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20 November 2003

The Securities Markets Amendment Act 2002, which was implemented on 1 December 2002, inserted registration provisions for securities exchanges into the Securities Markets Act 1988. Under sections 36B to 36D of the Act the Minister of Commerce can declare that a person must not operate a securities market in New Zealand unless they became a registered exchange and fulfil the New Zealand regulatory requirements that imposes. The Minister can only restrict a market from operating, without registration, if it is considered that its operation is likely to be detrimental to the integrity and effectiveness of securities markets in New Zealand or confidence of investors in securities markets in New Zealand (section 36D). Submissions from market participants must be accepted and considered, and consultation with the Securities Commission must be undertaken.

Other than the fact the Minister must be satisfied that either the operation of a facility is likely to be detrimental to the integrity and effectiveness of, or the confidence of investors in, securities markets in New Zealand, the Act does not provide a specific list of matters that must be considered in determining whether to use the declaration power. The main reason for this is the desirability of retaining sufficient flexibility to make sound decisions on a case by case basis, that focus on the overall merits of the individual situation, rather than a number of criteria that might or might not have been met. The risk of having more specific rules is that they may undermine the purpose of the regime and lead to arbitrary and indiscriminate outcomes.

Although it is essential to retain this flexibility, it is also useful to give market participants some further guidance regarding the matters the Minister might consider when assessing whether there is a need to exercise the powers contained in sections 36B to 36D. The Minister of Commerce, Hon Lianne Dalziel, therefore released the following draft guidelines that have been developed by the Ministry of Economic Development, in consultation with the Securities Commission and interested market participants, to assist in determining the circumstances under which she might exercise her powers to make a declaration in accordance with the integrity, effectiveness or confidence tests set out in section 36D of the Act:

1. How investors, potential investors, participants of the market, other participants in securities markets generally, and other interest groups' perceive the market, including whether the market is sufficiently similar to a registered exchange to cause confusion in investors' minds;
2. Whether the operator seeks to regulate (or is perceived to regulate), in a manner analogous to general securities regulation or any registered exchange, the conduct of activities occurring on its market, or the behaviour of its participants, or the public perception of the market or its participants, through the use of Rules, Codes of Conduct, Guidelines or other means, beyond those controls that are necessary for the operation of the system;
3. The proportion (or perceived proportion) of the total New Zealand market activity, including size, number, volume, type or importance of: companies listed, executed trades, and overall market percentages;
4. Comparative international regulation of securities markets/facilities, including the types of market that attract regulatory requirements or exemptions from regulatory requirements; and
5. The operation of the market and its treatment of participants, and whether the operation of the facility causes (or is perceived to cause) unfair or discriminatory treatment of market participants.

It must be emphasised that none of these guidelines are determinative. Further, they do not derogate from the requirement of the Act to consider the overall circumstances applying to a specific trading facility. Finally, although they seem appropriate at the current time, they are draft only and may be subject to change as situations develop.

In addition, officials consider the underlying policy rationale of the Act is the desire to facilitate the development of smaller and/or more innovative markets in New Zealand bearing in mind (among other factors) the costs of registration. Although this does not directly relate to the section 36D criteria, nor the guidelines that may be of assistance in determining whether those criteria are met, it may be another factor that could be helpful when considering any possible exercise of the declaration power.