EXPLANATORY STATEMENT
STATUTORY RULES 1987 NO. 111
ISSUED BY AUTHORITY OF THE ATTORNEY-GENERAL FUTURES INDUSTRY REGULATIONS (AMENDMENT)
Section 160 of the Futures Industry Act 1986 (‘the Act’), provides in sub-section(1) that the Governor-General may make regulations, not inconsistent with the Act, prescribing all matters required or permitted by the Act to be prescribed, or necessary or convenient to be prescribed for carrying out or giving effect to the Act. Paragraph 160(5) (f) of the Act provides that the regulations may provide that the provisions of the Act or any of those provisions do not have effect in relation to a specified transaction or class of transactions entered into by a specified person or class of persons. Sub-section 160(8) of the Act provides that the power of the Governor-General to make regulations shall be exercised only in accordance with advice that is consistent with resolutions of the Ministerial Council for Companies and Securities (‘the Council’).
2. The Council was established under an agreement between the Commonwealth and the States, executed on 22 December 1978, (‘the agreement’) that provides the framework for a co-operative Commonwealth-State scheme for a uniform system of law and administration in relation to company law and the regulation of the securities industry in the six States and the Australian Capital Territory. The Northern Territory became a party to the agreement in 1986.
3. Under sub-clause 45(1) of the agreement, the Council may consider a proposal for the amendment of regulations made under the Commonwealth Acts enacted for the purpose of the co-operative companies and securities scheme. Should the Council approve any draft amending regulation which gives effect to such a proposal, the Commonwealth is then required,
under sub-clause 45(2) of the agreement, to submit the draft regulation to the Federal Executive Council for making by the Governor-General.
4. The Council has resolved that the regulation be made under the Act.
5. The regulation inserted new regulations, Regulation 37 and 38, into the Futures Industry Regulations.
6. Regulation 37 provides an exemption from the operation of the Act for interest rate transferable cash hedge (ITCH) contracts entered into by Harlow-Butler (Australia) Pty Ltd (Harlow-Butler) on behalf of those participants listed in the regulation.
7. The ITCH contract is being promoted in a joint venture between Harlow-Butler and the merchant bank, BA (Australia) Ltd. It provides a facility whereby specified corporations may trade the interest rate on 11.00 a.m. ‘call’ money (i.e. 24 hour borrowings) in the short term money market on a forward basis.
8. The Act does not apply to futures contracts to which a bank or a merchant bank is a party. However, likely users of the ITCH contracts include finance companies, authorised money dealers, building societies and insurance companies as well as banks and merchant banks. Accordingly an exemption from the Act is required if these other organisations are to participate in the contracts.
9. The rationale for the regulation is that the ITCH contracts will not be made available to members of the general public and the organisations participating in the contracts are sufficiently sophisticated to protect their own interest. It was not intended that the Act regulate commercial arrangements of this type.
10. Regulation 38 provides that the licensing provisions of the Act do not apply to dealings in futures contracts by:
• authorised trustee corporations on behalf of their unit trusts where the dealing is executed by a licensed futures broker;
• corporations on behalf of a related corporation; and
• local members of a futures exchange that perform order execution business for floor members.
11. At present these three classes of persons are required to be licensed in respect of the above dealings. The rationale for the regulation is that these dealings do not raise investor protection concerns. The Companies Act already imposes adequate fiduciary obligations on a trustee corporation and, in any case, the actual futures transactions involved will still need to be executed by licensed futures brokers. The requirement that a company be licensed as a futures broker to engage in futures dealing on behalf of a related company is unintended and unnecessary. Local members performing order execution business for a floor member are already subject to the articles of the relevant futures exchange and are guaranteed by floor members. Therefore no further control by way of licensing is necessary.
Overview
The **Futures Industry Regulations (Amendment) 1987** was enacted to provide further clarification and exemptions within the scope of the **Futures Industry Act 1986**. This legislation was introduced by the Parliament of Australia to address specific gaps and refine the application of the existing regulatory framework for financial derivatives and futures contracts. The **Ministerial Council for Companies and Securities** played a pivotal role in the amendment process, ensuring alignment with the broader co-operative Commonwealth-State scheme for company law and securities regulation. The primary policy objective of this amendment was to exempt certain sophisticated entities from the regulatory oversight of the Futures Industry Act, while maintaining necessary protections for the broader market. By introducing specific exemptions for interest rate transferable cash hedge (ITCH) contracts and certain futures dealings, the amendment sought to balance the need for regulatory oversight with the practicalities of commercial transactions among financial institutions.
Scope and Application
The Futures Industry Regulations (Amendment) Statutory Rules 1987 No. 111, made under section 160 of the Futures Industry Act 1986, aim to refine the application of the Act by introducing specific exemptions and modifications to the regulatory framework. These regulations, issued by authority of the Attorney-General, are crafted to ensure the Act does not interfere with certain sophisticated financial transactions deemed not to require regulation. Regulation 37 exempts interest rate transferable cash hedge (ITCH) contracts entered into by Harlow-Butler (Australia) Pty Ltd for specified participants from the Act's purview, as these contracts are intended for sophisticated entities like finance companies and insurance companies rather than the general public. Regulation 38 further refines the Act by exempting certain dealings from licensing requirements, including those executed by authorised trustee corporations on behalf of their unit trusts via licensed brokers, dealings by corporations on behalf of related corporations, and order execution business performed by local members of a futures exchange for floor members, as these activities are considered adequately regulated under existing laws and do not pose significant investor protection risks. These amendments reflect a targeted approach to deregulation, aiming to streamline regulatory burdens while maintaining necessary protections.
Key Provisions
The main operative sections of the Futures Industry Regulations (Amendment) are Regulations 37 and 38. Regulation 37 exempts interest rate transferable cash hedge (ITCH) contracts entered into by Harlow-Butler (Australia) Pty Ltd on behalf of specific participants from the operation of the Futures Industry Act 1986 (section 160(5)(f)). This exemption is predicated on the rationale that the ITCH contracts will not be made available to the general public and the participating entities are deemed sufficiently sophisticated to safeguard their interests (paragraph 8). Regulation 38 exempts certain dealings in futures contracts from the licensing requirements under the Act, specifically those executed by authorised trustee corporations on behalf of their unit trusts, corporations on behalf of related corporations, and local members of a futures exchange performing order execution business for floor members (paragraph 10).
The obligations and requirements imposed by these regulations primarily revolve around ensuring that certain types of financial transactions and entities are exempt from the regulatory purview of the Futures Industry Act. For Harlow-Butler, this entails ensuring that ITCH contracts are only entered into on behalf of the specified participants listed in Regulation 37. Similarly, authorised trustee corporations, related corporations, and local members of futures exchanges must adhere to the conditions set out in Regulation 38 to avail themselves of the licensing exemptions. This includes ensuring that futures dealings on behalf of unit trusts are executed by licensed futures brokers and that local members performing order execution business are appropriately aligned with the articles of the relevant futures exchange and guaranteed by floor members.
Failure to comply with these regulations could result in severe consequences, although the specific provisions for offences, penalties, or civil/criminal consequences are not explicitly detailed in the Explanatory Statement. Generally, under the Futures Industry Act, breaches could lead to significant fines and potential criminal penalties. The exact penalties would depend on the nature and severity of the breach, but they could include substantial financial penalties as well as imprisonment in cases of serious or repeated violations. The precise maximum penalties are not specified in the provided text, but they would be determined by the courts based on the relevant provisions of the Act and any applicable case law.