31 March 2016
by Jacob Greber

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Treasurer Scott Morrison opens door to ASX competitor, offshore buyers

Potential competitors to the ASX have been given the green light by the government to create alternative places to clear share trades.

Treasurer Scott Morrison also announced on Wednesday that the government would relax ownership restrictions on the ASX, increasing the stock market operator's scope to access foreign capital.

The government was responding to a review of competition in cash equities clearing by the Council of Financial Regulators - the Reserve Bank, the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority - handed to the government in the middle of 2015.

The ASX had asked to keep its clearing monopoly for another five years to give it time to invest in new clearing and settlement systems.

But it argued that if it loses its monopoly, it should be allowed to seek additional capital, including mergers, so it can compete on an equal footing with any other competitors that emerge.

Removal of its ownership restrictions, which limit any one shareholder to 15 per cent of ASX Ltd, was recommended by the Murray Financial System Inquiry to boost competition and flexibility across markets.

The restriction will remain, but the ASX will have the same conditions as banks where the 15 per cent restriction can be waived by the Treasurer.

Mr Morrison said while it was unlikely a competitor in clearing to the ASX would emerge in the short term, he insists that enabling such a move is important.

"What's important right now is that we ensure that our arrangements here are as tight as they can be, that I think provide the potential for competition and keep the tension ...with the ASX in operating in a light competitive environment," Mr Morrison said in Sydney.

Mr Morrison said the national interest test would remain on any offshore move to buy more than 15 per cent of the ASX.

"You've got to look at every case on its merits and its impact more broadly," he said of potential purchases of stakes in the ASX. "We're also saying here there's an 18-month period where we wouldn't be contemplating anything of that nature. At least, I should stress."

At present, the ASX's only competition as a trading platform comes from 4 ½-year old Chi-X Australia, a stock and derivatives operator licensed and regulated by ASIC.

ASX Ltd executive chairman Rick Holliday-Smith welcomed the announcement as it gave certainty to the exchange.

"The Treasurer's announcement promotes the desirability of well-regulated competition in the Australian marketplace and supports ASX's efforts to invest in and stimulate innovation," he said in a statement.

"The announcement recognises that the operation of markets changes as new technologies are developed. The Government's decision gives certainty to ASX to continue to assess solutions for the Australian equity market using distributed ledger technology or blockchain.

"As announced in January 2016, this technology has the potential to reduce risk and costs for market participants, speed-up the settlement process for investors, and support new services for listed companies."

Chi-X Australia chief executive, John Fildes, has been lobbying for competition in clearing since Chi-X began. He claims the ASX has not given it equal treatment to the ASX itself and the new regime will for the first time give Chi-X an independent arbitration process overseen by the competition regulator that it can turn to.

"We're very pleased and very excited by the Treasurer's announcement. Competition is highly unlikely to appear in the short term, [but] regulators will have the legislative teeth to impose conditions on ASX," he said.

The Council of Financial Regulators will publicly set out conditions for ASX conduct, instead of ASX managing their code of conduct, now the financial regulators will. If we are not satisfied we can go to the ACCC and implement a binding arbitration. This is truly going to open up Australias financial markets and create a vibrant and innovative market."

The changes include the CFR - the Reserve Bank, the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority - devising "minimum standards" to maintain a safe market over the next 18 months that must be met before a clearing competitor to ASX is allowed to operate.

These will include the finalisation of rules that will ensure clearing and settlement of equities is done in Australia.

The government will make changes to legislation to allow regulators to publicly state regulatory expectations for ASX's conduct in operating its cash equity clearing and settlement facilities until competitors emerged.

Regulators will also be able to impose requirements on ASX's cash equity clearing and settlement facilities and give the ACCC the ability to abitrate disputes over the terms of access to ASX's clearing and settlement services.

However, former ASX chief Elmer Funke Kupper has said if it replaces its settlement system with blockchain technology, their may be little need for clearing in future.

The government said technological developments could "outpace regulation" so some specific requirements of the minimum conditions would not be developed or implemented until a committed competitor emerged.

"While implementing the recommendations of the CFR Review, the government and the CFR agencies commit to working with ASX as it progresses its technology initiative," the government said in its response to the CFR review.

"At the same time the government notes that the regulatory expectations should seek to ensure that technological developments do not preclude effective competition in post-trade services."