The changes require the Minister and ASIC to have regard to the
likely impact on the underlying physical markets when making a
determination imposing a mandatory obligation or making a
Derivative Transaction Rule (DTR) in relation to a commodity
Why have the changes been made?
The changes have been made in response to concerns expressed by
stakeholders that limitations on the use of OTC derivatives may
affect the operation of the underlying physical market.
Energy market participants have been particularly concerned to
ensure that the operation of the National Electricity Market (NEM)
is considered prior to the introduction of any determinations
relating to electricity derivatives. These concerns stem from the
fact that, unlike tangible commodities (such as oil, which can be
stored in ships and tanks, or gold, which can be stored in bullion
reserves), electric energy is very difficult to store or transfer
between regions, which gives rise to volatile spot power prices.
This can lead to very significant differences between the
derivative price and the underlying spot commodity price,
particularly for shorter term contracts.
Regulations that reduce the number of available participants in
the electricity derivatives markets, or otherwise inhibit liquidity
in those markets, could leave participants in the volatile
underlying power price market considerably more exposed and
ultimately increase rather than reduce systemic risk.
Several NEM participants made submissions to the Government
highlighting these issues and indicating that, as a consequence,
the derivatives reforms could potentially have led to less
flexibility in the management of electricity market risks, and a
consequent price increase for customers.
The Bill is expected to be assented soon, with the substantive
changes to come into effect on the 28th day after assent.
There are still important pieces of the puzzle that have not yet
been finalised. It is not yet known if or when the responsible
Minister will prescribe a class or classes of derivatives under the
new laws. However, if this occurs, the Australian Securities and
Investments Commission will consult publicly in relation to any
rules that will apply to prescribed classes of derivatives.
Clayton Utz communications are intended to provide
commentary and general information. They should not be relied upon
as legal advice. Formal legal advice should be sought in particular
transactions or on matters of interest arising from this bulletin.
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In the years following the global financial crisis of 2008 many Australian investors lost their life savings as financial products failed and the Australian Stock Exchange shed over 3,000 points.
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