Aussie Plan to Save the Continent

By Kharouf, Jim | Modern Trader, October 1997 | Go to article overview

Aussie Plan to Save the Continent


Kharouf, Jim, Modern Trader


A new government and potential regulatory changes are forcing the Sydney Futures Exchange and its New Zealand counterpart to look inward and build on a burgeoning domestic market through new contracts and changing roles.

While other exchanges reach for more international products, battle neighboring exchanges with competing contracts and aggressively launch overseas linkages, the Sydney Futures Exchange (SFE) and subsidiary New Zealand Futures and Options Exchange (NZFOE) are focusing more on markets at home. Both exchanges are launching new contracts geared toward domestic participants, and that's the niche in which they want to stay.

Concurrently, the Australian government has embarked on sweeping changes to its financial system that will alter the way exchange-traded and OTC markets are regulated. And as the proposals slowly wind through the Australian bureaucracy, market players are building a managed futures base. Singularly, governmental and exchange moves do not appear to amount to much. Collectively, they offer a blueprint of Australia's derivatives industry in the coming years.

New rules

Changes in Australia's financial markets are expected to modify the regulatory and competitive structure of the country's banking, finance and insurance sectors. Paved by two separate reports - the Wallis Inquiry and the Companies and Securities Advisory Committee (Casac) report - Australia eventually will eliminate or modify several laws that have kept such industries basically separate and non-competitive.

The Wallis Inquiry, which was initiated by the Treasury Department in 1996, proposes sweeping structural changes to Australia's financial sectors and a more streamlined regulatory approach. The Casac report is focused more on the laws as it pertains to the derivatives industry. The Casac and Wallis reports have been turned over to the Treasury Department to study for the next several months.

One idea behind Wallis, as it pertains to the SFE, is to take away some of the exchange's self-regulatory responsibilities and redefine exchange and OTC regulations. Currently, the SFE and the Australian Securities Commission (ASC) watch the wholesale or professional participants as well as retail users. In the future, however. wholesale participants will be unregulated on exchange and OTC markets. Exchange retail users will continue to be watched by the SFE and the ASC. By eliminating some SFE regulatory duties on wholesale players, exchange officials say it creates a more level playing field with the OTC market.

The Casac report, released in July, mirrors some Wallis recommendations (see "Changing the rules," left). Other significant recommendations define a wholesale and retail player and eliminate regulatory restrictions on retail participation in OTC markets. All this means greater freedom to trade financial products.

"We'll see a much-reduced regulatory environment for the professional end of the market," says Les Hosking, chief executive and director of the SFE. "And we'll see less distinction between exchange-traded markets and OTC markets."

But a clear division between wholesale and retail participants may be difficult.

"It is not always possible to assume that retail and wholesale participants are necessarily the same as unsophisticated and sophisticated users," says Michael Hains, compliance director at BZW Australia Ltd. "For example, it may not be possible to define some high net worth individuals as wholesale participants, yet they are sophisticated users of the market."

Some changes may hurt some SFE contracts. OTC warrants, which will be less regulated under OTC rules, are expected to steal volume from SFE equity options, Hosking says.

"With the freeing up of limitations on OTC trading and more liberal attitudes toward trading OTC derivatives by professionals, you're going to see very rapid growth in OTC equity derivatives at the expense of exchange-traded markets," he says. …

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