Weekend reading: The Formula That Killed Wall Street
I am fascinated by the way mathematicians explain risk.
But, as Recipe for Disaster: The Formula That Killed Wall Street (a 4 page article in Wired) shows, the mathematical formulae are reliant on valid assumptions.
The article tells the story of mathematician David X.Li's formula, known as a Gaussian copula function, for predicting risks of corporate bonds (including mortgage bonds) which was ultimately used as the basis for collateralised debt obligations.
Guidance for non-profit organisations on Counter-Terrorism Financing
The Australian Government has released a draft guidance document to assist non-profit organisations (NPOs') protect themselves from the risk of terrorism financing.
This guidance document is intended to:
- build awareness of the risk of being misused for the purpose of terrorism financing
- outline Best Practice Principles which NPOs can undertake to reduce this risk; and
- assist NPOs to understand and comply with legal requirements in relation to terrorism financing.
Comments can be made until 27 March 2009.
APRA Chair gives update to Senate
In his opening statement to the Senate Standing Committee on Economics on 25 February 2009 APRA Chair John Laker gave a brief update on the global financial crisis and its implications for the work and priorities of APRA.
In a positive view of banks, building societies and credit unions he said:
In the face of weaker economic conditions in Australia, APRA's key focus over 2009 will be on the core strength of our supervised financial institutions -- that is, on their capital. Having weathered choppy financial seas for over 18 months, our institutions are now beating into headwinds from the real economy. Nonetheless, provided they remain close-hauled --in APRA's terms, prudently managed and well-capitalised -- there is no reason why our institutions cannot continue to make good headway.
For our authorised deposit-taking institutions -- banks, building societies and credit unions -- our main priorities in 2009 are credit quality and capital strength; our earlier concerns about liquidity and funding have eased somewhat. The level of problem loans has been rising (though from a low base) and is broadening beyond the high-profile names that have dominated the data. We are monitoring a range of indicators of credit quality, including institutions' own `watchlists', with a particular focus on commercial property exposures. We are also reviewing capital management plans and potential access to capital, which has become a very scarce commodity in banking systems globally. The success of recent capital raisings by our larger banks is testament to the strong standing of the Australian banking system.
He also commented on APRA's supervision of the life and general insurance and superannuation industries.
27 February: APRA: The Year Ahead
Small Business and General Business Tax Break details
The Treasurer has released an exposure draft of the Tax Laws Amendment (Small Business and General Business Tax Break) Bill 2009 and associated explanatory material. The Small Business and General Business Tax Break was announced on 3 February 2009 as part of the Government’s Nation Building and Jobs Plan.
Treasury has also produced a series of frequently asked questions about the Tax Break.
Interested parties are invited to comment on the exposure draft legislation and explanatory memorandum by 10 March 2009.
ASIC issues consultation paper on equity capital raising refinements
ASIC has issued a consultation paper which considers refinement of measures to facilitate equity capital raising including modification of existing exemptions from disclosure requirements.
In the consultation paper, ASIC is proposing to allow:
- listed managed investment schemes to make placements at a discount of more than ten per cent to the current market price of their units;
- more rights issues and placements using a cleansing notice instead of a prospectus or PDS, even if a listed entity has been suspended for more than the current five day maximum period set out in the law;
- underwriters or large shareholders to participate in rights issues and dividend reinvestment plans even if they exceed the twenty per cent takeover threshold in doing so.
The Consultation Paper discusses ASIC's expectations that the issuer of securities during a placement or other capital raising must take steps to ensure:
- the market is fully informed at all relevant times;
- investors are fully informed before they agree to buy securities;
- retail investors are able to participate in equity capital raisings, to the extent possible and at a fair price; and
- there is minimal risk of any unacceptable transfer of control resulting from the equity capital raising.
Comments on the consultation paper are due by 30 March 2009.
AXA loses appeal against Direct Share decision on cost of access to member register
In AXA Asia Pacific Holdings Limited v Direct Share Purchasing Corporation Pty Ltd  FCAFC 15 AXA lost its Full Court of the Federal Court appeal against the decision of Judge Finkelstein (here) that a reasonable fee for Direct Share's access to AXA's member register under Section 173(3) Corporations Act was $250.
Australian Business Investment Partnership
The Australian Business Investment Partnership was announced by the Prime Minister in January 2009 as a temporary contingency measure to provide liquidity support to viable major commercial property projects in Australia.
This Partnership will be initially capitalised at $4 billion, with the Government contribution of $2 billion matched by an equal contribution by Australia’s four major banks. The initial $4 billion capitalisation could be extended via the issuance of government guaranteed debt to create up to $30 billion of loanable capital.
The Partnership will be limited to the re-financing of existing Australian commercial property syndicated loans on commercial terms when the withdrawal of funding by a participant of the syndicate threatens the refinancing of the loan.
The Partnership will focus on completed commercial property investments and partly completed development projects with secured pre-commitments (for example, retail shopping centres, commercial office and industrial property). It will be structured to allow sufficient flexibility to provide financing in other areas of commercial lending, should the need arise and the Government and four major banks jointly agree.
Pension Drawdown Relief for Retirees
The Treasurer has announced relief from minimum account-based pension draw down requirements.
Currently, it is a requirement that minimum payments be made from a superannuation account-based pension at least annually. Minimum payments are determined by age and the value of the account balance as at 1 July each year. The minimum annual payment rule is designed so that retirees draw down on their superannuation capital over their retirement.
Retirees with a lower income may qualify for the age pension.
The Government will suspend the minimum drawdown requirement for account-based pensions for the second half of 2008-09 through a 50 per cent reduction in the minimum payment amount for 2008‑09.
For those people who have already taken half of the current minimum payment for 2008-09, the annual nature of the minimum payment rules means that a further payment will not be required until the end of the 2009-10 year.
The temporary suspension of the minimum payment requirement will apply to account‑based annuities and pensions (payable since 1 July, 2007); allocated annuities and pensions (pre-dating the Better Super changes); account-based and allocated pensions payable from Retirement Savings Accounts, and market-linked (term allocated) annuities and pensions.
UPDATE 27 February: Treasury Fact Sheet
Guidance for emissions-intensive trade-exposed industries
The Department of Climate Change has released a guidance paper for the assessment of activities for the purposes of the emissions-intensive trade-exposed (EITE) assistance program under the Government’s Carbon Pollution Reduction Scheme.
The assessment process will inform the Government’s decision on which activities in the economy are eligible to receive EITE assistance, the rates of assistance that will apply to eligible activities and the basis for allocations to these eligible activities.
The Government will make final decisions taking into consideration the policy framework outlined in the White Paper and the information provided in this assessment process. The Government’s final decisions will be reflected in the Scheme regulations.
New Australian Consumer Law: national unfair contracts law
Assistant Treasurer Chris Bowen has announced that the national consumer protection law which was agreed between the Commonwealth and the states last year (see here), will be fast tracked with a bill to be introduced by June 2009 and commencement on 1 January 2010.
Proposals for the law are outlined in a consultation paper (An Australian Consumer Law: Fair markets — Confident consumers). Submissions on the Australian Consumer Law are due by the 17th March 2009.
The consultation paper follows recommendations from a Productivity Commission review that there be a new consumer policy framework, comprising a single national consumer law and streamlined enforcement arrangements.
The reforms have three key elements:
- the development of a consumer law to be applied both nationally and in each State and Territory, which is based on the existing consumer protection provisions of the Trade Practices Act 1974, and which includes a new national provision regulating unfair contract terms, new enforcement powers and, where agreed, changes based on best practice in state and territory laws;
- the implementation of a new national product safety regulatory and enforcement framework, as part of the national consumer law; and
- the development of enhanced enforcement cooperation and information sharing mechanisms between national and state and territory regulatory agencies.
The purpose of the consultation paper is to:
- explain how the national consumer law will be developed;
- explain the nature and scope of COAG’s agreed reforms to create the national consumer law and, in some limited circumstances, seek views on specific aspects of those reforms; and
- seek views and explore options for augmentations and modifications to existing generic consumer protections which are based on best practice in existing state and territory laws.
Amongst other things, the law will target unfair terms in standard form contracts (such as those used for utilities, mobile phones and bank accounts). A contract term will be unfair if it charges consumers for breaches that do not reflect reasonable costs.
The new Australian Consumer Law will allow consumers and the ACCC to take action against contract terms that cause detriment or a substantial likelihood of detriment to consumers.
The legislative package will also include new powers for the Australian Competition and Consumer Commission, including:
- Civil pecuniary penalties;
- Disqualification orders;
- Infringement notices
- Substantiation notices;
- Public warning notices; and
- Court orders to seek redress for consumers who aren't party to a particular action.
The Minister also proposed changing the name of the Trade Practices Act to the 'Competition and Consumer Act' to better reflect the protections the law gives to Australian consumers.
Financial services implications
The Government has provided a commitment to maintain consistency between the Australian Consumer Law’s generic provisions and the consumer (or investor) protection provisions in credit and financial services laws, to the extent that it is practicable to do so.
The financial services laws are currently the subject of a reform process including the establishment of uniform national laws for the regulation of consumer credit.
Nevertheless there will be an overlap between the 2 sets of laws, especially in the area of unfair contracts.
Unfair contract terms are those that cause a significant imbalance in the parties’ rights and obligations arising under a contract and are not reasonably necessary to protect the legitimate business interests of the supplier. They are prevalent in standard form contracts.
The consultation paper lists banking and financial services, including credit agreements, as examples of contracts that may be affected.
Particular unfair terms that will be banned include:
- Unreasonable flat/fixed early termination fees and those requiring the paying out of the contract; and
- Terms requiring consumers to pay more than suppliers’ reasonable enforcement costs reasonably incurred.