Foss Craig: Settlement Systems Futures and Emissions Units Bill — First Reading 
Foss Craig: Settlement Systems Futures and Emissions Units Bill — First Reading 
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CRAIG FOSS (National—Tukituki) 
: 
 As my colleague Mr Power just noted we will be voting for the Settlement Systems Futures and Emissions Units Bill at its first reading and voting for it to be referred to the select committee—Commerce Committee or Finance and Expenditure Committee— 
Nathan Guy 
: Commerce. 
CRAIG FOSS 
: The Commerce Committee. That is very good. 
This is good legislation from what I can see at the moment and it is a step-up. As Simon Power and the Minister of Commerce noted it is a step-up to global best practice. I declare that I have operated and used futures exchanges in all sorts of jurisdictions starting on the New Zealand exchange many many years ago. 
This bill helps the capital markets framework of New Zealand to remove some of the anomalies and weaknesses in the existing model. We have the Reserve Bank Austraclear model and the New Zealand Exchange’s model and the emerging model through which it is hoped to develop a carbon trading scheme. As the Minister said yes that is not essential to this bill but this legislation is very important to the creation of that. 
I gave a speech on this bill this morning at a conference in Auckland. We talked about futures. It might be important for anyone who is listening to understand what the futures market is because many people think it is the price of something in the future. Actually it is not. It is the price today plus or minus the opportunity cost of the delay in receiving or delivering that product—whatever it is—and the risk of settlement. That is actually all it is. When we hear about oil futures gold futures or anything like that all that means is the price today and the cost of carrying borrowing or lending money until the day of the future settlement. That is all it is. It is not the price of something in the future. 
I note that because when the Climate Change Response (Emissions Trading) Amendment Bill came through the Finance and Expenditure Committee many people confused the futures price of carbon in Europe or something like that with the idea that that was the price it was going to be in the future. We can look at any analysis we like but it is not that at all. It is merely the price today plus or minus the cost of carry plus or minus any credit risk and plus or minus any settlement risk which in fact this bill before us aims to fix up. 
We are talking here about settlements for the futures and emissions exchanges etc. but it is a long way from the original futures markets which were actually on the floor. We used to see these guys and we still see them on the stock exchange where they have all sorts of colours. All they seem to do on those floors is shout very very loudly and they are very tall. The tallest people and the ones who shouted the loudest on those particular exchanges in the old days were very successful. Now much of this stuff is on screen in the virtual world and across the Internet. Huge huge volumes are traded. 
As the Minister started to say this is where many of the issues around the problems that are coming from the United States at the moment come from because via futures we can have massive leverage. It is from massive leverage that we can create a very small operator that can have huge exposure. Sometimes and there have been instances of this in the past the exposure and losses those operators are incurring are more than what they can meet; thus there is a settlement or payment risk. That is exactly what this bill is trying to make less harmful. The bill will never eliminate that. 
There is an example that I remember from about 1988 or 1989 right here in New Zealand. The eyes of the world were upon New Zealand because there was a particular bank in New Zealand that had a massive short position on Government bonds at the time. Let us say there were a billion of those particular Government bonds in the market issued by the Reserve Bank or the Debt Management Office. The particular futures contract was a deliverable contract which meant that when it was settled it was not a payment risk. Someone actually had to front up with the particular bonds if they had been sold short via the futures exchange and had to deliver them. In this particular instance the total number of short futures in the market was 1.1 or 1.2 billion. Someone had sold more bonds than there actually were. The New Zealand financial markets at that time were in crisis and it was very interesting that what the Reserve Bank and Debt Management Office did in the end was to issue more bonds. Their first job was to try to save the market. 
As my colleague noted the Settlement Systems Futures and Emissions Units Bill picks up the payment and settlement system. There is still huge risk involved here but it now takes away individual risk and puts risk only on the settlement be it the Reserve Bank Austraclear model or the New Zealand Exchange emerging model whatever that might be. We still do not know; it will be interesting to see. We will go through this at the select committee and we will look at how this works for deliverables. For example we will see whether the New Zealand Exchange’s carbon futures will be deliverable or cash settled and netted; Mr Power explained to us what netting was earlier on. 
I will not talk for too much longer to the relief of many. It is 10 to 12 we are in urgency and one of the most urgent bills for the Government is this particular bill. I do wonder why this one has taken so long to come out because it is actually an eminently sensible bill. Perhaps it was tied up because we have the Capital Markets Development Taskforce looking at things like this. If only the Government looked at the harder questions regarding how to help offer debt to our capital markets it could start to reduce the risk premium on New Zealand’s capital markets which it is fully to blame for and for fiascos such as the Auckland airport sale—or non-sale. The political interference in that process had the effect of “shallowing” New Zealand’s capital markets not deepening them. As many people agreed with us at a conference today— 
Hon Lianne Dalziel 
: Oh so you want to sell Auckland airport? Thanks for that. 
CRAIG FOSS 
: As the Minister is now chipping in I could talk about something else that could be used to help. However it is 10 minutes to 12 o’clock so I will let that go. I look forward to this bill going to the Commerce Committee and I look forward to the more technical contributions of the next speaker. Thank you.