08 Nov 2012
Home straight for retail trading of Australian Government Bonds
by Louise McCoach, Alex Chernishev
An exchange-traded facility for Commonwealth Government Securities trading is likely to commence in the first half of 2013.
On 1 November 2012, the Australian Parliament passed legislation to enable retail investors to participate in the trading of Commonwealth Government Securities (CGS). This reform is an important part of the Government's broader economic agenda to promote a competitive and sustainable banking system in Australia.
Retail trading of CGS is seen as a crucial first step to open the retail corporate bond market as it provides a visible pricing benchmark for investments in corporate bonds. CGS trading also provides a low risk way for retail investors to familiarise themselves with fixed-interest securities as an asset class.
The Government sees the development of a retail corporate bond market as important for a number of reasons, including giving Australian companies greater access to more diversified funding sources, potentially reducing their reliance on offshore wholesale funding markets and increasing competitive pressure on bank lending rates.
The development of a retail corporate bond market will also diversify and reduce volatility in Australia's savings pool by allowing Australian retail investors to broaden their investments beyond equities.
How does the CGS framework operate?
The legislation amends the Commonwealth Inscribed Stock Act 1911 (CIS Act) to allow the trading of CGS on financial markets accessible to retail investors.
Under the CIS Act retail investors will not acquire legal ownership of the CGS (which will remain with Austraclear). Instead a new financial product called a Depository Interest (DI) will be created which will provide retail investors with beneficial ownership of the underlying CGS (which confers investors with the right to receive interest and principal payments on the underlying CGS).
The DIs will be issued by nominee entities known as a Depository Nominee and will be able to be traded by retail investors in a manner similar to shares, with trades settled through clearance and settlement facilities.
The legislation amends the Corporations Act to ensure that most of the investor protection provisions in Chapter 7 of the Corporations Act will apply to retail investors in CGS DIs. The amendments make it clear that CGS DIs are securities under Chapter 7. However, Depository Nominees as issuers of CGS DIs will be exempt from the product disclosure statement requirements in Part 7.9 of the Corporations Act.
Moreover, the legislation exempts CGS DIs from the scope of the prospectus requirements in Chapter 6 of the Corporations Act. Instead, the Australian Office of Financial Management will be required to produce a tailored information statement which summarises the key information necessary for retail investors to understand the proposed investment in CGS as well as the terms of a particular offering.
The ASX has confirmed it has been working closely with the Australian Office of Financial Management and other stakeholders to provide an exchange-traded facility for CGS trading, which is likely to commence in the first half of 2013, subject to regulatory clearance. It notes that investors will access the market in the same way as they do for shares and other ASX-quoted securities via their ASX participant, online broker or financial planner.
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