5 June 2009

Equity Derivatives in the Australian Market

Senator Nick Sherry, Minister for Superannuation and Corporate Law, has today released an industry issues paper, Improving Australia's Framework for Disclosure of Equity Derivative Products, on the issue of the regulation and disclosure of equity derivatives.

Equity derivatives, which have grown significantly in use, are financial contracts whose value is derived from underlying share assets in companies, share indices or managed investments schemes. Equity derivative instruments are commonly used to manage risks associated with share trading and ownership and are also commonly used in speculative trading strategies.

There has been market concern that there is a lack of an appropriate disclosure framework covering equity derivatives, which has reduced transparency of ownership changes and takeover moves, reduced the ability of companies to know who their effective owners are, and enabled hedge funds to outflank traditional institutional investors by using economic interests to influence companies.

Non-disclosure of equity derivatives has also arisen in the context of the global financial crisis, and the need for robust financial market regulation, as highlighted by G-20 discussions.

"Equity derivatives allow investors to decouple their economic interests in shares from their voting rights. In practice, this means investors can use these instruments to avoid disclosure requirements normally associated with direct investments."

"The Rudd Government wants to boost the transparency of how equity derivatives are traded and disclosed."

"This work, which will take place in close coordination with our international partners, will also ensure that Australia's regulatory regime does not impose an undue burden on market participants or inappropriate barriers to foreign equity investment in the Australian market," Minister Sherry said.

The Prime Minister announced that Treasury would progress this work. Today's industry issues paper forms a key part of that process.

"Australia is now at the global frontier of policy work on equity derivatives issues and this extensive and complex project will play a key role in determining the disclosure regime for equity derivatives for the next decade," Minister Sherry said.

The industry issues paper can be found at www.treasury.gov.au. Consultation will remain open for eight weeks, ending on 31 July, 2009.