ABN 98 008 624 691
20 Bridge Street
Sydney NSW 2000
PO Box H224
Telephone 61 2 9227 0930
Facsimile 61 2 9227 0917
10 August 2009
Equity Derivatives Assessment
Corporations and Financial Services Division
CANBERRA ACT 2600
Via email: EDAssessment@treasury.gov.au
Issues Paper: Improving Australia’s Framework for Disclosure of Equity
It is with pleasure that I attach ASX’s submission in response to the Treasury’s Issues Paper.
If you have any questions on the submission or wish to discuss any issues in more detail, please feel free to contact me
in the first instance (tel: 02 9227 0930 or email: firstname.lastname@example.org)
Senior Policy Analyst
Regulatory and Public Policy
Improving Australia’s Framework for
Disclosure of Equity Derivative Products
Australian Securities Exchange
ASX welcomes the opportunity to comment on the issues raised in the Treasury issues paper and provide
some information on the operation of our equity derivatives markets.
We would be happy to expand on the views in this submission or provide any additional information, including
data and background on ASX derivative markets that would help you in forming views on these matters.
Many of the specific areas canvassed in the issues paper, particularly regarding practices in the over the
counter (OTC) equity derivative market and hedging activities of market participants, are outside of ASX’s
particular area of expertise and so others are better placed to respond to those matters.
Therefore ASX’s comments generally relate to the impact amended disclosure requirements for equity
derivative positions might have on the operation of our equity and derivative markets.
It is important than any proposed policy change be in response to clearly identified shortcomings with the
existing arrangements. We note that data suggests that the scope for equity derivatives to undermine the
substantial shareholding disclosure regime is limited.
While greater disclosure has the potential to enhance market efficiency and integrity, poorly designed
disclosure requirements can generate data that provides ambiguous pricing signals and confuses market
In addition, a reporting regime that is unnecessarily intrusive in disclosing proprietary information of investors
(without any offsetting public benefit) and/or that imposes significant compliance costs on participants may
reduce market liquidity and efficiency. It can also potentially reduce the availability of products, such as equity
derivatives, that are an important investment/risk management tool for investors.
As a general principle, ASX regards effective disclosure as a fundamental prerequisite for the operation of a
fair, orderly and transparent market. This view is highlighted by the importance given to enforcing the
continuous disclosure requirements placed on listed companies and set out in the ASX Listing Rules.
Disclosure is also a fundamental philosophy underpinning much of the Corporations Act. As noted in the
Treasury issues paper the substantial shareholding, takeovers, and directors disclosure provisions of the
Corporation Act prescribe certain disclosures that are largely designed to underpin an effective market for
The requirement for investors to file a substantial shareholding notice is governed by Section 671B of the
Corporations Act which requires disclosure of a “relevant interest” in equity securities representing greater than
5 per cent of the voting rights of a public company. The relevant interest is defined broadly to include the
power (directly or indirectly) to control the voting rights or disposal of the shares.
As such, the public policy objectives underlying the regulation of takeovers (the market for corporate control) -
which are embodied in Part 6 of the Corporations Act, are quite separate from the public policy objectives
underpinning the regulation of the provision of financial services and the conduct of financial markets (dealt
with in Part 7). Care should be taken to ensure that the policy objectives are not confused when considering
the rationale for policy change, in sections of the issue paper sometimes the distinction is not clearly drawn.
We do not see a strong case for imposing a comprehensive disclosure framework for equity derivative
positions beyond ensuring that the existing requirements which apply in takeover situations are working
effectively. The primary concern arising from non-disclosure of such positions is the impact it may have on
Page 2 of 6
Australian Securities Exchange
ensuring that the acquisition of control of a listed entity takes place in an efficient, competitive, an informed
ASX is not aware of evidence that there is widespread use of equity derivatives to circumvent the substantial
shareholding requirements of the Corporation Act, beyond those specific instances quoted in the paper that
involved takeover situations.
Of course, should the Treasury consultation process unearth evidence to the contrary then ASX could see a
stronger case for further regulatory action to enhance disclosure requirements.
The publication by the Takeover Panel’s Guidance Note 20 dealing with equity derivatives appears to have
provided useful clarification of situations when positions held through equity derivative contracts should be
disclosed. However ASX believes a more robust outcome over the longer term may be to incorporate such
disclosure requirements explicitly into the Corporations Act or the Corporations Regulations rather than relying
only on the Panel’s guidance note.
Enhancing general transparency of equity derivative markets
The Treasury issues paper was comprehensive in considering the full range of existing derivative products
available in the exchange-traded and/or OTC environments; although it is fair to note that the size and depth of
the individual markets can differ markedly.
ASX Ltd is the operator of the exchange-traded equity derivatives market in Australia. As noted in the
Treasury paper, this includes products such as Exchange Traded Options (ETO), warrants and exchange-
traded Contracts for Difference (CFD). Of these exchange-traded markets, ETO products represent the
largest, and hence for the purposes of the policy issues being discussed here, the most important market at
As noted in the issues paper there is also a growing OTC equity derivatives market including equity swaps,
OTC equity options and CFDs.
Given the underlying policy rationale for collecting equity derivative position data is to shine a light on
substantial economic and/or voting interests in listed entities, a consistent approach should be applied across
all similar products regardless of where they are traded. Therefore it would not be appropriate to draw an
artificial line between exchange and OTC markets. In fact, such an approach would only create an opportunity
for regulatory arbitrage to avoid disclosure requirements.
While considering how disclosure requirements might apply to existing products is relatively easy, it is much
harder to design a regime that can foreshadow product innovation in the future. In framing any disclosure
requirement it is necessary for the regime to be expressed in terms that will not encourage the structuring of
financial transactions specifically to avoid the obligation to disclose.
While crafting such a definition may not be easy to achieve in practice, it is consistent with the current
regulatory approach of tying the disclosure obligation to the investor having a ‘relevant’ interest in the
underlying security. ASX believes that the key policy objective is to ensure all transactions that transfer
effective control of the underlying security are captured by the reporting requirements.
While the disclosure regime examined in the Treasury issues paper is appropriately considered only in the
context in takeover situations that does not exclude separate consideration being given to requiring more
timely information on equity derivatives activity as it could add materially to market efficiency and fairness (ie a
policy objective more closely aligned with Part 7 of the Corporations Act). However, that information does not
Page 3 of 6
Australian Securities Exchange
necessarily need to dig into the positions of individual investors to provide information that can add to price
discovery and/or indicate possible cases of market misconduct.
Timely information on aggregate derivatives contract volumes traded and current prices (by underlying
security) are currently available for ASX traded equity derivative products. Such information can provide
market users with insight into the full breadth of trading activity in a company’s securities and to help investors,
at times, interpret movements in the price of the underlying securities (eg around derivative contract expiry
However, similar information (prices and trading volumes) is not usually available for OTC derivative contracts.
Trading in OTC equity derivatives markets is much more opaque, with very limited or no timely information
available of volumes traded and transaction prices. This largely reflects the nature of these markets which are
conducted through bilateral channels, with no centralised infrastructure and/or collection of data. Although
some indication of the overall size of particular OTC markets is generally provided, at a much higher level (ie
not at an individual security level) less frequently through organisations such as AFMA.
While beyond the scope of the current Treasury issues paper, it is worth noting that there is currently an active
international policy debate (including in Australia) around encouraging more OTC derivative trading activity to
be conducted through regulated markets/electronic trading platforms and/or with clearing services performed
by a central counterparty (CCP). While this debate is largely focused on the larger fixed interest and credit
related markets (such as CDS) the same principles can easily be applied to equity related derivatives.
That policy debate may lead to improvements in transparency that move OTC markets closer to the level
applying in the exchange-traded environment, although it is unlikely they will ever have equivalent
transparency. This may go some way to achieving the objective of shining more light on activity in this area
which could, in turn, enhance price discovery in the underlying securities and improve the supervisory
oversight of markets.
As noted above, the ETO market operated by ASX is transparent and information is widely available. This
information, some of which was included in aggregated form in the Treasury issues paper also helps to provide
more context to the breadth and depth of the ETO market. Given ETOs are the largest of the equity derivative
segments relating to the securities of individual companies, further examination of the nature of that market
can help give some sense of the magnitude of the potential for these products to undermine the substantial
We would suggest that this closer examination would indicate that, in practice, these risks are minimal and
most likely to arise only in cases of takeover situations, which are already adequately addressed by the
Takeover Panel’s guidance note.
As noted in the Treasury issues paper, the number of ETO contracts1 traded grew strongly over a number of
years, before falling back in 2008 as the impact of the global financial crisis on overall equity market activity
flowed through to activity in the ETO market.
ETO products traded on the ASX currently cover the securities of around 90 of the 2,200 entities listed on
ASX, although in June 2009 ASX indicated that this number will fall to around 60 over the coming years, as
illiquid ETO contracts are retired via a phased delisting.
To qualify to have an ETO listed over a company’s security, the underlying security must meet certain
minimum market capitalisation and liquidity criteria as well there being evidence of investor demand for an
An ETO contract generally represents 1,000 shares in the underlying security.
Page 4 of 6
Australian Securities Exchange
So the potential risk of non-disclosure of substantial positions through use of ETOs is limited to a relatively
small group of the largest and most liquid listed securities.
While the ETO market has grown over time it is important to note that, in practice, just over half of all trading
volume is concentrated in the top five ETO contracts and just over 80 per cent in the top 20 contracts. Even in
these most activity traded ETOs, monthly trading volumes and total open interest usually represents less than
5% of the total securities on issue. It should also be noted that these figures aggregate both put and call
option contracts (ie a combination of long and short positions) and so the actual long or short positions
underlying these figures would be smaller again.
The aggregate numbers suggest that, in general, individual equity derivative positions are unlikely to be a
significant source of understating gross substantial shareholding positions. That is not to say that in specific
situations, such as around an actively contested takeover situation, there is not scope for an investor to use
the ETO market to build up a position in a particular stock. However, we believe this is already adequately
covered by existing requirements.
It is worth noting that on average around 85-90% of all ETOs are not exercised, with the open position instead
being closed out prior to expiry of the contract or by the ETO expiring worthless, with the remaining 10-15%
being exercised and involving the actual transfer of the underlying shares. Therefore the amount of any
specific option series exercised would equate to, on average, around 0.5% of the securities on issue changing
The investor in an ETO is unable to directly exercise voting rights in the shares, to dispose of the underlying
shares, or to have some ‘side-agreement’ with the writer of the option to influence their actions with regard to
voting or disposal, given the use of an interposed entity (the CCP) which sits between the two counterparties.
Control over the shares is only transferred if and when the derivative is exercised and physical transfer of
securities occurs. This is recognised by the current substantial shareholding regime which only requires
disclosure of positions held through ETOs at the time of exercise.
The markets for exchange traded CFDs and warrants are currently smaller in absolute terms than for ETOs2
and so represent an even smaller ‘risk’ in terms of them being used to undermine the substantial shareholding
ASX’s role in the substantial shareholder notice regime
ASX facilitates disclosure of the substantial shareholder notices of investors (required under s671B of the
Corporations Act) through its Companies Announcement Platform (CAP). To the extent that Treasury decides
to recommend that changes be made to the substantial shareholding notification requirements we would
expect that those would continue to be reported through the existing distribution channel.
While ASX distributes the substantial shareholding notices to the market through its infrastructure, it is not
responsible for enforcing the disclosure regime or ensuring that appropriate disclosure is made. ASX is not
required to (and does not) review each substantial shareholder notice in detail. However, on occasion, where
there is an obvious error in the notice or where there is significant public speculation of a possible failure to
disclose a substantial shareholding position, ASX has taken action to query the listed entity about whether they
are aware of any breaches of the requirement. The ability of the company to trace breaches can be limited,
particularly in cases where the speculation may relate to positions held through equity derivatives, as the
company will not have direct access to such information.
A CFD contract represents only a single underlying security, while warrant contracts have no standard conversion ratio.
Page 5 of 6
Australian Securities Exchange
As noted above, information on aggregate transaction volumes and open positions (by security) are much
more transparent when conducted via an exchange. However it is not the case, as suggested in the Treasury
paper (paragraph 35), that information about the identity of particular investors and their positions are more
easily obtained by an exchange operator than if the transaction had occurred in the OTC market.
An exchange generally has contractual relationships only with its derivatives trading, clearing and settlement
participants – not the end investors (unless they are a proprietary trading participant).
In instances where information is sought on an individual investor basis (for example, in the course of
investigating potential market misconduct) ASX can approach a participant to seek information on the investor
on whose behalf particular trades were entered. The participant is, however, unlikely to know the aggregate
investment position of that client in the underlying security.
In contrast, in OTC markets the bilateral nature of the transaction means that the specific counterparties are
both known to each other, unlike in the an exchange-traded market where a clearing house is usually
interposed between the counterparties. However, there is no mechanism available to collect, aggregate or
publish individual trading information when the trade is conducted OTC.
Despite the location of where the trade is executed, the substantial shareholder disclosure obligation is placed
on the individual position holder not on either the market operators (where there is one) or on the participant
who facilitates the transaction. There should be no practical difference for the investor determining their net
substantial position, whether the position was established in the OTC or exchange traded market.
Director Disclosure Requirements
The paper notes that s205G of the Corporations Act requires directors of listed companies to disclose their
relevant interests in the entities that they manage but then indicates that positions established through equity
derivative contracts are not captured by these provisions. While the Government may wish to consider
amending the legislation to make the obligation clearer if they believe there is a deficiency in the existing
definition we would point out that ASX Listing Rules already overlap to some extent with the Corporations Act
ASX Listing Rule 3.19A requires the listed entity to notify ASX of a director’s holding of relevant interests in the
securities of the entity and interests in contracts relating to the securities. The latter seems to mirror to
provisions in s205G(1)(b) of the Corporations Act.
ASX Guidance Note 22: Director Disclosure of Interests and Transactions in Securities – Obligations of Listed
Entities” notes that the Listing Rule definition of “securities” includes options. So for the purposes of reporting
under LR 3.19A a director that has a relevant interest in options (because the director holds or controls them)
must disclose this interest. This obligation, however, may not extend to interests arising from other equity
10 August 2009
Page 6 of 6