Rationalising regulation of securities and futures exchanges
Current situation in New Zealand
66. Currently a person who describes themselves as a "stock exchange" or "securities exchange", or who wishes to hold themselves out as a regulated securities market, must apply to the Minister of Commerce to be a registered exchange under Part 2B of the Securities Markets Act. If the same exchange wishes to hold itself out as a regulated exchange for trading in futures contracts in New Zealand, the exchange must apply separately to the Securities Commission for authorisation under Part III of the Securities Markets Act.
67. It is proposed to amend the Securities Markets Act so that a registered securities exchange under Part 2B of the Securities Markets Act may be registered either for securities only or for securities and futures trading. An exchange registered for operating securities markets will be deemed to be an authorised futures exchange under Part III of the Securities Markets Act, subject to the Minister being satisfied on the advice of the Securities Commission that the operating rules and infrastructure of the exchange are satisfactory for conducting a market in futures trading.
68. Subsequent changes to the existing (or introduction of new) operating rules of an authorised futures exchange proposed to be made on the basis of provisions similar to the current disallowance and approval provisions for the conduct rules of registered exchanges under the Securities Market Act.
Futures Dealers
69. Currently futures dealers are required to make an application to the Securities Commission to obtain authorisation to deal in futures contracts. It is proposed to codify the existing class exemption for NZX participants who are futures dealers under the Authorised Futures Dealers Notice (No 3) 2004 into the legislation so that all dealers in futures contracts who have been approved by a registered exchange to deal in the futures contracts shall be deemed to be authorised to carry on the business of dealing in futures contracts for the purposes of Part III of the Securities Markets Act 1988.
70. This removes the need for futures dealers, who have already been subjected by the registered exchange to a substantially similar application process for admission as a participant in its futures market, from the need to separately seek authorisation from the Securities Commission.
Clarification of the general powers and functions of the Securities Commission
71. It is proposed to make a minor amendment to clarify that the Securities Commission has the power to review and comment on the law relating to, and activities on, futures markets and registered clearing and settlement systems, including advising the Minister in relation to conduct rules.
72. This will give clear guidance to the market and potential participants as to the Commission's statutory functions and powers as regulator.
Technical amendments
73. It is also proposed to make certain technical amendments which will provide greater certainty. These amendments are legally necessary to enable the proposal to proceed.
Legal effect of registration
74. Under current law relating to title to securities or shares in a company, entry onto a register is prima facie evidence of title. This provides certainty for persons transacting on the basis of ownership of the securities or shares that the person registered as the holder of the securities or shares has legal title.
75. It is necessary to extend the provisions relating to registration of securities to emissions units. This will further support certainty and integrity of the system. Note that owners of ETS units will receive certainty of title through the legislation establishing the ETS.
Registrability of electronic transfers
76. It is proposed to confirm the registrability of electronic transfer of securities and emissions units traded through a registered clearing and settlement system (similar to a FASTER Order under the Securities Transfer Act).
77. The current provisions under the Securities Transfer Act are limited to securities (and do not currently apply to emissions units).
78. In addition to providing certainty as to the legal effect of entry onto a register of emissions units, it is necessary to provide comfort to persons acquiring securities or emissions units cleared and settled through a registered clearing and settlement system that they will be registered as the holder of the product. This is currently provided for in respect of securities under the Securities Transfer Act that are transferred in accordance with prescribed procedures (including in respect of securities transferred electronically through the FASTER system).
Clarification of the definition of a futures contract
79. It is proposed to clarify the definition of futures contract so that it extends to a futures contract for emissions units. It is unlikely that the current definition in the Securities Markets Act is broad enough to include an emissions unit. Clarifying this provides certainty as to the application of the futures contract regime in the Securities Markets Act to futures contracts for emissions units. Officials consider it desirable to extend the definition to both NZ ETS units and non-NZ ETS units. This will enable authorised futures exchanges to trade in voluntary market units as well as NZ ETS units.
Clarification that an emissions unit is not a security
80. It is proposed to expressly exclude an emissions unit from the definition of "security". This will provide certainty as to the legal treatment of an emissions unit, in particular, that it is not a security and therefore trading in emissions units will not attract the provisions of the Securities Act and Securities Markets Act applicable to a security (eg prospectus, insider trading, etc). Again, officials consider it desirable to make this change in respect of both NZ ETS units and non-NZ ETS units, as the applicability of the Securities regime does not "fit" well with emissions units.
Consultation
81. The following agencies have been consulted and agree with the recommendations in this paper: Securities Commission, Reserve Bank, Treasury (Emissions Trading Group).
82. NZX has also been consulted during the preparation of this paper.
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