.

Labor supports measures to improve the stability of the financial system, noting the negative impact that unsecured derivative contracts had on the deepening of the global financial crisis. That is why we support this bill and why we support reasonable steps to bring our derivative trading sector into line with internationally agreed standards.

Matthew Canavan (Queensland, Liberal National Party) Share this | Link to this | Hansard source

Once again, thanks to Senator Dastyari for his contribution and his support for the Financial System Legislation Amendment (Resilience and Collateral Protection) Bill 2016. It reminds us all and the public that, for the vast majority of legislation that goes through this place, we work together. This is an important piece of legislation. It has been in train since the global financial crisis in 2007 and 2008, and there has been a concerted international effort since then to reform international financial markets, including over-the-counter derivatives markets.

The Financial System Legislation Amendment (Resilience and Collateral Protection) Bill 2016 builds on progress already made in Australia and overseas to better regulate derivatives markets and facilitate the effective participation of Australian financial institutions in those markets. Specifically, it supports an international move to impose margin requirements for non-centrally-cleared derivatives. Margining is the process of exchanging collateral to protect against counterparty credit risk in financial contracts. It is intended to reduce the potential for contagion and spillover effects by ensuring that there is sufficient collateral available to offset losses associated when a counterparty to a derivatives arrangement defaults. In domestic and international over-the-counter derivatives markets, margin requirements are the next substantial wave of regulatory reform. Several other G20 nations either have already adopted final margin rules or are currently undergoing consultation to confirm them ahead of international margin requirements which come into effect in September of this year.

This bill amends the Payment Systems and Netting Act 1998 to enable entities subject to Australian law to give and enforce rights in respect of margin provided by way of security in connection with certain financial market transactions. It creates a facilitative regime that will enable financial institutions to comply with international margining requirements and any corresponding prudential standards set by the Australian Prudential Regulation Authority. This will ensure that institutions can continue to trade effectively and efficiently in domestic and international markets.

This bill also clarifies an inconsistency in Australian financial markets law. The bill does this by clarifying the way in which certain rights, known as close-out rights or as early termination rights, may be exercised by counterparties against Australian regulated financial institutions when those institutions become subject to resolution measures such as statutory management or judicial management. The clarification is made in a manner which is broadly consistent with international developments as set out in the Financial Stability Board's Key Attributes of Resolution Regimes for Financial Institutions and the International Swaps and Derivatives Association Inc.'s ISDA 2015 Universal Resolution Stay Protocol.

Finally, this bill will enhance financial system stability by providing legal certainty for the operation of approved real-time gross settlement systems, approved netting arrangements and netting markets—more specifically, market netting contracts—in all market conditions. These markets, systems and arrangements are fundamentally important to the stability of the Australian financial system. It is essential that the operation of these markets, systems and arrangements is protected even in difficult market conditions. The proposed amendments will ensure that participants in and the operators of these markets, systems and arrangements have cooperation in their operation.

The bill is a result of consultation with the Council of Financial Regulators, industry bodies, market participants and their advisers. All submissions received during the consultation process supported the bill's intent. With that, I commend the bill to the Senate.

Question agreed to.

Bill read a second time.