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APPENDIX
A: INCLUSIONS IN THE DEFINITION OF FINANCIAL PRODUCT
SECURITIES
The
definition of
‘
securities
of a body
’
in section 92 of the Corporations Law will form the basis of the definition of
securities for the licensing, conduct and disclosure provisions.
[185]
However, as recommended by the Companies and Securities Advisory Committee
(CASAC) in its report on the Regulation of On-exchange and OTC Derivatives
Markets,
[186]
the definition of securities will be modified to take derivatives, such as
warrants and options over securities, outside the scope of securities. This
will mean that some derivatives that have been subject to the fundraising
provisions of the Corporations Law will instead fall under the disclosure
requirements for financial products outlined in Chapter 4. This is consistent
with a functional approach to regulation. The section 92 definition of
securities will remain for all other purposes in the Law.
DEBENTURES,
STOCKS OR BONDS ISSUED BY A GOVERNMENT
These
will be included in the definition of financial product.
DERIVATIVES
As
recommended by CASAC, the definition of derivatives will focus on the functions
or commercial nature of derivatives. The definition proposed by CASAC will form
the basis of this definition.
An
agreement or arrangement will be regarded as a
derivative
if
it has the following features:
- A
party to the agreement or arrangement must provide at some future time
consideration of a particular kind to someone;
- That
consideration is not an initial or periodic payment whose amount is fixed at
the time the agreement or arrangement is entered into; and
- The
amount or value of that consideration is ultimately determined, derived from or
varies by reference to (wholly or in part) the value or amount of one or more
of the following:
— An
asset;
— A
rate (including an interest rate or exchange rate);
— An
index; or
— A
commodity.
This
definition will encompass:
- Derivatives
currently traded on the Sydney Futures Exchange and Australian Stock Exchange;
- Options
over securities or derivatives; and
- All
derivative transactions on OTC markets including:
— Interest
rate and currency swaps;
— Interest
rate options;
— Forward
rate agreements;
— Foreign
exchange transactions;
— Currency
and bond options;
— Synthetic
agreements for forward exchange; and
— Reciprocal
repurchase agreements.
Some
agreements and arrangements will be excluded from the definition of derivatives
by:
- Specific
exclusions from this definition in the legislation; and
- A
regulation making power to accommodate emerging agreements and arrangements
which should not be regulated as derivatives.
Specific
exclusions from the definition of derivatives
The
following items will be excluded from the definition of derivatives:
- Agreements
under which physical delivery of a commodity other than currency is mandatory;
- Agreements
that would otherwise be covered purely because the consideration could be
varied by an inflation index (such as the Consumer Price Index);
- An
option (other than an option over a derivative or an option over securities)*;
- An
option issued by a company permitting the taker to subscribe for the
company’s unissued shares*;
- An
at call or term deposit with an authorised deposit-taking institution (ADI)*;
- An
insurance contract (as defined below)*;
- A
mortgage over real or personal property*;
- A
security*;
- A
loan*; and
- A
contract for the future provision of services.
While
all of the above agreements and arrangements will be excluded from the
definition of derivative, those indicated with a * will be included within
other categories of financial product. The remaining items will be excluded
altogether. For example, while an insurance contract will be excluded from the
definition of derivative it will be brought specifically within the definition
of financial product under the concept of contract of insurance. Other items,
such as contracts for the future provision of services, will be excluded
altogether.
INTEREST
RATE OR CURRENCY SWAPS
To
the extent that these products do not otherwise fall within the definition of
derivative, they will be specifically included.
INSURANCE
All
contracts of insurance will be brought within the regulatory framework. The
concept of contract of insurance will not be defined in the legislation. Case
law on the meaning of the term will be relied upon to determine the scope of
the concept. Contracts of insurance will include those regulated under both the
Insurance
Act 1973
and
the
Life
Insurance Act 1995
.
It
will also include products of friendly societies that fall within the
definition of contract of insurance. It is envisaged that by the time the
single licensing provisions are in place friendly societies will have been
brought within the
Life
Insurance Act
and some provisions of the Corporations Law.
Certain
types of insurance contracts will be excluded from the definition of financial
product through the list of specific exclusions. For example, health insurance
will be excluded, as there is another regulatory regime applying to such
insurance.
INVESTMENT
COMPONENT OF LIFE INSURANCE
Life
policies
and
sinking fund policies under the
Life
Insurance Act
that are not contracts of insurance will also be brought within the regulatory
framework. This would include a:
- Contract
that provides for the payment of an annuity for a term not dependent on the
continuance of human life but exceeding a term prescribed by regulations under
the
Life
Insurance Act
;
- Contract
(whether or not it is a contract of insurance) that constitutes an investment
account contract;
- Contract
(whether or not it is a contract of insurance) that constitutes an
investment-linked contract;
[187]
and
- Sinking
fund policy that is not a contract of insurance.
[188]
Products
of friendly societies that are not contracts of insurance but fall within the
definition of life policy under the
Life
Insurance Act
will also come within the definition of financial product.
Business
declared to be life insurance business under the
Life
Insurance Act
that does not fall within the definition of life policy or sinking fund policy
would not be included specifically under this item. It would either fall within
the definition of contract of insurance or within the general definition of
financial product. Any variations in how the regulatory framework applies to
particular products would then be based on the type of product, not on the kind
of institution that issues them. This is consistent with the functional basis
of the regulatory framework.
SUPERANNUATION
INTERESTS
Superannuation
interests within the meaning of the
Superannuation
Industry (Supervision) Act
1993
will be specifically included in the definition of financial product.
[189]
Superannuation funds that fall outside the scope of SIS will be specifically
excluded.
RETIREMENT
SAVINGS ACCOUNTS
Retirement
savings accounts within the meaning of the
Retirement
Savings Account Act
1997
will
be specifically included.
[190]
FOREIGN
EXCHANGE
A
contract to buy, borrow, sell, lend or exchange money that is not Australian
money, whether entered into to make a financial investment or not will be
specifically included. Contracts the value of which is less than $Aus 2,000
will be excluded.
ADI
PRODUCTS
Any
product, facility or arrangement made available by an ADI within the meaning of
the
Banking
Act
1959
in the course of its banking business within the meaning of that Act
[191]
will be brought within the regulatory framework. This will include products
made available by building societies and credit unions once they are brought
within the
Banking
Act
as part of the second phase of the Financial Sector Reform implementation.
Mortgages
over real or personal property
These
will be specifically included to the extent that they are not covered by the
Uniform Consumer Credit Code.
[185]. Under
section 92(2) of the Corporations Law
‘securities
of a body
’
means:
• Shares
in, or debentures of, a body;
• Interests
in a managed investment scheme;
• A
regulated superannuation fund, an approved deposit fund, a pooled
superannuation trust, or a public sector superannuation scheme within the
meaning of the
Superannuation
Industry (Supervision) Act
1993
(for
the purposes of Parts 7.3-7.6);
• Units
of shares; or
• An
option contract within the meaning of Chapter 7.
[186]. Companies
and Securities Advisory Committee,
Regulation
of On-exchange and OTC Derivatives Markets
–
Final
Report, June 1997.
[187]. Section
9 of the
Life
Insurance Act
1995
defines
‘life
policy
’.
[188]. A
‘sinking
fund policy
’
is defined in the Schedule to the
Life
Insurance Act
as
a contract that has the
following
features:
• the
company issuing the policy undertakes to pay money on one or more specified
dates;
• neither
the payment of that money nor the payment of premiums is dependent on the death
or survival of the person to whom the policy is issued or of any other person.
[189]. Under
section 10 of the
Superannuation
Industry (Supervision) Act
‘superannuation
interest
’
means a beneficial interest in:
• A
regulated superannuation fund;
• An
approved deposit fund; or
• A
pooled superannuation trust.
[190]. Under
section 8 of the
Retirement
Savings Account Act
an RSA, or retirement savings account, is an account
or
a policy :
• that
is described as an RSA ; and
• that
is provided by an entity that is an RSA institution at the time the account is
opened or the policy is issued; and
• that
is capital guaranteed; and
• that
is held by a person who is an eligible person at the time the account is opened
or the policy is issued ; and
• that,
at the time that it is opened or issued, satisfies:
• the
requirements in section 15; and
• any
prescribed criteria; and
• that
is opened or issued on or after 1 July 1997 or such later day as is prescribed.
[191]. Under
section 5 of the
Banking
Act
‘banking
business
’
means:
• a
business that consists of banking within the meaning of paragraph 51(xiii) of
the Constitution; or
• a
business that is carried on by a corporation to which paragraph 51(xx) of the
Constitution applies and that consists, to any extent, of:
: both
taking money on deposit (otherwise than as part-payment for identified goods or
services) and making advances of money; or
: other
financial activities prescribed by the regulations for the purposes of this
definition.