O'Connor DamienFINANCIAL MARKETS (DERIVATIVES MARGIN AND BENCHMARKING) REFORM AMENDMENT BILLSecond ReadingHon DAMIEN O'CONNOR (Minister of Agriculture) 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 second time. This bill reforms the regulation of our financial markets by bringing aspects of our law into line with international best practice. The key objective of the bill is to ensure that New Zealand's financial institutions can continue to fully participate in international markets particularly through the use of derivatives and financial benchmarks. This in turn will reduce risk in our financial system and costs for New Zealand consumers and businesses.The bill has been reported back by the Finance and Expenditure Committee with a unanimous recommendation that it be passed with amendments. I'd like to thank the members of the committee for their careful consideration of this complex bill. The committee considered more than a dozen often highly technical submissions covering a range of matters. The majority of those submissions strongly supported the policy intent of the bill but the committee also recommended some important changes to ensure that the bill achieves its objectives.To recap briefly what this bill is all about Part 1 of the bill brings New Zealand into line with new rules around the trading of derivatives. Derivatives are used by a number of larger institutions such as banks when investing in raising money. While complex instruments they are critical tools for managing risks. For example banks use them to manage the risk that movements in the exchange rate will make it more expensive to repay money they have borrowed from offshore. Following the global financial crisis the G20 brought in new rules relating to derivatives to reduce risks in international derivatives markets. These include requirements to post collateral which protects one party to a derivative from losses if the other party to the derivative defaults. These new rules have now flowed on to New Zealand and require us to change our laws to ensure our institutions can comply with the rules and continue to participate in international markets. However I think it is important to see this bill and what it does in its wider context. While on the surface it appears to be a highly technical piece of legislation about derivatives the ultimate beneficiaries of the bill are in fact the New Zealand consumers and businesses that interact with or borrow from the banks. Without the changes in the bill interest rates could increase potentially significantly and there could be negative impacts on the overall stability of our financial system. It is therefore critically important that we progress the changes in the bill to improve the resilience of our financial system and ensure our financial markets remain connected internationally. Part 2 of the bill responds to a different but similar set of international reforms. The European Union recently introduced new regulations designed to improve the integrity of financial benchmark administration. Financial benchmarks are important tools used to determine the price or value of various financial instruments including derivatives. The EU regulations are part of a broader international effort to improve the stability of financial benchmarks and make them more resilient to manipulation. This comes in the wake of issues around manipulation of benchmarks by the likes of the UK banks in the London Inter-bank Offered Rate scandal. The bill achieves these objectives by introducing a voluntary licensing regime for administrators of financial benchmarks in New Zealand supervised and enforced by the Financial Markets Authority. This regime is both flexible and robust and will bring benchmark administration in New Zealand into line with best practice internationally aligning with EU regulations. It will also be able to be adapted to future international developments. Changes made by the select committee were: firstly the Finance and Expenditure Committee has recommended some key changes to make sure the bill achieves its objectives and works from a practical perspective for industry. For example the committee recommended that the transitional provisions of the bill be amended so that Part 1 applies to derivatives entered into before the bill comes into force as well as after. This change was necessary to address a practical issue related to how derivative users manage and exchange the collateral required by the G20 rules. The bill was also amended to require collateral to be in the possession or control of the enforcing party before they can enforce their rights to the collateral. This change will avoid confusion that may arise if there is an overlapping claim on the same collateral by other third-party creditors. The committee also worked through the bill in detail to make a number of other technical changes that while small in size were significant in effect particularly for a complex piece of legislation like this where the devil is in the detail. I commend the bill to the House.