ASIC CLASS ORDER [CO 10/407]
EXPLANATORY STATEMENT
Prepared by the Australian Securities and Investments Commission
Corporations Act 2001
The Australian Securities and Investments Commission (ASIC) makes ASIC Class Order [CO 10/407] under s911A(2)(l) of the Corporations Act 2001 (Act).
Paragraph 911A(2)(l) provides that a person is exempt from the requirement to hold an Australian financial services (AFS) licence for a financial service they provide if the provision of the service is covered by an exemption specified by ASIC in writing and published in the Gazette.
1. Background
On 1 July 2009, the Australian Energy Market Operator (AEMO) assumed a range of functions in the gas and electricity markets that were previously undertaken by other market operators including statutory bodies such as the National Electricity Market Management Company Limited. AEMO currently operates and administers national electricity markets, the Victorian gas market, and retail gas markets in South Australia, New South Wales, Victoria and Queensland.
AEMO was tasked with establishing, operating and administering a Short Term Trading Market for gas (STTM) in South Australia and New South Wales by June 2010, with a view to expanding this market to other states in the future.
The STTM has been established by way of amendments to the National Gas Law (NGL) and National Gas Rules (NGR). Compliance with the STTM rules will be monitored and enforced by the Australian Energy Regulator (AER). The STTM caters for shippers and users of gas. Shippers have contractual arrangements to deliver gas to the distribution system using pipelines and other facilities, and offer that gas into the STTM. Users bid in the STTM to buy the gas they intend to withdraw from the distribution system. Both shippers and users are required to register as trading participants in the STTM (Trading Participants) and are subject to the NGR.
An ‘ex ante market’ forms part of the STTM process. The ex ante market is where gas is traded a day ahead of the day the gas is actually supplied, that is, a day ahead of a ‘gas day’. The ex ante market sets the price for all gas supplied on a gas day. AEMO must prepare a market schedule for the gas day based on the bids and offers provided by Trading Participants. This schedule will specify the ex ante market price and the quantity of gas that Trading Participants are expected to deliver or withdraw. This scheduling creates what we have termed ‘ex ante rights’. That is, the rights and obligations created when AEMO schedules trading participants in the ex-ante market of the STTM. These rights may satisfy the definition of a derivative under s761D of the Act upon consideration of the following features:
(i) Trading Participants who are scheduled in the ex ante market are given the right but not the obligation to deliver or withdraw a specified quantity of gas on the following ‘gas day’;
(ii) Trading Participants undertake these obligations the day following their scheduling in the ex ante market; and
(iii) the amount of consideration is ultimately determined by reference to the volume of gas actually delivered (or withdrawn) on the gas day, multiplied by the ex ante market price, and subject to variations.
As such without relief AEMO and Trading Participants may be required to hold an AFS licence to deal in ex ante rights.
2. Purpose of the class order
The purpose of Class Order [CO 10/407] is to exempt AEMO and Trading Participants from the requirement to hold an AFS licence covering the provision of specified financial services related to the operation of the ex ante market of the STTM.
3. Operation of the class order
Under paragraph 4 of Class Order [CO 10/407], AEMO is exempt from the requirement to hold an AFS licence covering the provision of the following financial services to a Trading Participant that is a wholesale client:
(i) providing general advice in relation to ex ante rights;
(ii) dealing in ex ante rights by issuing them; and
(iii) making a market in ex ante rights.
Under paragraph 5 of the class order a Trading Participant is exempt from the requirement to hold an AFS licence for dealing in ex ante rights on its own behalf by issuing the ex ante rights where the ex ante rights are also issued by AEMO to the Trading Participant as a wholesale client of AEMO. This means that Trading Participants must fit the definition of a wholesale client as set out under s761G(4) of the Act.
4. Consultation
Before making this class order we consulted with AEMO (as the market operator) regarding the required terms of relief, and the AER (as the regulator responsible for monitoring and enforcing the NGL and NGR) regarding the regulatory arrangements and structure of the STTM.
Overview
The ASIC Class Order [CO 10/407] was introduced in 2010 under section 911A(2)(l) of the Corporations Act 2001, aiming to address the potential requirement for the Australian Energy Market Operator (AEMO) and Trading Participants to hold an Australian financial services (AFS) licence for specific financial services related to the Short Term Trading Market (STTM) for gas. The problem this legislation sought to resolve was the potential need for an AFS licence for dealing in ex ante rights, which are rights and obligations created when AEMO schedules trading participants in the STTM ex ante market. This legislation was introduced by the Australian Securities and Investments Commission (ASIC), with the policy objective of providing relief to AEMO and Trading Participants from the need to hold an AFS licence for certain financial services related to the STTM. The operation of the class order exempts AEMO from holding an AFS licence for providing general advice, dealing in, and making a market in ex ante rights, while also exempting Trading Participants from the requirement to hold an AFS licence for dealing in ex ante rights on their own behalf under specific circumstances.
Scope and Application
ASIC Class Order [CO 10/407] applies specifically to the Australian Energy Market Operator (AEMO) and Trading Participants involved in the Short Term Trading Market (STTM) for gas in South Australia and New South Wales, as well as those who may be involved in the future expansion of the STTM to other states. The exemption granted by this Class Order pertains to the provision of specified financial services related to the operation of the ex ante market of the STTM, which includes providing general advice, dealing in, and making a market in ex ante rights. AEMO is exempt from needing an Australian Financial Services (AFS) licence when providing these financial services to Trading Participants who qualify as wholesale clients. Likewise, Trading Participants are exempt from holding an AFS licence for dealing in ex ante rights on their own behalf, provided they are also issued ex ante rights by AEMO as a wholesale client. This Class Order is a Commonwealth instrument made under the Corporations Act 2001 and is designed to ensure that AEMO and Trading Participants can efficiently operate within the gas markets without the burden of holding an AFS licence for the specified activities.
Key Provisions
The ASIC Class Order [CO 10/407] operates under the Corporations Act 2001 (section 911A(2)(l)) to provide specific exemptions from the requirement to hold an Australian Financial Services (AFS) licence for certain financial services related to the Short Term Trading Market (STTM) for gas. Specifically, the order exempts the Australian Energy Market Operator (AEMO) from needing an AFS licence when providing certain financial services to wholesale clients, such as general advice about ex ante rights (section 4 of the Class Order), dealing in these rights by issuing them (section 4(i)), and making a market in ex ante rights (section 4(ii)). Additionally, it exempts Trading Participants from holding an AFS licence when dealing in ex ante rights on their own account if those rights are also issued to them by AEMO as a wholesale client (section 5 of the Class Order).
The Class Order imposes specific obligations on AEMO and Trading Participants. AEMO must comply with the terms of the exemption, which means it can provide the specified financial services without holding an AFS licence. For Trading Participants, they must ensure they meet the definition of a wholesale client as outlined in section 761G(4) of the Corporations Act. This includes satisfying the criteria that they are not retail clients and that they are dealing in ex ante rights on their own behalf. Both AEMO and Trading Participants are required to adhere to the rules and regulations set out by the Australian Energy Regulator (AER) for the STTM, ensuring compliance with the National Gas Law (NGL) and National Gas Rules (NGR).
Breaches of the Corporations Act 2001, including non-compliance with the provisions of the ASIC Class Order [CO 10/407], may lead to various civil or criminal penalties. For corporations, penalties can include fines up to a maximum of $210,000 under section 1317E for contravening certain civil penalty provisions. Individual officers or employees found in breach may face personal fines of up to $42,000 and imprisonment for up to five years under section 1311(1). Additionally, the Australian Securities and Investments Commission (ASIC) may take enforcement actions such as seeking injunctions, compensation orders, or disqualifying individuals from managing corporations under sections 206C and 206D. It is crucial for AEMO and Trading Participants to adhere to the terms of the exemption and the broader regulatory framework to avoid these consequences.