Good morning, and thank you Ian [Matheson, CEO AIRA] for the invitation to address the Australasian Investor Relations Association 2012 Annual Conference.
I appreciate the valuable role that AIRA plays in keeping the investor relations industry up-to-date in today's rapidly changing environment.
With that in mind, this morning I'd like to talk to you about how the Gillard Government is responding to recent market developments.
AGMs and CAMAC review
The Government wants to ensure that the annual general meeting remains responsive to the needs of shareholders and stakeholders, and continues to serve its intended purposes. Another reason why it's important for AGMs to maintain their relevance is because they provide a forum to facilitate effective corporate governance.
For some time, both Government and industry have been concerned about the continuing decline in shareholder interest and engagement in AGMs.
This lack of engagement was highlighted in two reports published separately in 2008 by the Chartered Secretaries Association, and the Parliamentary Joint Committee on Corporations and Financial Services, of which I was Chair. The issue was also raised in an earlier report prepared by the Government's corporate advisory committee, the Corporations and Markets Advisory Committee or 'CAMAC'.
In December 2011, my predecessor, David Bradbury, asked CAMAC to examine the future of annual reports and AGMs… the risks and opportunities that advancements in technology may present for AGMs… and the challenges that increasing globalisation of capital markets pose to AGMs.
In response, CAMAC released a discussion paper, The AGM and Shareholder Engagement, in September 2012.
As Joanne Rees, the Convenor of CAMAC, said when she released the discussion paper:
"The matters considered in this paper go to the heart of corporate governance in Australia."
The paper identified, and sought views on, three issues that are central to the continuing corporate governance role of the AGM.
The first issue is the role of the AGM within the broader context of the ongoing relationship between the board, and institutional and retail shareholders of the company, often referred to as shareholder engagement. The paper asked, among other things, whether there should be more formalised guidance on how company board members engage with shareholders.
The second issue raised was the content of the annual report, as the principal document for consideration at the AGM, which provides information to shareholders on the state of the company and the stewardship of the board. The paper sought views on whether annual reports contain unnecessary "clutter", and how technology could be used to help shareholders glean useful information from the annual report.
And lastly, the paper considered the future of AGMs and the processes for conducting the meeting. Historically, the concept of an AGM was developed when a physical meeting was the only way for shareholders to interact with their company. But the advent of electronic communications which enable companies to provide continuous, real-time information means that the AGM is now only one method of informing and engaging with shareholders. As well, foreign share ownership and dual‑listing make it difficult for international stakeholders to participate in physical meetings.
How can AGMs be maintained or enhanced as a useful part of the corporate governance framework? And now that the functions traditionally performed by the AGM can be performed without holding a meeting, could they be dispensed with altogether?
The issues raised in the CAMAC discussion paper are important and timely. Submissions to this referral close on 21 December and I would strongly encourage AIRA members to make a contribution, if you haven't already done so.
Equity markets
As we all know, well-functioning financial markets are essential for any growing economy. Equity markets are an important source of funds for businesses that want to expand, and Australia's superannuation arrangements mean that the vast majority of Australians have at least some financial interest in equities.
During the Global Financial Crisis, we saw how just how quickly poorly-functioning markets can damage the economy.
For example, between November 2007 and June 2009, the value of the ASX dropped by about 41 per cent, causing significant losses for investors and the superannuation fund sector.
Although the ASX 200 has recovered around one-third of the value lost during the GFC, several stutters in the market's recovery, combined with ongoing uncertainty around global economic performance, mean that confidence in the market remains subdued.
G20 reform agenda
At the 2009 G20 summit in Pittsburgh, the Australian Government joined other jurisdictions in committing to substantial reforms to practices in the Over the Counter or 'OTC' derivatives market.
The three key G20 commitments are:
- the reporting of OTC derivatives to trade repositories;
- the clearing of standardised OTC derivatives through central counterparties; and
- the execution of standardised OTC derivatives on exchanges or electronic trading platforms, where appropriate.
These commitments are designed to increase transparency in the OTC derivatives market for regulators, market participants and the public, as well as reduce counterparty credit risks and operational risk associated with OTC derivatives.
Legislation currently before Parliament will introduce a framework to allow for regulations and rules to be put in place to implement the G20 commitments in a way that is flexible enough to deal with changing market conditions. The legislation will provide a high degree of flexibility in implementing trading, clearing and on-platform trading mandates. This flexibility will enable Australia's financial regulators to work with their international counterparts to ensure a unified approach to the regulation of global OTC derivatives markets.
Consistent implementation by all economies is important to reduce systemic risk and the risk of regulatory arbitrage that could arise if there are significant gaps in implementation. International cooperation and flexibility will also help to avoid unintended consequences of national laws, such as the burden on businesses of duplicated or conflicting rules and the costs of reduced access to international markets.
The legislative framework has been developed with the help of extensive consultation. As well, the framework itself requires that further consultation be conducted before any mandate is established.
As part of the Government's approach to implementing the G20 OTC commitments, the Council of Financial Regulators was asked to conduct an OTC derivative market assessment to evaluate the potential suitability of derivatives classes for the imposition of a trading, clearing or execution obligation.
The agencies provided their report to the Government in October last year. The report recommended the implementation of a broad-based trade reporting requirement, with reporting for classes of derivatives to be phased in over time.
The report did not recommend that a central clearing mandate be imposed at this stage, as commercial incentives continue to increase central clearing of OTC derivatives. However, the report did recommend that the market be monitored to ensure that migration to central clearing continues to occur at an appropriate pace.
Neither did the report make any recommendation to impose a trade execution obligation, at this stage.
The Government is currently considering the market assessment report recommendations and expects to provide a decision on whether to mandate trade reporting by the end of the year, if the legislative framework is in place.
Dark pools and high-frequency trading
Turning now to recent market developments, a range of new, alternative trading platforms have emerged in the last few years. In particular, so-called 'dark pools' are now competing with the public exchanges. An evolution from historical 'upstairs markets' that were used for block trades, dark pools are open to smaller trades and retail investors.
A related issue is high frequency trading or 'HFT', which uses computer algorithms to make trading decisions based on price and other market data.
Both dark pools and HFT activity provide benefits to the market. In particular, both facilitate competition in stock trading — dark pools through directly creating rival markets, and HFT through acting as a market maker on smaller public exchanges or less liquid securities.
Dark pools also provide an alternative trading venue for firms that wish to execute very large trades that would have a market impact if completed on the public exchange. HFTs are thought to provide liquidity to the market, narrowing spreads and improving the opportunity for would-be traders to find a counterparty.
But these alternative markets also present potential drawbacks.
High-frequency trading may increase the risk of excessive market volatility, and potentially increase the scope for market manipulation. Dark pools may undermine investor protection principles, and also undermine the functions of 'lit' markets by withdrawing price information and trading volume. This can hinder price formation and lead to widening spreads in the market.
In response to these concerns, ASIC has drafted a number of market integrity rules which my colleague, Bill Shorten, the Minister for Financial Services and Superannuation, is considering.
These rules require HFT operators to have more direct control over, and testing of, their algorithms and systems. They also provide for an extreme trading range to address periods of large price movements, and require that investors receive meaningful price improvement over the lit market in having their trades executed in the dark.
These rules also provide for additional trade reporting data to assist ASIC in performing market surveillance. ASIC will also use this data to consider the adequacy of new market integrity rules in addressing concerns about dark pools and HFT activity. In particular, ASIC will investigate whether there is evidence of market manipulation by HFTs and, if so, how to address it.
ASIC will also consider the impact of dark pools on price discovery in the lit market, including whether there is a need for a minimum order size in dark pools to encourage trading on the lit exchange.
Takeover rules and creeping acquisitions
Finally, takeovers law is another area where current legislation may need to be brought up to date to deal with market developments. While Australia's takeover laws have been largely successful in achieving their policy objectives, it's important to ensure that the law continues to operate effectively in response to market developments.
On 5 October, I announced the release of an initial scoping paper by Treasury on policy issues relating to takeovers law. Specifically, the paper explained the issues raised by ASIC around the use of creeping acquisitions, the clarity of takeover proposals, equity derivatives, the impact of social media, and the impact of undisclosed associations on takeovers.
To briefly outline some of the issues…
Creeping acquisitions refer to the ability of a person who holds at least a 19 per cent interest in a company to continue to acquire up to three per cent every six months. In this way, a shareholder can take over a company without complying with a permitted procedure under the takeovers law, such as formally launching a takeover bid, which would normally be required when a shareholder increases their interest above 20 per cent.
The takeover provisions also include mechanisms for aggregating the interests of associates to ensure the takeover rules apply to persons who, acting together, can exert control over a company, even if they don't individually have interests in excess of the 20 per cent threshold. However, although such associations are technically regulated, they can be difficult to prove. As a result, it can be challenging to ensure that such groups of associated people don't exert improper influence over a company.
Another issue is that some equity derivatives can be used to obtain a substantial economic interest in a company without that interest being required to be disclosed to the market in the way that substantial shareholdings need to be disclosed.
This can potentially allow a shareholder to build up a large stake in a company in a way that is hidden from the market and give them an unfair advantage in seeking control of a company.
Treasury is in the process of undertaking a series of targeted roundtables with key business, legal and markets stakeholders to discuss ASIC's concerns.
Treasury will use the outcomes of these roundtable discussions to inform a thorough analysis of the issues, before providing further advice to the Government.
Of course, the Government welcomes industry views on these issues to help us to develop an appropriate regulatory response, if necessary.
Conclusion
So as you can see, the Gillard Government is working on several fronts to ensure that Australia's financial markets continue to operate effectively in line with domestic and international developments.
I'd like to thank AIRA for your input and support as we carry out this important work. And once again, thanks very much for the opportunity to come and speak with you today and I wish you a rewarding and productive conference.
I'm happy to take a few questions.