Chapter 2 - Advantages of the Current Framework
Introduction
2.1
This Chapter explores the Committee’s first term
of reference and sets out the advantages of the current framework, as
identified in the evidence presented. The Chapter also briefly canvasses witnesses’
and submittors’ views about how well the framework functions.
2.2
A small number of submissions viewed the
framework as flawed and in need of major change. However, the majority of
organisations that made submissions, while not hesitating to make critical
comment in some areas, generally supported the current supervisory framework
and expressed the view that the ASX operates efficiently and with integrity.
The predominant view was that the regulatory framework is generally
appropriate.
Advantages of the current
framework
2.3
A range of submissions and evidence identified
advantages associated with the current framework. A major theme repeated on a
number of occasions was that the market is well served by having as its front
line supervisor an operator that is familiar with the day to day operations of
the market and is able to respond quickly to developments in the market itself.
2.4
Advantages identified by ASIC and Treasury
represent a fair cross section of those identified in other submissions. These
included:
- the cost of market regulation is borne by market participants and
users[1];
- the proximity of exchanges to market trading, activity and
participants means that exchanges are well placed to supervise operations,
transmit information and respond rapidly to irregularities in trading;
- the exchange’s ability to adapt elements of supervisory
arrangements through changes to operating rules to reflect the needs of the
market and its users and cater for developments in business practices;
- the ability of exchanges to monitor market movements and respond
quickly limits the potential for market abuse and aids the market as a reliable
price discovery mechanism; and
- the framework bestows a commercial incentive on exchanges to
ensure that they discharge their supervisory responsibilities effectively as
they have a vested interest in maintaining reputation and attracting
investment.[2]
2.5
The final point, the exchange having a
commercial incentive to maintain standards, is particularly important. Because
the ASX has a commercial incentive to maintain integrity, this may reasonably
be expected to exert a counter to commercial pressures that might otherwise
provide inducements to compromise integrity. In theory, this should result in
the exchange being largely self policing. The ASX’s key business asset is its
reputation for integrity and efficiency and not one that it could compromise
without threatening the value of its own business.
2.6
The ASX itself
identified the advantages of the current framework as
follows:
- in its detailed prescription of the activities of securities
exchanges, its powers of intervention and calling to account, the framework
promotes a high integrity environment; and
- in its strong self-regulatory emphasis, there is the ability to
provide efficient market responsive rules and flexible and effective
enforcement of them in a cost effective way for government.[3]
2.7
The ASX’s submission summed up its own view of
how well the current framework operates:
ASX believes that the co-regulatory model has served financial
markets very well. Market operators like ASX have a strong vested interest in
the efficient and robust regulation of the markets they provide. They are also
better placed to respond quickly to develop best practice and to strive for
improvements in the efficiency and transparency of market activity. The
proximity of the market operator to the market and its participants allows it
to respond quickly and cost effectively to changes in the market dynamic and
indeed, to anticipate them. A change to the rules governing market activity –
the contractual arrangements between the market operator and its customers, is
a more expedient process than legislative change.[4]
2.8
The ASX’s assessments of the advantages of the
framework in which it operates are not disinterested. However, it is
significant that a number of the other submissions and evidence received by the
Committee during the inquiry also supported the co-regulatory model and
supervisory framework and identified advantages flowing from them. For example,
in its submission the Securities Institute of Australia said:
There are considerable advantages with the current supervisory
framework of Australia’s stock exchanges. These advantages revolve around
having experienced, well-funded, independent experts who currently perform the
role rather than regulators with little or no practical experience. Being close
to the market is essential to this important function.[5]
2.9
The Chartered Secretaries Australia (CSA) also
expressed confidence in the current arrangements:
Chartered Secretaries Australia is not aware of any major
concerns among its members with respect to the present regulatory framework for
Australia’s stock exchanges...Chartered Secretaries Australia also believes that
the current framework is appropriate for supervision of the activities of ASX.[6]
2.10
A possibility that major changes in the
regulatory structure might be contemplated also appeared to concern the CSA,
leading them to warn about the consequences of imposing additional regulation:
...CSA is concerned that any additional layers of regulation would
increase costs that would ultimately be passed on to companies through listing
fees. The ASX, and Australian companies, must remain competitive in worldwide
terms. Any increase in the cost of doing business should be avoided.[7]
2.11
Representing Australia’s institutional
investment managers, the Investment and Financial Services Association (IFSA)
also expressed general support for current arrangements, despite holding
reservations about some aspects, as elaborated later in this report. Ms Lynn
Ralph, Chief Executive Officer, told the Committee that:
I have to say that probably in general our view would be that
the market works pretty well here in Australia, people have reasonable
confidence in it. That is not to say that it is perfect by any sense of the
imagination. Do we think that there needs to be a shift in response to some
problems, concerns or lack of confidence? I would be surprised if my members
felt that there should be some sort of conscious shift in the balance between
listing and regulation and legislation at this time without some evidence that
there was some serious problem and/or serious breach in the perceptions that
people had about how the market was operating.[8]
2.12
The Australian Shareholders’ Association (ASA),
representing the individual investors who comprise 26 per cent of the
Australian equities market,[9]
while expressing reservations about some aspects of the framework, (in
particular the perception of conflicts between ASX supervisory and commercial
roles) also appeared to generally support the current framework:
Subject to the following comments we agree with ASIC in
supporting the continuance of the current legislative model as modified by the
changes which we understand are proposed by the Financial Services Reform Bill.[10]
2.13
The ASA continued:
While we support the present co-regulatory framework involving
ASX, ASIC and the Minister we agree with the Securities Institute that a
disadvantage of the current framework is the possibility of a perceived
conflict between the role of the ASX as a profit making company and its
supervisory role.[11]
IOSCO view
2.14
The self-regulatory model is also viewed
favourably by the International Organization of Securities Commissions (IOSCO).
In a recent review of self-regulation, IOSCO was of the view that self
regulatory models have a number of advantages resulting from their familiarity
with the industry and can be efficient and cost effective:
Overall, self-regulation fosters integrity in the marketplace
and among participants. Moreover, it is an effective method of regulation
because self-regulatory organizations are familiar with the increasingly
complex nature of the industry as well as the products developed and marketed
by members and member organizations. SROs [self regulating organisations],
therefore, have the specific knowledge and ability to effectively implement and
conduct efficient and cost-effective regulatory programs.
2.15
IOSCO emphasised that there is a need to subject
SROs to appropriate accountability mechanisms ‘to ensure that regulatory
responsibilities are discharged properly and that the regulated markets operate
in accordance with general performance standards in the public interest’. IOSCO
noted that properly implemented self-regulatory regimes can produce ‘efficient
rules, wide compliance with and acceptance of those rules, timely adjustment of
rules to meet changing conditions, and flexible and effective enforcement’.[12]
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