Webb DuncanDr DUNCAN WEBB (Labour—Christchurch Central): Oh Madam Speaker thanks very much for that. I'm not sure I can add a huge amount after that comprehensive speech by Kiritapu Allan but I was sitting here listening to Mr Yule mash through his exchanges with the ANZ bank and I thought to myself well how can we understand derivatives and explain them in a way that even a boy from Havelock North can understand? So I thought to myself well let's put it into a currency that the boys from Havelock North will understand and imagine we're buying ourselves a Holden Commodore because Mr Yule may well want a Holden Commodore and he may not be able to pay for it now; perhaps he's going to buy it next year. He might rightly be concerned that the price of his Holden Commodore will go up and so he might want to deal with that risk in some way and come to me a derivatives broker and say Duncan I'm concerned about this." I would say to him "Mr Yule if you pay me a hundred dollars I will guarantee you the same price next year." There we have it. I have derived value from that transaction—a transaction which is yet to occur. I've got my hundred dollars; Mr Yule has certainty that he can get his Holden Commodore next year.Of course he may be getting that Holden Commodore from Australia and he may say "But Duncan I'm also concerned that my New Zealand dollars won't be worth tomorrow or next year what they are today." and I'll happily take another hundred dollars off Mr Yule and say "Mr Yule I will guarantee you the exchange rate as well." and there we have a derivative related to foreign exchange. Of course he may in fact be borrowing the money and say "Well Duncan I'm actually going to have to borrow the money but I can only afford 10 percent interest and the bank will only give me a floating rate." So once again I will take a hundred dollars off Mr Yule and guarantee him an interest rate—another derivative.Or perhaps Mr Yule simply wants to be absolutely sure that there will be a Holden Commodore to buy in a year's time and I will take another hundred dollars off Mr Yule and guarantee him that there will be a Holden Commodore—we have a futures contract. There we have in pretty much a nutshell how to explain derivatives to someone from Havelock North and how for me to make 500 bucks very quickly from Mr Yule. So—Jan Tinetti: Who lives in Napier.Dr DUNCAN WEBB: Oh well it's pretty close—it's pretty close.In any event that's what derivatives really are; they're laying off risk and they're called derivatives because they derive their value not from assets in themselves but from transactions related to those assets whether those assets be gold or shares or currency or some other asset like a Holden Commodore or pig bellies or whatever you like. But the thing about these transactions is because they are derived—because they actually depend in their value on movements and markets—they're extremely volatile and so large sums of money can be lost or made very very quickly. That is why it's only the very largest institutions that enter into these transactions because only they have the financial assets to do so.What it also means is that when there is a default that default can be catastrophic and also cascading because one of the problems with these transactions is they build on each other. We can have derivatives on derivatives on derivatives and as Kiritapu Allan rightly observed in the movie The Big Short in the global financial crisis one of the problems was this domino effect of one financial institution having to meet its derivatives demands which then led to another financial institution and so on and so on and so on. That's why this bill is so important because it strengthens the derivatives markets. One of the key things it does is it makes sure that a person who is on the receiving end of the derivative—the person who is essentially the guarantor—can access collateral for guarantee because these transactions are so huge that guarantees of millions and billions of dollars are put up on the international markets often in cash reserves or other highly liquid assets. In our domestic framework we have an entirely different securities regime where if a company goes into liquidation there is a careful ordered and extremely slow process for unwinding these transactions. On the international financial market that's not good enough because if you have to wait six months for $5 billion that will simply lead to a catastrophic financial collapse.So one of the key things that this bill does is it makes sure that parties can access collateral pretty much instantly—that is within a matter of a day or two. So even if a large company one of our trading banks—God forbid—is put into statutory management under statutory management under our law every asset of the company is frozen. This is an extraordinary exception to that which says no except for the margins they've put up for their derivatives transactions. In that case the international parties will be able to access that because that's how derivatives work. I must say when I saw that when those excellent policy wonks came in and explained that to us I raised an eyebrow. I must say when you're in the world of derivatives raising an eyebrow is tantamount to thumping the table. It's a pretty crazy world. It seemed odd to me that all of the mum and dad creditors out there would have to wait under statutory management for their money but you know JP Morgan or whomever out there could immediately access their margin.Now I must say the officials were very good and did very carefully take us through exactly how that would work and how in fact it was only a small amount of the assets that would be available and also that the international financial system was very dependent on this kind of access being available. It wasn't only statutory management but also the Companies Act itself essentially is set aside for—it gives super-priority to these derivatives margins and also the Personal Property Securities Act. In many ways these transactions are personal property securities because personal property asset is given at the disposal of another person if you default on your interests but it's entirely inappropriate for that domestic piece of legislation which is really aimed at things like car transactions and financing farm machinery to be part of the international derivatives framework. So that was really important to get those rules right.It's really important though to remember that this isn't just for any Joe or Josephine Bloggs down the street. This is only for banks the Superannuation Fund and ACC and if anyone else is in that league they can apply to come within this framework. Also my colleague mentioned financial benchmarking licencing—that's really important too because many of these derivatives will be triggered when certain events happen. A classic one would be when the exchange rate falls below a certain level or where the interbank interest rate rises to a certain level.Now we know from the London Inter-bank Offered Rate scandal that if you leave the market to itself there will be manipulation. In that situation the threshold was the rate at which banks would offer money to each other—a weighted average of them. Now there was a cartel of banks which manipulated that so that they could make money on derivatives over there—manipulating interest rates here on a particular time of the day so that they would trigger derivatives events over there. That's fraud. That's utterly unacceptable. And it's because they weren't carefully regulated. So what we have here is buying into a regime of financial benchmark licensing to make sure the systems used to reach those benchmarks are defensible and transparent. What that means is that our systems will be recognised internationally we will be able to trade internationally and we will meet those European standards that we've heard about already.There's one other thing I want to note which is quite interesting and that's the commencement date. It might seem very boring but it turns out that if we had a black-and-white commencement date here and we said this applies to everything in the future we would run into huge problems the difficulty being that many of these derivatives transactions are kind of portfolio transactions so it's a shifting pool of assets which doesn't have a clear beginning and a clear end. To unwind them and say the commencement date applies to this transaction but not that one would be a hopeless mess. So it was decided that in fact it would apply retrospectively in those situations.So an excellent fascinating piece of legislation. Thank you to the officials: an excellent job. I commend this bill to the House."