Recommendations
91. It is recommended that the Committee
Background
1. Note that the government has decided in-principle to introduce an economy wide, internationally linked emissions trading scheme (NZ ETS) and is currently engaging with stakeholders over the detail of the proposed scheme [CBC Min (07) 19/2 refers].
2. Note that the proposed New Zealand Emissions Trading Scheme does not require the trading of emissions units to occur through a registered exchange or on a particular platform.
3. Note that the trading of emissions units (including those arising from regulated/mandatory or voluntary markets) is expected to grow as the international actions to combat climate change increase.
4. Note that NZX has identified that there is a commercial opportunity for a New Zealand private-sector enterprise to benefit from a first mover advantage to establish a regional emissions trading platform ahead of its competitors overseas.
4.1 Note that NZX plan to launch their emissions trading platform in mid 2008 (expected May 2008) and would prefer to have the necessary legislative amendments in place by then in order to provide their platform with the international credibility that comes with the international credibility that comes with the regulation of trading functions. Officials expect legislation to be drafted by the end of 2007 for introduction into parliament by February 2008.
5. Note that overseas experience has shown that a large proportion of emissions trading has occurred in the form of futures contracts. Therefore, it is important to ensure that New Zealand's regulatory environment for futures exchanges allows for emissions trading.
6. Note that, following establishment of the ETS, it could be appropriate to limit the protections available through clearing and settlement to NZ ETS units only. However, such limitation could have the practical effect of making a clearing house commercially unviable.
6.1 Agree that it is not appropriate to limit the scope of emissions units that may be cleared and settled through a regulated clearing and settlement system.
Clearing and settlement systems
7. Note that there are some practical difficulties which arise out of the current law regulating futures exchanges and clearing and settlement systems which mean that it is difficult for a person to establish an efficient and robust trading platform for futures contracts. These problems include:
7.1 Lack of conformity with international best practice, as reflected in the recommendations of the International Organisation of Securities Commissions (IOSCO). This has an impact on the ability to attract domestic and international participants to New Zealand markets.
7.2 Different regulatory treatment of securities exchanges and futures exchanges, and the compliance costs associated with needing to seek regulatory approval twice.
7.3 Current regulation of clearing and settlement systems was developed with a different focus (ie focused on the payments system rather than the underlying securities/commodities market), before the IOSCO recommendations were made and includes no formal monitoring and enforcement role for the securities market regulator.
8. Agree to amendments so that the New Zealand regime for clearing and settlement systems better conforms with IOSCO recommendations. These are considered commercially necessary to give a trading platform international credibility and thus make it more attractive to potential international participants.
9. Agree to establishment of an "opt-in" regulatory regime under the Securities Markets Act 1988 which will allow the regulation of clearing and settlement in a similar manner to provisions relating to registration of securities exchanges (including in relation to application procedures, assessment criteria and approval of operating rules by the Securities Commission).
9.1 Note that there will be parallel regimes under the Securities Markets Act and the Reserve Bank Act for approving and regulating clearing and settlement systems. The Securities Commission and the Reserve Bank will each have responsibility for monitoring and enforcing the activities of the clearing house which are relevant to each agency's area of responsibility.
10. Direct Ministry of Economic development officials to undertake scoping and report back to the Minister of Commerce on further work required in the 2008/9 year in relation to whether the new regime should remain opt-in or become mandatory for trading in emissions units and whether the regime should be opened to clearing and settlement in relation to products other than securities and emissions units.
11. Agree that the certain aspects of the operating rules of the clearing and settlement system be valid and enforceable despite any law or agreement to the contrary. Note that this is not a blanket validation of the operating rules in their entirety. Rather (as currently the case with designated payment systems), the validation will only cover certain aspects of the rules that deal with matters specifically addressed in the IOSCO Recommendations (for example, netting, defaulting participants, and the finality of settlements).
12. Agree for a clearing house to have protection against a liquidator of a participant from clawback of a transaction which has been settled through the clearing house in so far as it is necessary to protect the integrity of the clearing system. Note that while this primacy will give the clearing house protection against clawback of the transaction by a liquidator of a market participant, it will not affect the liquidator's right to pursue the original parties to the underlying transaction.
13. Agree to give priority to the clearing house in relation to any collateral posted by a clearing participant (in so far as necessary to settle any transaction relating to that participant) subject to the interests of existing security holders being taken into account before the collateral is lodged in the system.
14. Agree to extend the priority provided by section 97 of the Personal Property Securities Act ("PPSA") in respect of shares and other securities to emissions units.
Rationalising regulation of securities and futures exchanges
15. Note that officials see the benefit in rationalising the current law for authorisation of securities and futures exchanges to simplify administration of the law and reduce compliance costs. These amendments are desirable from a policy perspective to provide for simpler administration of the regime, but are not legally necessary to allow establishment of a futures exchange or clearing and settlement system.
16. Agree 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.
17. Agree that market participants who have been approved by an authorised futures exchange under its operating rules shall be deemed to be authorised to carry on the business of dealing in futures contracts under section 38 of the Securities Markets Act (in effect codifying in law the existing exemption granted by the Securities Commission under the Authorised Futures Dealers Notice (No 3) 2004).
Technical amendments
18. Note that technical amendments are required in response to the emergence of emissions units in New Zealand (both NZ ETS units and non-NZ ETS units), and the way they fit into New Zealand's current regulatory environment.
19. Agree to clarify provisions relating to title and registration of emissions units to:
19.1 provide that registration of an emissions unit on a register is prima facie evidence of title.
19.2 confirm the registrability of electronic transfer of securities and emissions units traded through a registered clearing and settlement system.
20. Agree to clarify definitions to make clear that:
20.1 a "futures contract" extends to a futures contract for emissions units.
20.2 an emissions unit is not a security.
Legislative implications
21. Note that the proposals in this paper will be the subject of a standalone Bill separate from the anticipated Bill on a New Zealand Emissions Trading Scheme.
22. Agree that a standalone Bill be added to the 2007 legislative programme with a category 5 priority (instructions to the Parliamentary Counsel Office to be provided in the year).
23. Invite the Minister of Commerce to issue drafting instructions to Parliamentary Counsel Office to give effect to the above proposals.
24. Agree to delegate to the Minister of Commerce the power to make decisions on minor issues that arise during the drafting process.
Publicity
25. Note that it is important to ensure there is a clear conceptual separation between the proposed New Zealand Emissions Trading Scheme (which requires participants to obtain and surrender certain emissions units) and the proposals in this paper (which relate to improvements to the regulatory environment for futures exchanges and clearing and settlement systems more generally).
26. Agree for the Minister of Commerce to communicate Cabinet's support of the proposals in this paper to NZX.
Hon Lianne Dalziel
Minister of Commerce
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