The Corporations and Markets Advisory Committee (CMAMAC) has released its report on derivatives, finding  that the legislative treatment is appropriate and effective.

 

The report responds to a request from the Government for advice on the suitability of the legislative definition of derivative for today’s derivatives markets and whether it may be possible to decrease complexity in this area of the law.
In responding to the Government, CAMAC took into account the broader economic and commercial role of derivatives as a financial instrument and, within that context, considered whether the current legislative structure properly regulates derivatives in the simplest manner possible. As part of that process, CAMAC conducted a Roundtable of relevant peak bodies and industry participants.

 

In releasing the report, the Convenor of CAMAC, Joanne Rees, said: "CAMAC recognises the important role that derivatives have as risk management products. It is essential that derivatives markets be regulated appropriately. In CAMAC’s view, the Australian legislation regulating derivatives compares favourably with overseas regulatory systems, and regulatory initiatives in local OTC derivatives markets are fully in line with international development."

 

CAMAC concluded that the current definition suitably aligns with market and regulatory perceptions of what constitutes a derivative. The definition is meant to be broad, to allow for its application to new derivative products without disruption to the regulatory structure of derivatives markets. CAMAC also considers that the s 761D definition of derivative is not unduly complex. It is a broad principles‑based definition, tempered by specific exclusions and the ability, if necessary, to enact regulations that make further adjustments in response to developments in the market.

 

Some problems in applying concepts in the definition to less common financial arrangements which might be caught by the definition, highlighted in recent case law, may give the impression that the legislative concepts may not apply to more common financial arrangements which would be expected to be caught by the definition.  CAMAC does not consider this to be the case as any problems that may arise can be dealt with through regulations declaring something to be/not to be a derivative, rather than seeking to redesign the legislation to cater for uncommon situations.

 

In CAMAC’s view, Australian derivatives markets are appropriately regulated through the general licensing and disclosure requirements applicable to all financial products, including derivatives, as well as the provisions specifically tailored for derivatives. The report also outlines some differences between the regulation of derivatives and securities which could, at an appropriate time, be rationalised.

 

The report can be downloaded here .