asx boss trying to calm the masses

'Worst crisis since Depression'By Robert Elstone, ASX chief executive
April 12, 2008 12:00am
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WE are in the midst of a global financial crisis inspired by a potent combination of forces.

A drift in fiscal and monetary responsibility in the US, care of the "War on Terror", has been accompanied by a meltdown in the US mortgage market and a failure of intermediation by several global investment banks.

In this decade of easy credit, access became a right with fewer obligations and leverage became mainstream for households and investors.

These forces have coincided to produce the worst financial crisis in the US since the Great Depression, which globalisation has exported to other financial economies, including Australia.

Bank borrowing and lending spreads have substantially widened, diversified financials and banks have been savagely re-rated, financial group failures are openly speculated on, and vocal stakeholders have blamed every regulator in sight, irrespective of where regulatory responsibilities actually lie.

In late March 2008, US Treasury Secretary Henry Paulson released a blueprint for reforming the structure of financial services regulation in the US along the lines of the "twin peaks" model that prevails in Australia (recently endorsed in the IMF's Global Financial Stability Report).

Last February, I argued that a mini Wallis-style review of the Australian financial sector was logical, once the new Australian Government had passed its first test of fiscal responsibility with the May Budget.

Much has changed in Australia's financial sector in the decade since the Wallis inquiry in terms of the development of opaque OTC derivatives, the depth of transparent exchange-traded derivative markets, credit and collateralisation practices, particularly in the mortgage and (share) margin lending markets, and the enormous growth in self-managed superannuation funds.

Irrespective of whether the Government pursues a "whole of system" inquiry or a series of more targeted Green Papers as referenced by Senator Sherry, the opportunity should not be missed to strengthen Australia's competitive position as a financial economy in much the same way that governments in Singapore, Hong Kong, Ireland, Switzerland, the Middle East and China have done.

The next generation of vital microeconomic reform in Australia will rely heavily on the quality of our financial market infrastructure to deliver longer-dated price discovery for industries with long-dated asset lives, a forward price for carbon to facilitate technology substitution decisions, more transparent risk-sharing arrangements in public/private partnerships, and a regulatory framework that continues to balance the interests of capital providers and users.

Importantly, issuers (users) of capital will better appreciate that the financial sector is not there to purely be accommodative to the real economy.

Conversely, supporters of an ever more robust continuous disclosure regime also need to take account of a listed entity's right to preserve confidentiality for competitive reasons and not have to spend its resources quashing constant rumours and often baseless speculation.

Market events in Australia, such as the circumstances surrounding Tricom's woes and Opes Prime's failure (and Lift Capital's entering into administration), have reinforced the case for higher resource levels for corporate regulator ASIC to deal with record numbers of ASX frontline referrals and to address regulatory gaps, rather than for radical surgery to overhaul the entire regulatory framework.

Calls in the media for severance of market supervision from market operation and risk management, or for the dismantling of the "twin peak" separation of corporate and prudential regulation, carry their own costs, risks and unintended consequences, which those making the calls would seem to have little interest in taking accountability for.

Legislative initiatives in the area of "short selling" of equity securities, a Treasury review of disclosure requirements for equity (swap and contracts for difference) derivatives and an RBA review of settlement risks with stock lending are necessary and welcome moves from the new Government.

Recent market events in Australia have spanned the gamut of corporate and prudential regulation, as well as the market for corporate control.

They have an impact on the policy considerations for the evolving market microstructure of Australia's wholesale markets in a way that the Financial Services Reform legislation of 2002 did not cater for. Any claim that such legislation envisaged a world of competition for market services is very different from it providing the practical apparatus for implementation.

The investment community has every right to expect that policy decision-makers would only allow a significant structural change after a rigorous cost/benefit and risk analysis, conducted with the hindsight of recent market events, and with a high level of confidence in the outcomes. Moving towards such a world without appropriate planning and transitioning milestones, as well as clear market integrity protection mechanisms, would be unwise.

Recent market events will create a linkage between what were hitherto considered private contractual arrangements, in areas like stock and margin lending, and the Corporations Law.

They certainly provide the case for ongoing review of areas of vulnerability and opportunity.

This is especially so if we are to pursue our national interests in infrastructure, climate change and the growth of national savings for an ageing population, and ensure the Prime Minister's stated aspirations for our financial economy are realised.