Wood MichaelMICHAEL WOOD (Labour—Mt Roskill): Can I first acknowledge the Minister Kris Faafoi for bringing this bill to the House—the Financial Markets (Derivatives Margin and Benchmarking) Reform Amendment Bill. Can I thank the Minister for forwarding the bill on to the Finance and Expenditure Committee. All committee members are quite excited by this prospect and really keen to get our teeth into this bill in all of its detail. Can I acknowledge the previous speaker Brett Hudson; that was a passionate and very focused speech. I think he's really found his niche in terms of the legislative agenda today. So thank you Mr Hudson.The thing about this bill is that while it seems pretty technical it is actually—as the previous member outlined—quite an important bill in terms of the functioning of our economy. It's a bill that ensures that New Zealand firms can continue to be active in terms of securing credit and engaging in international financial markets. It's a bill that ensures that we are complying with international standards in respect of those financial markets particularly standards that have been set by organisations like the G20 and the EU. In a sense really it's a case of New Zealand being a pretty small player and these being the rules that big global players have set. The reality of the situation is that if we don't ensure that we have a legislative environment that aligns with those rules it will—as the previous two speakers outlined—make it very difficult for New Zealand firms to engage in those financial markets and access the credit that they require to function and that ultimately our economy requires to function as well.I think the other thing that's worth pointing out at the outset is that really these rules are in some respects the wash up of the financial scandals that were exposed at the time of the global financial crisis and a little bit later in the London Inter-bank Offered Rate (LIBOR) scandal of 2012 which I will come to later on. So really what we see is a bit of a delayed regulatory process of international regulators looking back on those calamitous events in the world economy and resetting the regulatory legislative environment to minimise the risks of those kinds of calamities happening again. Let's remember that that global financial crisis stalled worldwide economic growth for several years and wiped hundreds of billions of dollars off global capital markets caused huge unemployment created instability in parts of the world and to a large extent you can sheet home the trigger point for that global financial crisis to unregulated capital markets where the controls were too lax and where the big boys played hard and loose and engaged in greedy and unscrupulous behaviour because there was no one really looking. These rules are partly a response to that.It does impact upon New Zealand in a significant way. It's estimated that our major trading banks have over $1 trillion of exposure just in the EU to financial markets which will have to comply to these new rules. Major public entities like the ACC fund and the New Zealand Superannuation Fund also have significant exposure. Ultimately if we don't have a legislative environment that is compliant the ability of those entities to engage in those markets will be cut off and that would be a very serious problem. The Ministry of Business Innovation and Employment the Reserve Bank and the Financial Markets Authority have been working on these issues for some time to ensure that we have rules that are fit for purpose that minimise risk and ensure our compliance to those markets.There are two key areas in which the legislation enacts reform. The first I want to talk about is around the issue of benchmark rates. People might have a little bell ringing in their head when I talk about the LIBOR scandal of 2012. Now the LIBOR is the London Inter-bank Offered Rate. It is effectively the average of the interest rates offered by the major trading banks in London and it effectively became the default rate that interest was offered at. What emerged in 2012—through a scandal that erupted in Barclays Bank but spread through many others—was that effectively unscrupulous traders had been fiddling with the rates pumping them up or down at different times in order to create margins that they could make profit on. Sometimes they tried to pump up the creditworthiness of their particular institution. It was a massive abuse of the system that enriched a number of people within that system but created chaos throughout the rest of the system and disadvantaged ordinary people ultimately. And so a series of reforms arising out of that LIBOR scandal centred in Europe ensure that there is far greater regulatory oversight of those who set what are called those benchmark rates. Now in New Zealand we have had a different system for determining benchmark rates but what the new EU regulations say is that if you're going to have your own local system for setting benchmark rates then you have to have what's called equivalence with the EU regulatory framework and so ultimately that is what this piece of legislation does. It ensures that we have equivalence so that we are able to ensure that we have benchmark rates that are considered to be valid and ensure that our entities can continue to engage in global financial markets. So that's really really important. The second issue is around the issue of requiring margins and derivatives transactions. Now derivatives are financial instruments that sort of derive out of some kind of a real asset. So the financial instruments that are traded—they might be based on the value of certain commodities or they might be based on a real asset such as mortgage debt. These were commonly sort of sliced and diced and traded in that period leading up to the global financial crisis and what is being required under the new regulatory framework to mitigate some of the risks that arise out of derivatives trading which is a huge financial industry—hundreds of trillions of dollars of money involved; so if something goes wrong there are huge effects across the economy. What the regulations from the G20 ensure—to avoid that sort of house of cards effect so that if one transaction goes wrong it flows on across all of the others—is that we have effectively some money on the table what we call margin in those transactions. So if something goes wrong there is actually some real money to fall back upon. The issue we have is that within the New Zealand legislation certain bits of our legislation would not allow for that to happen particularly our insolvency legislation which for very good reasons has rules about who has first right of call on money if something goes wrong in certain situations. So this piece of legislation ensures that we can be compliant with the new regulations set by the G20 around margins so that our financial institutions can engage in the financial markets particularly in respect of derivatives and that ensures that they can access the credit and the capital that we need. So those are the two key changes introduced by this bill: the changes around the regulation of margins and also around benchmark rates. These changes will ensure that we minimise some of the significant risks that are a reality in the modern financial markets and which caused so much damage in that period between about 2008 and 2012 as we reeled from the global financial crisis. And they will ensure that going forward New Zealand entities are able to engage with international financial markets which we require to keep our economy moving forward. So it's pleasing to see that these changes seem to be supported on both sides of the House. It's a bit of a no-brainer really and I certainly commend the bill to the House and look forward to considering it further on the Finance and Expenditure Committee. Thank you.