Bayly AndrewFINANCIAL MARKETS (DERIVATIVES MARGIN AND BENCHMARKING) REFORM AMENDMENT BILLThird ReadingDebate resumed from 22 August.ANDREW BAYLY (National—Hunua): Thank you Mr Speaker. It's a pleasure to be talking on the Financial Markets (Derivatives Margin and Benchmarking) Reform Amendment Bill at its third reading. Of course we've had a few speeches on this bill which is quite a technical bill dealing with an issue that not a lot of people have the opportunity to be involved in but it's about allowing entities and particularly banks and financial institutions to be able to use what's called derivatives or hedging instruments to be able to manage their risks when they want to go and borrow money—as an example—or just generally to operate.A good example is those foreign currency swaps where you might want to ensure that you always maintain a New Zealand dollar amount on your balance sheet but you have to borrow in US dollars. So you can swap that out at the time that you borrow that money and when you have to repay it have a fixed rate at which you would repay it. That's normally covered during that intervening time through an interest rate cost that's a part of the cost of the derivative.Another example is on interest rates. Often people borrow money at floating rates from offshore and they may want to make sure that it's fixed at a known rate and they can enter into interest rate swaps to ensure that again they have the ability to control that risk and manage it in a way that they want. Of course other parties may want to take on more risk because risk often correlates to a higher return but not always of course as Madam Speaker will know.Just to put this in context this is a huge huge trading platform that financial institutions use; not only banks but our large financial institutions such as the New Zealand Superannuation Fund a $40 billion fund the ACC fund—$40 billion as well. They all use it and most large corporates use it to some extent. Just to give context the current value just of New Zealand trading banks annually is about $8.7 trillion estimated. Of that about $90 billion every year is with international counterparts.This is the essence of this bill because what this bill is doing is actually reacting to the European and the G20 requirements as a result of the financial crisis to make sure that these types of instruments have sufficient security—or another term for that is collateral—to ensure that banks do not get overexposed or financial institutions don't get overexposed. The European Union and also the G20 have set about around the world putting in place some rules that have been agreed to make sure that there is a platform or an understanding about the collateral arrangements that go with it. New Zealand at the moment is slightly out of step with that.What this bill seeks to do is bring New Zealand in line with those international requirements. It requires a lot of changes. It requires changes to the Reserve Bank of New Zealand Act it requires changes to the Insolvency Practitioners Regulation Act and it also requires changes to the Financial Markets Conduct Act.I think that the main point about this is that we had a number of very technical submissions on it but the first thing was around collateral as I mentioned before. The issue is this: when you enter into a trading agreement or a swap of some sort if an event occurs that will mean that the swap is not going to be paid or one of the parties it may be the counterparty fails for some reason what is the collateral that sits in the middle that provides security to the person that has provided that loan? That point of collateral recognition at the moment is very confused under New Zealand law because it really doesn't anticipate it particularly under the Personal Property Securities Act. All these rules in New Zealand actually frustrate the ability of someone who's legitimately entered into a swap to be able to grab the collateral normally in the form of a margin and to apply that against the losses they may receive with the counterparty not actually fulfilling its obligations. That's an important part of this bill.