Lotu-Iiga Peseta Sam: Settlement Systems Futures and Emissions Units Bill — Second Reading 
Lotu-Iiga Peseta Sam: Settlement Systems Futures and Emissions Units Bill — Second Reading 
[Volume:658;Page:7600] 
PESETA SAM LOTU-IIGA (National—Maungakiekie) 
: 
 I am pleased to take a call in the second reading of the Settlement Systems Futures and Emissions Units Bill. I acknowledge the sponsor of the bill the Minister of Commerce the Hon Simon Power and also the chair of the Commerce Committee and the previous Minister of Commerce the Hon Lianne Dalziel who introduced this bill in September 2008. The Commerce Committee of which I am a member received and considered 12 submissions and reported on 22 June this year on the bill. 
The bill is designed to align New Zealand’s clearing and settlement system with international best practice. It is also designed to facilitate trading in futures and emissions units. Firstly it provides that trades in securities and other products can be cleared and settled through designated systems that meet the expectations of international and domestic participants in New Zealand’s financial markets. Secondly it aligns the regulatory environment for exchanges seeking to operate in both the securities and futures markets. Thirdly it allows market participants who are approved by an authorised futures exchange to be deemed to be authorised to deal in futures contracts. Finally it clarifies the regulatory treatment of emissions units to support the development of the market for emissions units. 
The bill provides settlement systems operating in New Zealand with the option of applying for designation. Designation provides additional legal protections to support the integrity of the system in the case of a participant’s insolvency or default. Specifically it provides the operators of a designated settlement system with priority under the Personal Property Securities Act 1999. At present New Zealand’s legislation provides for the designation of payment systems under Part VC of the Reserve Bank of New Zealand Act 1989. As has been stated by the two previous speakers the bill aligns the regulation of exchanges that are seeking to operate in both the securities and futures markets. The Securities Markets Act 1988 currently provides one process for registering a securities exchange and a separate process for authorising a futures exchange. The bill amends the Securities Markets Act so that an exchange registered under Part 2B of that Act may be registered either in respect of securities markets or futures markets only or in respect of both securities markets and futures markets. The choice is open to those who are seeking such registration. 
The bill also provides that market participants who have been approved by an authorised futures exchange under its operating rules are authorised to deal in futures contracts on any futures markets operated by the authorised futures exchange. That does not affect the ability of the Securities Commission to authorise futures dealers more generally but codifies the existing class authorisations granted by the Securities Commission and makes them available to any authorised futures exchange. 
The previous speaker touched on emissions units and I want to comment briefly on them. The Finance and Expenditure Committee is doing good work on the Climate Change Response (Moderated Emissions Trading) Amendment Bill. But this bill clarifies the regulatory treatment of emissions units to support the development of the market for emissions units. This applies as Mr Chauvel has stated to both units issued as part of a statutory scheme and units issued in the voluntary market. It does take into account the Kyoto Protocol. It gives effect to the policy through technical amendments to existing legislation. For example the bill clarifies that emissions units will be treated like other forms of property under the Securities Act 1978. As a result trading in emissions units will not need to meet the requirements of the regulatory regime for offers of securities or the relevant provisions of the Securities Markets Act until they are part of an investment scheme. 
I was a member of the Commerce Committee which sat and listened to submissions on the bill. The key recommendation from the committee to replace the definition of insolvency with a new definition of “becomes subject to an insolvency event”. This is critical because it is the moment at which a participant becomes subject to an insolvency event and it is much clearer. The committee proposed several amendments to avoid potential problems in the event that a participant in a settlement transaction became subject to an insolvency event while the settlement was only partly completed. Although such a situation is unlikely it is wise to close any gap in the difference in timing between those two events especially in the current global financial climate. The bill as introduced provides that the finality protection extends until the earlier of 24 hours after the commencement of the insolvency or the time when the designated settlement systems contact person has notice or ought to have notice of the insolvency. The committee’s recommendation that finality protection would extend for 24 hours after the commencement of insolvency is regardless of when the contact person has such notice. This would remove any uncertainty over the receipt of notice while maintaining a 24-hour window after the commencement of an insolvency in which to complete any settlements that were already in progress. 
I will now touch on penalties. The bill proposes various penalties for offences relating to designated settlement systems ranging from fines and imprisonment to the revocation of designation. It was submitted that the revocation of designation was the only necessary and effective penalty. But the committee concluded that a range of penalties is more appropriate as revocation is an extreme measure under any circumstance. Without lesser penalties minor or even moderate offences that did not warrant revocation might go unpunished and that would inevitably undermine the system. There is also a need for penalties against individuals as the committee believes the possibility of employees being held personally accountable would greatly increase the incentive to comply. After comparing those penalties with penalties in other jurisdictions the committee proposed one change to the level of penalty for corporate bodies. It recommended that the maximum fine for a body corporate should be reduced from $1 million to $750000 bringing it into line with fines in other jurisdictions. 
I have given a summary of the key issues that were involved within the committee in bringing this bill to its second reading and I commend the bill to the House. Thank you.