Financial Markets (Derivatives Margin and Benchmarking) Reform Amendment Bill

on behalf of the Minister of Commerce and Consumer Affairs: I move, That the Financial Markets (Derivatives Margin and Benchmarking) Reform Amendment Bill be now read a third time.

Can I begin by thanking all of the groups who have contributed to making this piece of legislation and getting it to this very important third reading. First and foremost, I’d like to thank those in the industry who have worked alongside officials from the Ministry of Business, Innovation and Employment and the Reserve Bank in a very consultative way to ensure that we have a piece of legislation that achieves its objectives. This is a complex area of the law, and the bill required specialist input from a range of highly qualified people in this sector to get it right.

I’d also like to thank the members of the Finance and Expenditure Committee for their hard work in considering the bill. With the select committee period shortened to four months to meet international deadlines, there was a lot of detailed work to be done in a short space of time. The result of all that hard work is a very important piece of legislation now in very good shape.

As a Government, we understand how important it is to maintain strong linkages with international markets. The global financial system is highly interconnected, and our banks and other large financial institutions rely on their international linkages to be able to provide vital credit and other services to New Zealanders.

The international financial system is also increasingly rules-based, and when new rules are introduced, New Zealand has to play by those rules in order to continue to participate in the system. This bill helps do those things and brings New Zealand into line with major international reforms to the operation of financial markets. This bill will help New Zealand entities that are looking to raise funds offshore and manage financial risks by making sure they are able to maintain access to key counter-parties and markets. This will directly benefit New Zealand consumers and businesses by reducing borrowing costs and supporting the soundness of our financial system.

While there have been jokes in previous speeches about this being a dry piece of legislation, I prefer to characterise this as a quiet bill that is actually hugely significant in what it delivers for both our financial sector and everyday New Zealanders. There are some whose response to this bill might be described as actually raving about it, and one of those is no less than my colleague Dr Deborah Russell, who I think will make a contribution to this bill. I think this House will be enthused by Dr Russell’s contribution, and I think many New Zealanders will be as well—as, indeed, they should—because it’s such an important piece of legislation.

There are two parts to the bill. I hope that members opposite might get excited by the bill too, because they have contributed to it through their representation on the Finance and Expenditure Committee as well, and I know that for many of them, if not raving about it, their pulse might be slightly elevated, at least, when they come to consider it.

Part 1 of the bill contains amendments to various Acts that will remove barriers to compliance, with new rules for over-the-counter derivatives. The rules require parties to these types of derivatives to exchange what’s called “margin”, and were introduced following the global financial crisis as a way of reducing systemic risk. Compliance with the rules is important for large New Zealand banks and our other large public sector entities, like the New Zealand Superannuation Fund and ACC, which rely on derivatives for their activities. The bill facilitates compliance with these new margin rules by making various amendments across the statute book.

As I mentioned earlier, the Finance and Expenditure Committee did an excellent job of scrutinising this piece of legislation, particularly to this first part of the bill. The committee recommended a number of important technical amendments. These included changes to the transitional provisions and changes designed to clarify the position when two or more parties have certain types of competing claims to posted margin. During the committee of the whole House stage, a number of valuable amendments were also made to the bill. These included amendments to four Acts, which, while not essential to ensure compliance with foreign margin rules, will provide additional reassurance to qualifying derivatives users.

In relation to Part 2, this bill also introduces a licensing regime for New Zealand administrators of financial markets. The regime will be monitored and supervised by the Financial Markets Authority. The key objective of this part of the bill is to create a regulatory framework that will achieve equivalence with new EU regulations and enable important benchmarks to be used with EU counterparties. Administrators of New Zealand financial benchmarks who opt in to holding a licence will need to meet the requirements in the bill and further detailed obligations that will be set out in regulations.

The bill also provides the Financial Markets Authority with important new powers that are designed to avoid disruption to the market. They do this by ensuring that a financial benchmark can continue to be generated and used on an ongoing basis. These powers would be used only as a last resort in situations where a benchmark administrator is going to stop generating a benchmark, or a contributor to a benchmark is going to stop making information available for that benchmark. The powers, however, are important examples of the types of measures being introduced to make our regime for financial benchmarks more robust. Overall, this new licensing regime will reinforce the integrity of the benchmark administration in New Zealand and, as with the first part of the bill, maintain vital linkages with international financial markets.

I’m very happy that we’ve got to the stage where we’ve got to a third reading of this bill. I’d like to conclude by reiterating my thanks to the submitters on the bill, to the Finance and Expenditure Committee, and to officials for all their work on the bill. This bill makes important reforms to New Zealand financial markets which will support New Zealand’s integration with global financial markets, support the soundness of the financial system, and benefit New Zealand consumers and businesses. I commend this bill to the House.

Thank you, Mr Speaker. It is indeed a delight. I’m full of excitement to be standing and talking on the third reading of the Financial Markets (Derivatives Margin and Benchmarking) Reform Amendment Bill. It is indeed a bill that should excite all of New Zealand for what it achieves, not necessarily for its contents. I am one of the people who, in an earlier contribution, noted that this bill and its provisions were as arid as the Sahara, and that I hold to be true. In fact, it’s not often—but we did have in this case—that submitters apologise for the fact that they feel their submissions are going to bore the committee; they certainly didn’t, and I’d like to acknowledge my colleague Andrew Bayly, who, if I might say, at an intellectual level, was like a pig in muck over this bill, and he did a fantastic job of helping us all with it on both sides of the table, although I also acknowledge Dr Russell. She too enjoyed and contributed as the bill went through the Finance and Expenditure Committee.

Now, while the bill will pass—and it appears it will; I think it still has the support of the entire House—and while it is all about ensuring New Zealand financial market participants can still participate in international markets, particularly in the area of derivatives, in actual fact what’s more important—because those things are large trading banks, the Superannuation Fund, ACC, dealing in what normal people, the average hard-working Kiwi, would see as astronomical numbers, far too big really to comprehend. But, at a real level, at the heart of what this bill actually does, are not those large scale transactions, because, at the end of the chain of what those transactions enable, is a business, small or large, being able to borrow money to buy more plant, to increase their factory or facilities, to employ more people. So this bill is about employing more New Zealanders. It’s about unlocking potential for people to get meaningful work—work that will pay well and work that will help them to meet their aspirations and to achieve what they want in their lives for them and their families.

Equally, the outcome at the end of the chain of these large transactions is moneys that individuals and families can borrow for houses or for other needs in their lifestyles to help them deliver for their families, to have a safe place to raise those families, and to have the things that help them lead the lives that they wish to. That is what this bill is truly about, because large-scale transactions, while being fundamental to being able to deliver what is at the end, it is what actually comes at the end that is most important. That’s why I say the provisions in this aren’t quite as exciting as the outcome, but they are extremely important because there is no way our large financial institutions would be able to deliver upon that if they weren’t themselves able to secure the funding they need for what leads on to that further lending down the track. I particularly see Dr Webb shaking his head a bit. I’m, obviously, referring to banks more than ACC or the Superannuation Fund, but they will actually be the largest users of this anyway. They need to be sure that they can access those capital markets and those funds around the world. This is what the bill is all about in the sense, at least, of its technical provisions.

We have supported the bill all the way through. I believe that every other party in the House has. It was actually a pleasure, despite the technical nature of the provisions, to sit on the select committee. We continue to support it, as I hope all parties still do, and I commend this bill to the House.

Thank you, Mr Speaker. Well, the last speaker managed to speak for six minutes and demonstrate he did not actually understand what a derivative is. But I’m pleased to support this bill. It brings New Zealand into the international market. It makes sure that we’re compliant with EU principles. It makes sure that we can participate in the international market for derivatives, and it avoids the risk of contagion in the event that there’s a derivative failure. That is really all I need to say about this. It’s an excellent piece of legislation and I commend it to the House.

Thank you, Mr Speaker. It’s clearly a very interesting piece of legislation. I just want to make a brief comment on this bill. It’s designed, as the Minister said, to allow New Zealand businesses to compete in the international market place. It allows New Zealand businesses to protect themselves, and it enables them to, I suppose, secure the funds and secure their place in the market around the world. But I want to make a little comment which is slightly contrary to the comments that have been made so far.

We in New Zealand tend to borrow what’s best practice in international legislation to deal with these issues. Because of the unusual nature of our country and of our financial markets and the size of them, and also the very diverse nature of our country, sometimes these bits of legislation don’t always work out as you anticipate. I’m sure that in this case it might, but I think it’s worth just thinking as a country about how we might look at customising some of this legislation to a much greater extent to suit our own financial environment. I think we’ve seen it with a number of bits of legislation in recent years, where the intention is always good but the carrying out of that legislation and the implementation of it in New Zealand often costs us a lot more money and a lot more effort than we might have thought, and perhaps a lot more effort than is necessary.

With those few words, I will commend this bill to the House.

Thank you, Mr Speaker. I think all that needs to be said about this bill has been said, and I commend this bill to the House.

I must admit I’m very surprised by that last contribution from the Hon Ron Mark, because I knew he was an expert in financial derivatives. When you go and buy warships, sometimes you have to buy future currency—you know, FX currency—and I thought that a man like you, with your experience, would actually know about these things and want to talk about the $20 billion you’re spending in defence and how you’re going to make sure it doesn’t cost a cent more than what you’ve actually budgeted for. So I’m a little bit disappointed by the Minister of Defence. I think I’m emotional. I’m just disappointed.

This is a very important bill. We’ve had a number of very good contributions, including from my colleague there, Mr McKelvie. We on the Finance and Expenditure Committee enjoyed this bill, because we knew it was making a difference to New Zealand financial markets. At the moment, derivatives—which can be broadly defined as things like forward rate agreements, foreign exchange swaps, interest rate swaps—are, effectively, ways of dealing with risk. In many cases, derivatives are split up. So if you decide to buy some currency and to actually buy that forward at a certain date, you can actually buy it now, with certainty that when you bought it in, say, 90 days’ time—you can actually buy it at that date, even though the exchange rate may have moved quite significantly during the intervening time.

Another example is if you want to lock in interest rates. You may have a floating mortgage, but you may wish to move to a fixed rate, and you can actually swap that part—and that’s where the name “swap” comes from. They’re complex financial instruments, but they essentially allow banks to manage their massive exchanges of cash and the way they fund their operations. That’s why they’re absolutely crucial to financial institutions, banks being one of them, but even such institutions as the New Zealand Superannuation Fund—all those large financial institutions. They are heavily using swaps, and quite legitimately so, because, as I say, it’s a way of making informed decisions, protecting themselves against unwarranted risk or, in some cases, deciding to take on a risk where they see a market is going to change. They will bet that the market is going to move against them.

This bill is about ensuring that our financial institutions can comply with the international requirements for benchmarking of these types of financial instruments, called derivatives. Now, at the moment, New Zealand is in a state where we largely rely on New Zealand’s type of benchmarking, which is the threshold or the standard by which we measure the certainty around these and the type of these instruments—the accreditation, if I can use another word—and up to now that’s been fine. A classic benchmark that most people will know is when they do a house mortgage. Banks will quote their own bank bill rate. That term is very appropriate for the New Zealand context, but in the international context it has no reference. Often, they will use a London Interbank Offered Rate, or some other banking term, to set what might be a base rate.

So New Zealand is in a situation where we’ve been using our own benchmarks, but with the movement around the world to make sure that we can standardise the benchmarking—the standardising of that accreditation—it was imperative that we moved quickly to actually make sure that New Zealand complied with our international requirements. In some cases, it’s hopeful that even some of the New Zealand benchmarks may be used in a continuous fashion. But the main thing was to move quickly so that our banks could continue to operate in international markets, buying, basically, finance to fund their banking operations—you know, banks take in money and then they lend it out—and to be able to do that in a way that they could manage their portfolio. This bill is a crucial part of that.

I think one of the things about this bill is the importance in terms of how those operations take place, and I think one of the things which will come about through this is greater certainty for our financial institutions. It doesn’t mean that we’re running our financial markets in a riskier manner; it just merely makes sure that we’re complying with our international obligations. I think that on those grounds, this is a very valuable bill and one that should be commended.

I’m sorry to interrupt the member, but it’s come time for me to leave the Chair. This exciting bill is interrupted and is set down for exciting resumption next sitting day.

Debate interrupted.

The House adjourned at 6 p.m.