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COMMONWEALTH OF AUSTRALIA

Official Committee Hansard

SENATEECONOMICS REFERENCES COMMITTEE

Reference: Framework for the market supervision of Australia’s stock exchanges

MONDAY, 9 APRIL 2001

S Y D N E Y

BY AUTHORITY OF THE SENATE

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SENATE

ECONOMICS REFERENCES COMMITTEE

Monday, 9 April 2001

Members: Senator Murphy (Chair), Senator Gibson (Deputy Chair), Senators Chapman, Conroy, Cook andRidgeway

Participating members: Senators Abetz, Boswell, Brandis, Brown, Calvert, George Campbell, Coonan,Crane, Eggleston, Faulkner, Ferguson, Ferris, Harradine, Harris, Knowles, Lightfoot, Mason, McGauran,Murray, Payne, Sherry, Tchen, Tierney and Watson

Senators in attendance: Senators Conroy and Gibson

Terms of reference for the inquiry:For inquiry into and report on the framework for the market supervision of Australia’s stock exchanges, withparticular reference to:

(a) the advantages and disadvantages (if any) of the current framework;

(b) the implications (if any) of the demutualisation and listing of an exchange and any proposed alliance betweenAustralian exchanges and other exchanges;

(c) other frameworks or structures for market supervision, including frameworks or structures of, or examined by,overseas exchanges; and

(d) whether trade practices law is deficient in ensuring a competitive stock exchange market.

WITNESSES

CHAMBERLAIN, Mr Dudley Keith, Senior Executive, Member of International StrategicBusiness Development Group, Computershare Ltd ....................................................................................52

FALCONER, Mr Ian, Chairman, Legislation Review Committee, Chartered SecretariesAustralia...........................................................................................................................................................68

GRIFFIN, Mr Peter John, Non-Executive Director, Computershare Ltd.................................................52

GROSE, Ms Claire, Director, National Markets Unit, Australian Securities and InvestmentsCommission........................................................................................................................................................2

HAMILTON, Ms Karen, General Counsel and Company Secretary, Australian Stock ExchangeLtd ....................................................................................................................................................................18

HORTON, Mr Ian, Principal, Boardroom Partners ...................................................................................77

HUMPHRY, Mr Richard, Managing Director and Chief Executive Officer, Australian StockExchange Ltd...................................................................................................................................................18

O’BRIEN, Mr Mark, Investment Board Committee Member, Investment and Financial ServicesAssociation.......................................................................................................................................................33

RALPH, Ms Lynn, Chief Executive Officer, Investment and Financial Services Association.................33

RENNIE, Mr John, Member, Victorian State Branch Councillor, Chartered SecretariesAustralia...........................................................................................................................................................68

ROFE, Mr Alfred Edward Fulton, Chairman, Australian Shareholders Association Ltd ......................62

SEGAL, Ms Jillian, Deputy Chairman, Australian Securities and Investments Commission...................2

SHEEHY, Mr Tim, Chief Executive, Chartered Secretaries Australia .....................................................68

TREGILLIS, Mr Shane Francis, National Director, Policy and Markets Regulation, AustralianSecurities and Investments Commission......................................................................................................... 2

TURNBULL, Dr Shann, Principal, MAI Services Pty Ltd......................................................................... 44

Monday, 9 April 2001 SENATE—References E 1

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Committee met at 11.05 a.m.ACTING CHAIRMAN (Senator Gibson)—Today the committee will begin its hearings in

relation to its inquiry into the framework for the market supervision of Australia’s stockexchanges, with particular reference to (a) the advantages and disadvantages, if any, of thecurrent framework; (b) the implications, if any, of the demutualisation and listing of anexchange and any proposed alliance between Australian exchanges and other exchanges; (c)other frameworks or structures for market supervision, including frameworks or structures of, orexamined by, overseas exchanges; and (d) whether trade practices law is deficient in ensuring acompetitive stock exchange market. The inquiry was referred to the committee on 5 December2000. The committee’s reporting date is being extended by the Senate from 30 April 2001 to 24May 2001.

Before we commence taking evidence, there are a couple of formalities to explain. First, thecommittee prefers all evidence to be given in public but, under the Senate’s rules, you have theright to request to be heard in private. All witnesses appearing before the committee areprotected by parliamentary privilege with respect to evidence provided. Parliamentary privilegerefers to the special rights and immunities attached to the parliament or its members and othersnecessary for the discharge of the parliamentary functions without obstruction or fear ofprosecution. This means that you cannot be prosecuted or disadvantaged because of anythingyou say in evidence or because you gave evidence. Any act by any person which operates to thedisadvantage of a witness on account of evidence given by him or her before the Senate or anyof its committees is treated as a breach of privilege.

E 2 SENATE—References Monday, 9 April 2001

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GROSE, Ms Claire, Director, National Markets Unit, Australian Securities andInvestments Commission

SEGAL, Ms Jillian, Deputy Chairman, Australian Securities and InvestmentsCommission

TREGILLIS, Mr Shane Francis, National Director, Policy and Markets Regulation,Australian Securities and Investments Commission

ACTING CHAIRMAN—We have your submission. Would you like to make an openingstatement?

Ms Segal—There is nothing additional I want to say other than to point to some of the keyparts of our submission. Would that be helpful?

ACTING CHAIRMAN—Please do.

Ms Segal—As we say in our introduction, we do believe that the regulatory framework andthe arrangements that support it have evolved in response to changes in the market structure.They are focused on maintaining a high level of confidence by domestic and internationalparticipants in the integrity of the market, but they will continue to be dynamic and to movewith the times. I think it is fair to say that we support the continuation of the legislative model,but we emphasise that it does need to be flexible and to respond to market changes. We dealwith some of those in our submission. Could I point you to the areas in paragraphs 45 to 50where we do note that some of the issues relating to new developments in the activities of theexchange were not necessarily fully thought about at the time of its listing, but they have beendealt with in the ways noted in our submission.

We believe that the formation of ASX Supervisory Review Pty Ltd and, indeed, the otherprovisions in the FSR Bill—the package of developments there—do provide a way of lookingat these in the new environment, and we consider that they are an appropriate package ofarrangements for dealing with the situation as it applies today.

ACTING CHAIRMAN—Does the option of contacting ASX staff by ASIC staff, as set outin the MOU suggest a lack of expertise within ASIC in terms of interpretation of the listingrules?

Ms Segal—I would say absolutely not. Obviously the listing rules are the exchanges rules—and I will ask my two colleagues here to add anything that they wish to add. But the listing rulesare the exchanges. Obviously, in the work that we do as an oversight regulator, there has to be agreat deal of contact between ASIC staff and ASX staff—not only on perhaps interpretation oflisting rules but on a whole range of issues. Indeed, that is the purpose of the MOU: to ensurethat there is appropriate contact and discussion. Obviously the expertise is different. Thefrontline regulator has the day-to-day market knowledge and expertise. As the oversightregulator, ASIC staff are not expected to have quite the same level of familiarity with the day today. But I think ASIC has managed to attract to its special market unit a number of staff with


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expertise and with a great deal of understanding. But that does not in any way take away theneed for pretty close contact.

Mr Tregillis—I might add to that. When we administer the listing rules in so far as theyapply to ASX, I think one of the principles is to try and apply them consistently as they apply toother companies. So one of the reasons for the contact is just to check precedent and otherissues. So, if an issue comes up, we check in the first instance to make sure that we know whathas been done for other listed companies. That is the primary reason we would contact thecompany’s officers, and that informs the decision. So that is one of the principles underlying ouradministration of the listing rules as far as ASX is concerned.

ACTING CHAIRMAN—Because of increased contact with the ASX, is there the possibilityof a conflict of interest between your staff and their staff?

Mr Tregillis—I do not think so. We have a number of dedicated staff; they perform theirfunctions quite independently. In terms of performance, it is very clear that we make thedecisions. Internally, we have review procedures; there is an escalation procedure. For moredifficult questions they would be referred to the Director Markets Unit or, in more complexmatters, to me. Internally, we have sufficient checks and balances and, for difficult questions,we have an internal procedure to make sure that they are done appropriately.

Senator CONROY—I just want to visit an unfortunate circumstance of a few months agowhen there was a fairly dramatic movement in the ASX’s share price. Following theannouncement of a proposed legislative increase of five per cent of 15 per cent in theshareholdings, did you investigate the causes of that sharp movement?

Mr Tregillis—We certainly reviewed the circumstances around that announcement, and Ithink we found nothing further to inquire into.

Senator CONROY—What did you find?

Mr Tregillis—We looked—as we would look in a whole range of different circumstanceswhere there is a potential increase in prices—to check whether there were any particular brokersinvolved. We did our normal checks of broker participants, the timing of that announcement, etcetera. After that, we found there was no reason that the procedures with the ASX had notworked properly or that, in fact, the mechanisms in place to call a trading halt had not beenapplied as appropriate.

Senator CONROY—So the ASX were not responsible for the release of information into themarketplace?

Mr Tregillis—Our review found that the procedures we had in place for the ASX to call atrading halt were applied appropriately by the ASX. We did our normal other checks in terms ofjust ensuring that we checked trading patterns. There was nothing in those trading patterns thatcaused us to have to take any further action.

Senator CONROY—Did you speak to the person responsible for releasing market sensitiveinformation? His name is Hockey.


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Mr Tregillis—We have canvassed these issues on previous occasions in terms of—

Senator CONROY—Unfortunately this is an inquiry specifically into market supervision,the ASX’s role and, given your interaction with them, your role.

Mr Tregillis—As I have tried to respond, we certainly did look at the circumstances aboutwhether the procedures between ASX and ourselves, in terms of calling a trading halt, were putin place appropriately. Those procedures were put in place. The ASX notified us and requesteda trading halt. We put that trading halt in place.

Senator CONROY—I appreciate that you are repeating what you have already told me. Butmy question is: did you speak to the individual responsible for releasing the market sensitiveinformation?

Mr Tregillis—I am not quite sure how—

Senator CONROY—It is a yes or no answer.

Mr Tregillis—I have not spoken to—

Senator CONROY—I am not saying for one moment, Mr Tregillis, that you personallyconducted the investigation into this issue. Did anyone from ASIC speak to the individualresponsible for releasing market sensitive information, or to his office?

Mr Tregillis—In terms of our responsibilities with self-listed ASX, I have tried to answer asfully as I can—which is that, in terms of the obligations for ASX to notify us when it becomesaware of information that is price sensitive, we looked at what was put in place—

Senator CONROY—Unfortunately, in recent weeks we have had another example of aminister releasing market sensitive information. Perhaps, if you had been able to speak to theirofficers and explain to them about their conduct in releasing market sensitive information thefirst time, it might not have happened the second time.

Mr Tregillis—If we are talking about ASX, our procedure is that the obligation is for ASX tonotify us about a trading halt. Those procedures were followed in the circumstances that you aretalking about.

Senator CONROY—But I have yet to meet any investigation you have carried out whereyou do not speak to the source of the leak. Normally you try to establish the source of the leak.What you are telling me is that you knew the source of the leak and you did not speak to them.

Mr Tregillis—In terms of the self-listing MOU and those arrangements, we checked whetheror not the ASX, as the company who had the obligation to notify us under the MOU, had putthose procedures in place. We did our normal checks in terms of trading patterns to see whetherthere was any other cause for investigation. The conclusion we reached was that there wasnothing further in terms of—


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Senator CONROY—So you did not consider any action against the individual responsiblefor leaking the market sensitive information?

Mr Tregillis—I do not think I can add to my answer.

Senator CONROY—Do you think you have a conflict of interest in investigating whetheryour minister is responsible?

Mr Tregillis—I think they are questions that you probably need to put to the minister.

Senator CONROY—You are an independent market regulator. I am sorry, Mr Tregillis, youare actually independent. The answer is not that the appropriate person to ask is Mr Hockey.The appropriate person to ask is the market regulator: that is you.

Mr Tregillis—We reviewed all the circumstances and found that there was no reason for anyactions under the Corporations Law.

Senator CONROY—The criminal sanctions were perhaps too high a barrier? Maybe youwelcome the minister’s own policy initiative this week that civil sanctions would have made iteasier to prosecute the source of the leak?

Mr Tregillis—I do not think I can add to my answer that there was nothing under theCorporations Law that was of concern to ASIC.

Senator CONROY—That is a big call. I can understand why you did not go ahead. But, foryou to make that statement, that is a very big call—and one, I guess you can work out, that I donot agree with. I hope there was nothing untoward. As I said, we have now had a secondincidence of a minister releasing price sensitive information. If you had taken a hard enoughposition the first time, it might not have happened the second time—or is it appropriate forministers to be announcing willy-nilly across the country market sensitive information prior tothe release by the organisations involved? Do you think that is an appropriate course of action?

Mr Tregillis—I think they are things that really should be taken up with the ministersconcerned.

Senator CONROY—I am sorry, they are not. They are your responsibility. You are in chargeof the corporate law in this country, and you are in charge of policing it to ensure that marketsensitive information is not being released inappropriately. Correct me if I am wrong, but youdo conduct prosecutions for that sort of behaviour.

Mr Tregillis—Our obligation is to administer the Corporations Law.

Senator CONROY—Which includes disclosure of price sensitive information—or it did lasttime I checked.

Mr Tregillis—Where the Corporations Law applies, that is right.


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ACTING CHAIRMAN—Senator, you have made your political point. Let us move on.

Senator CONROY—Unfortunately Dr Wooldridge made it a second time. That is the pointbeing revisited here. If the ASX were to form a partnership, a merger or an alliance with anoverseas exchange, do you believe that the existing situation with market supervision and thecurrently newly proposed one is sufficient if we move into the next most likely? It is constantlyspeculated on, if not encouraged. So I am not asking you, in essence, to talk about ahypothetical situation; it is one that is being sought. So it is an issue that is going to come up. Iam just interested in your view as to whether you believe the existing situation, the currentlyproposed one with this new board, would be sufficient to protect.

Mr Tregillis—I think that is a difficult question. It would depend on the alliance. When wethink of the regulation, the starting point is to look at the home country regulation. That isprobably necessary; whether it is efficient is a more difficult question. So, if we were looking atan alliance that the ASX was forming with an overseas jurisdiction, certainly we would beconcerned about the regulatory regime applying in that jurisdiction, in the same way that anoverseas entity or regulator would be concerned that the system in Australia was robust. So thecurrent arrangements of strengthening ASIC’s assessment audit provisions directly plus ASXRwould be part of the package. It would then depend on the alliance.

We have dealt with alliances where, for example, with the Sydney Futures Exchange, there isa connection with the NYMEX market. There, in some senses, we have put in place provisionsto protect Australian investors, but largely we rely on the regulation by the CFTC in thatjurisdiction. So that alliance is at one end of the spectrum where there are, if you like, jointtrading arrangements. Currently we have tracked through some of those issues with the ASXwith its link into the US via the Bloomberg system. We have reviewed the regulatoryarrangements there, and are satisfied with those arrangements. If there were to be a merger or ajoining together, then that would raise additional issues. Clearly there were recent discussionsinvolving the New Zealand Stock Exchange foreshadowed, which do raise significant issuesabout how you would effectively put in place supervisory arrangements. I think one of the moredifficult issues that we would all have to grapple with is how some of the market conductprovisions actually apply across the borders.

Senator CONROY—If we get lucky, Hong Kong could arrest Joe.

Mr Tregillis—There are a number of mechanisms that you could put in place to reassureyourself. Firstly, I think we would always look at the quality of home jurisdiction regulation.Secondly, we would certainly think about information sharing provisions and make sure thatthey are in place. Thirdly, you would have to look at trying to establish potentially commonstandards in some key areas. It will be quite a difficult issue if you take the step beyond tradingalliances, which I think we can deal with under the current regime and current mechanisms. Ifthere were more formal merger arrangements, I think that would raise complex jurisdictions notonly in Australia but also overseas. But certainly on the alliances, the trading linkages, I thinkwe will be able to successfully work through those issues under the current regulatoryframework.

Senator CONROY—So you would not be happy if, for instance, the ASX with Singaporeand Hong Kong formed more than just the current alliance that is proposed. If it were to go the


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next step, you would not be comfortable with those three bodies determining listing rules andwhether or not things applied under the Corporations Law and those sorts of things. You wouldwant to be involved in those discussions.

Mr Tregillis—We would certainly want to be involved. All I am suggesting is that, for allthree jurisdictions, there would be some regulatory issues to be worked out. But I think theywill be regulatory issues that will have to be worked out in the next few years because, if youlook at Europe and elsewhere, that is the sort of direction—

Senator CONROY—Do you think they have to be worked out before the merger, or wouldyou allow the merger and then just squeeze whatever is left into the merged scenario?

Mr Tregillis—Again, our practical experience is very much that you need to see the details ofthe arrangements so that conceptually you can put in some sort of broad framework. But myexperience dealing, for example, with the recent world link into the US is that you have to getdown to the detail and actually work out practically how you make certain arrangements work.You can have an idea, but I do think that probably both need to proceed reasonably closelytogether because the regime really—

Senator CONROY—Do you think you should have to sign off that you are happy beforeallowing it to be signed as a merger agreement? Does it need your tick first?

Ms Segal—Our experience to date with activities of the exchange, or indeed of overseasoperators wanting to do various things, is that they are very keen for the regulators to beinvolved. It is not a situation of the business going in one direction and leaving the regulators intheir wake but very much, as Shane Tregillis indicated, a business driven model so that thedetail needs to come out of whatever are the business imperatives, but then to very muchinvolve the regulators. So I do not think it is a question of conflict; it is very much thateverybody wants the regulators on both sides to agree with the arrangement or to suggest thatthere be various other mechanisms put in place. I think the issue is that it is not just thisjurisdiction but other jurisdictions that are in the process of putting in place new financialregulatory frameworks. You have a new law that is there in Hong Kong, Singapore and theUnited Kingdom. All over the world the legislative framework for market behaviour ischanging.

Senator CONROY—To keep up.

Ms Segal—I think it is not as if the playing field is either static or necessarily well known.Everybody is dealing with a new regime, so it is important that the regulators are involved andare right there and with any alliances. The detail is the thing that is important in terms ofwhether there is harmonisation or mutual recognition, or communication mechanisms are put inplace for discussion if particular things arise. So that has been our experience in discussing itwith regulators.

Senator CONROY—Do you think that our standards are of a sufficiently high level that wecan afford to reduce them in any discussions in terms of these mergers?


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Ms Segal—I do not think that it is a question of reducing the standards, can I say, and I donot think that would be—

Senator CONROY—So you would expect them to come up to our standards? That is yourbottom line position?

Ms Segal—I do not know that there is necessarily a question of high and low, if I could put itlike that. I think each regime has its own set of detailed requirements. You might say that oneelement in one jurisdiction is higher than another, if you are using that high-low distinction, butanother element is not. It is the package, I think, that one has to look at in terms of regulation. Ifyou look at our entire package and the entire package of another jurisdiction, we would need togo through the detail to see how they would mesh. But there would be no intent on our part toallow the protections available to the Australian public—

Senator CONROY—This is about the Australian shareholders; this is not about the interestof anybody else.

Ms Segal—Exactly.

Senator CONROY—This is about your role as protector of Australian shareholders. Myquestion to you is: will you give an absolute guarantee there will be no reduction in protectionto Australian shareholders in any alliance or future merger?

Ms Segal—I certainly think that it would be our intent, in looking at the regulatoryarrangements with another jurisdiction and at the requirement for mutual recognition—

Senator CONROY—I appreciate your intent. What I am asking about is the outcome.

ACTING CHAIRMAN—Let her answer the question.

Ms Segal—To satisfy ourselves that the framework that would apply to whatever was thealliance would provide no less protection, absolutely, to Australian shareholders.

Senator CONROY—Recently there was a claim by another witness in a supplementarysubmission. I think it is a public one, so I am sure others will have a view on it. It involves threeof our coming witnesses. I am just interested to know whether or not you received anycomplaint and, if so, if you did anything about it. It was about an ASX seminar, in conjunctionwith Chartered Secretaries Australia, to attend a seminar on ASX online, ASX developmentsand trends and proposed listing rule amendments and continuous disclosure obligations. So thatis the claim, that it was a joint function in which there was a newly acquired partner, as aspecific legal term—this is in Adelaide, Sydney, Melbourne and Brisbane—and there was a 30-minute presentation by Orient Capital.

Ms Segal—I think I saw that in reference to a submission.

Senator CONROY—Did you receive an official complaint about that? Do you have anyviews on whether it is appropriate for those joint functions to take place in that way?


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Ms Segal—I am not aware that we received any official complaint on that.

Senator CONROY—You are in charge of monitoring ASX—

Ms Segal—Yes—their behaviour as a listed entity. We have not received—

Mr Tregillis—No, I am not aware.

Ms Segal—We are not aware of any.

Senator CONROY—Do you have any views on whether it is appropriate behaviour? It maybe appropriate business behaviour, but is it appropriate behaviour?

Ms Segal—It is a hard thing to comment in abstract on, in that we do not know exactly whathappened.

Senator CONROY—I appreciate that, as I have only got the same details that you wouldhave seen.

Ms Segal—The ASX, in its role as a major market, presenting information out there onlisting requirements or other requirements, has to be very careful in balancing the roles that ithas. I can only say that, obviously, each one is a question of judgment and agreement. Nothaving been there, I think it is very hard to say what was done.

Senator CONROY—We will go to the abstract rather than the specific. Do you think it isappropriate for ASX to promote its business partnerships in forums that are advertised asinformation sessions by the ASX? As I say, we will talk in abstract here, so we are just talkingabout whether you think it is an appropriate behaviour. I am not referring to the specificexample, the details of which may be right or may be wrong.

Ms Segal—I do not think it goes to their behaviour as a listed entity, so I would becommenting quite outside our jurisdiction.

Senator CONROY—It is more of an ACCC role?

Ms Segal—I think so. It is a question of what the advertisement was—

Senator CONROY—Abuse of a monopoly position, perhaps?

Ms Segal—Not necessarily of that, but whether what was advertised was in any sensemisleading or not. I put it in that context rather than in anything to do with their role as a listedentity.

Senator CONROY—In an abstract sense, you do not see that there are any breaches ofCorporations Law or listing rules, which you are in charge of monitoring for them, in jointlyusing an ASX function to promote its business partners, which may be in a competitivesituation with somebody else?


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Ms Segal—I think it is fair to say it is a question of degrees—

Mr Tregillis—I do not think it is a breach, but I think we would agree that there clearlywould be a line—we do not know the facts of this circumstance.

Senator CONROY—No, I am talking in the generic, abstract sense, not specifics.

Mr Tregillis—But in terms of its regulatory role, if it were holding functions and they wereclearly being used for the commercial part of its activities, I think that does raise some issues.How you draw the dividing line is always difficult.

Senator CONROY—What are the issues that you see?

Mr Tregillis—There is the potential for a conflict of interest between their role as the marketoperator and regulator and the commercial interests. ASX performs, as it has set out in thesubmission, a whole range of important regulatory functions—its listing and business rules. Sofor important regulatory purposes, its infrastructure has important regulatory aspects to it. Ithink I would agree that it needs to be very careful that when it is dealing with its participatingorganisations or listed companies on regulatory matters that it, as far as possible, seeks toseparate out commercial ventures that it might be dealing with. So you have asked us for astatement of general principle, but on the facts and circumstances we really cannot comment.

Senator CONROY—As I said, I have only got exactly what you have seen.

Ms Segal—I do not think it is a listing rule issue. It is a question of separating out the roles sothat there is not either a conflict or a perception of conflict.

Senator CONROY—I want ask you about provision of information to the marketdisseminated by the ASX. Do you see that as an important role in ensuring that theshareholders’ marketplace is well informed?

Ms Segal—Certainly. Within our system, the company announcements platform that theStock Exchange maintains is the major forum for the way information is disseminated by listedcompanies.

Senator CONROY—Do you think you should charge to disseminate information? Is therean obligation as a market regulator to provide the information free of charge?

Ms Segal—I do think that is an interesting issue. Recently the ASX has moved to make someof that information free of charge on a 20-minute delayed basis.

Senator CONROY—Is it fair for it to be delayed even in those circumstances?

Ms Segal—I think it is fair to say that the debate on that has moved internationally as well aslocally. My understanding is that a number of other markets have charged and are moving awayfrom charging. If that was the accepted position, then I would hope that the ASX would look atthe issue. We do see market information as an important issue. As you know, we put out our


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disclosure principles and all of those issues. Obviously, the dissemination of information isimportant. I think the ASX have recognised that with their move, and I think it would beimportant that they look at it.

Senator CONROY—Surely time sensitive information is what is important. With MrHockey’s announcement, there was, I think, an 11-minute window—and a lot of people got veryrich in 11 minutes. I am just concerned that a 20-minute time delay is a market driven/businessdriven imperative that is denying the market timely information and could potentiallydiscourage small shareholders. Mr Rofe is here. The ASA may have some views about whetheror not a 20-minute time delay is appropriate if the whole market is to be kept fully information.Certainly some of the market is going to be informed, but the question is whether all the marketis being informed at the same time.

Ms Segal—I understand some organisations also put out information as required on thecompany announcements platform but also use other outlets, such as a Reuters or whatever else.

Senator CONROY—They are separate private companies. As far as information beingprovided to everyone at the same time, a subscriber to Reuters can find out quicker but asubscriber to the ASX may find out 20 minutes later. I am just looking for possible problems—for example, in a situation where a market regulator is providing it slower than a privateprovider.

Ms Segal—A subscriber to the market platform will get it immediately—it is just that it isavailable free on that 20-minute delay basis.

Senator CONROY—Sorry, how can it be immediately on a 20-minute delay basis?

Mr Tregillis—I am sure the ASX will take you through the details.

Senator CONROY—I am confident they will.

Mr Tregillis—There is a cap announcement that really goes to all the people who are on theseats trading system. That is the immediate announcement. My understanding is that there arealso information providers—I cannot remember who they are—who provide it on subscription.That pricing is, of course, determined subject to ACCC and other competitive guidelines. Inaddition to that, the 20-minute delay is the general public release. As the deputy chairman hasindicated, given market developments and developments elsewhere and the fact that the world ismoving, we would suggest that, subject to practicalities—and that is maybe what the ASX cantalk about—it is something that the ASX needs to keep an eye on. But the ASX has recentlyimproved in that area with the 20-minute delay, which is an advancement on the previousarrangement.

Senator CONROY—It is an advance on what was there previously. I accept that they aregoing in absolutely the right direction. With respect to information that is collected in the courseof their other regulatory duties—I am hoping that the ASX will take us through this—do youthink the ASX should be allowed to sell generic information; that is, information that is notcommercial-in-confidence? I am not saying that they are doing this, but do you think theyshould be in a position where they could sell it? Or, if information arises or comes into their


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domain, should that be ringbarked? I am fairly confident it is, but would you be more than fairlyconfident?

Ms Segal—What sort of information gathered in their regulatory role are you envisaging?

Senator CONROY—I do not know; I do not know all the things they collect. I am justlooking at, as I said, generic information. I am sure that there is actually a Chinese wall of somedescription. I am just looking for confidence from you guys that you would be unhappy ifinformation that was gathered in one section of their business was to end up as part of theircommercial. I am essentially saying that any information they collect on a commercial basis fortheir commercial is fine—just like Reuters or anybody else—but the information should notpass across to be traded with. I am pretty confident that that is the situation now, but I want toknow where you guys stand on that issue.

Ms Segal—I would prefer to answer your question once we hear from the ASX in the senseof the sort of information, as I am having difficulty envisaging it. In theory, it is important thatthey maintain the distinction that ASX are trying to convey and confirm between theirregulatory role and their commercial role. I think it is important that that distinction ismaintained and emphasised. The more that distinction is not maintained, the more the cause forconcern generally, as we have said in relation to potential conflicts and the appearance ofconflicts. So I would agree with you in principle, but it is really a matter for—

Senator CONROY—I do not think it is happening and I am not suggesting it is happening; Iam just looking for an ongoing commitment that ASIC would see it as inappropriate.

ACTING CHAIRMAN—In your submission about ASX supervisory review, you arebasically supportive of the idea but say that you do not know the details yet. But obviously youare working with ASX and you have been working through that material at page 30. Would youcare to make any further comment for the committee?

Ms Segal—We see the establishment of ASXSR as a positive step. It is ASX’s recognitionthat there are both actual and perceived conflicts. In our submission, we have dealt with howthose have been dealt with to date. There is this issue between their commercial interests andtheir regulatory responsibilities. We do think it is a positive way to deal with it in ourenvironment. It is fair to say that the issue of supervision and the regulatory role of commercialand listed exchanges is something that is being looked at world over. It is not an issue unique toAustralia; there are many exchanges now that have demutualised and are listing or have listed.The mechanism that is used has to be appropriate to the marketplace. Obviously, differentmarketplaces are looking are different mechanisms. We think that this is appropriate to thismarketplace at this point in time. This is together with, as I mentioned, the arrangements thathave been put in place through FSR, giving ASIC additional oversight responsibilities andpowers to undertake active surveillance.

We think the package is appropriate. Obviously, we need to see how it works in the detail.That will be very much a function of how the company itself operates. It is very muchdependent on the detail. We will stay very much in touch with how it is operating, because someof the matters that we have been dealing with we expect to be taken over by the entity—some ofthe issues of conflict. We will keep it under quite close monitoring to understand how it is


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working and if it is delivering not only the independence that we think is important but also theperception. I do think that confidence in the marketplace is not only reality but also perception.

Senator CONROY—There were two issues. I made a note that you said, ‘At this point intime’. This inquiry is also looking into the future proposed alliance between Australian stockexchanges and other developments. Mr Tregillis talked about it a little bit, but you do not seemto have set anything out in particular that you would see as necessities for a future situation. Iam just wondering whether if the US exchange, SEC, were in a position where it wascontemplating a merger, that it would just be silent on what it saw as the bottom lines in apublic debate. It is one of the terms of reference. I was surprised that your submission actuallydoes not seek to canvass some of the issues that you believe are important. Mr Humphry maycome to the table and they may have a button ready to press at the stock exchange as heannounces that they have merged with NASDAQ. I am sure that is an exaggeration. But he maybe scheduled at 11 o’clock, and we press the buttons and it is announced on the market. Youhave not taken the opportunity to put forward any views whatsoever about the regulatoryframework in what is now an expected event. I would never imagine Mr Levitt would be so shyas to say, ‘These are the standards; this is what we expect to see; this is how it is going to work.’

Ms Segal—I might respond in general and then ask Mr Tregillis to speak. Our lack of asubmission is not because there has been a lack of thought or discussion about the issues.

Senator CONROY—So you are holding out on a parliamentary committee?

Ms Segal—The fact is that it all depends on—I know this sounds like a way out—the detail.If it were an alliance with, let us say, NASDAQ, that would be very different from an alliancewith—

Senator CONROY—Hong Kong.

Ms Segal—Or London, let us say. It is a question of whether we are talking alliances,mergers, global linkages, et cetera. I think we are very conscious that Australia has its ownframework and its own regime and is thought of very highly in the international marketplace. Ithink it is fair to say that we have an excellent reputation and, indeed, the regulator is highlyregarded through IOSCO and through some other work. In all our discussions with the otherregulators regarding any such linkages with the markets, all the regulators are interested in howthat should be dealt with best. But we are conscious that, at the end of the day, our market is avery small piece of the world liquidity and so it will depend on what the arrangement is with theother players as to what would be appropriate—whether it is mutual recognition or whetherother changes would need to be made. I am not sure that it could just be done by the exchangewithout looking at both the legislative framework and certainly the supervisory framework thatit has at the moment. We would expect to be fully involved in those discussions.

We could set out for you some of the basic principles and they are some of the things that wehave already canvassed. We would expect there to be no less protection, obviously, toAustralian listed companies, shareholders and market players, but how that would be achievedwould very much be dependent on what the particular venture alliance linkage, et cetera are thatthe ASX or other market had in mind. I think it would need to be specifically crafted because I


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do not think that at this stage in the international regulatory framework we are envisaging amultijurisdictional new framework. I think these things have to be done bilaterally.

Senator CONROY—I would think no-one wants that.

Ms Segal—No. These are topics that have been discussed at a number of IOSCO meetings.Would it be a multilateral thing? Is it a bilateral thing? I think there are no definite answers inany regulatory framework—that we must have this framework all over the world or we musthave that framework. Everybody is looking at it on a bilateral discussion basis. So apart fromhaving the view that standards and protections should not be lowered, it would be very much anunderstanding of what protections are offered by the particular jurisdiction and whatmechanisms the other regulator has in place for market supervision, market intermediary,licensing and standards of competencies. All those things would need to be looked at.

Senator CONROY—All the standards.

Ms Segal—Exactly. The whole thing would need to be looked at. That is why these things, Ithink, would take quite considerable discussion.

Senator CONROY—Your equivalent in the UK has recently been given the listing rules tosupervise and look after, given the developments in the UK. Do you think there is a point intime at which listing rules should be transferred from the ASX to ASIC?

Ms Segal—I think it is fair to say that what the FSA have assumed is sort of complex. It isnot all the listing rules. As I understand it, they have assumed the function for matters that relateto new offerings—prospectus disclosure issues and the framework for companies to be listed.The detail of the trading rules has been left with the exchange. That is sort of an interestingdivision that fits in with their own particular framework, whereas I think ASIC, through itsCorporations Law powers, has different issues and different powers in relation to prospectusdisclosure and initial offerings. As I sort of said initially, it is hard to pick out bits and pieces ofdifferent regimes and graft them on. As to your more general question of whether the listingrules should come to the regulator, I do not know what the future will hold in terms of the wholeregime. But the benefit of the listing rules being where they are—namely with the marketoperator—is that they are the front-line, day-to-day interface with the listed entities. It isimportant, I think, that the people whose 100 per cent job is to maintain a knowledge of themarket and of the day-to-day—

Senator CONROY—It is not their 100 per cent job any more.

Ms Segal—It is a large part of their job; it is important they have that responsibility. We havea role in the oversight of the listing rules. As you know, they are approved by the minister.Changes to listing rules are put out for public consultation. They are issues that we have thingsto say about and on which we certainly make recommendations. So it is a combination of roles.But I think we would be looking at a different regime if they were moved to the regulator.

Senator CONROY—My question is: do you envisage that with any of the developments thatwe have canvassed—alliances, mergers, partnerships—it may be necessary to bring some or


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part of the listing rules across into ASIC? Or are you saying there are no circumstances, nomatter what happens, in which you would envisage such a move?

Ms Segal—It would be hard to say there were no circumstances. I think that internationalcomity in coming to a workable framework for mergers and alliances would mean that wewould have to be very open as to what was the most appropriate regime to discuss.

Mr Tregillis—I cannot think of a jurisdiction, but if in another jurisdiction the listing ruleswere statutorily based and you were entering into an alliance, then there might be circumstanceswhere in order to create the alliance you might—to be acceptable to the other regime. Clearly,one circumstance—which I do not think is within the foreseeable future—is if a number ofentities that were likely to have a conflict, and therefore fitted under the ASXFR’s specialarrangements, grew to such a number. That might be another circumstance. When we havelooked at the UK situation—and I know it is an active debate in Hong Kong and elsewhere—you have to take into account that the listing rules really regulate what the Corporations Lawregulate in the prospectus sense. So the actual content rules and the obligations for prospectuseswhich are not already in the Corporations Law are in the yellow book which used to beadministered by the LSE—plus, if you like, what I call quality criteria; that is, size and quality. Ithink in debates both domestically and around the world they tend to get bundled, whereas wealready have in the Corporations Law those disclosure prospectus provisions. Whether we gothe next step in terms of the quality criteria—size, those types of things—at this stage is notsomething that we are contemplating. But you could see circumstances, as I have outlined,where that might emerge as an issue—where the exchange itself, in order to enter into thosealliances, may wish to see some of those removed into law.

Senator CONROY—In paragraph No. 48, on Bridge DFS Ltd, on page 11, you make thecomment, ‘To date no issues have arisen.’ Some market commentators seem to disagree. Somehave argued that they think there has been a failure to disclose the overseas interests of Bridgeand they have basically gone belly-up. You obviously do not agree.

Ms Segal—Have we looked at the particular situation in relation to the point that SenatorConroy is raising in relation to their overseas—

Senator CONROY—Whether there was a requirement to release to the market theinformation that the overseas connected company—and I am not even sure; I am just drawingon the media commentary—the US Bridge, financial circumstance was, in other words, goingbelly-up.

Ms Grose—There were press reports in that respect and we took up it with ASX, as we do aspart of our normal supervision function. We are satisfied with the response that they gave us,which was that they knew nothing about—

Senator CONROY—Should they know something about it?

Ms Grose—What they confirmed to us was that it was speculation that—

Senator CONROY—I thought it is now confirmed that they have gone out of business,according to the media reports. There have been a string of media reports on this issue. The last


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ones I saw I thought indicated that the US Bridge were actually in far more serious financialcircumstances than had yet been disclosed on the Australian market.

Ms Grose—Senator, I am sorry. I thought you were referring to the press report that, with thefinancial difficulties that the Bridge parent was having, ASX was looking to take control ofBridge DFS. That was the issue that we raised with them as part of our supervision function,and we are satisfied with the response to that.

Senator CONROY—I am probably just looking to know why you do not think that thefinancial difficulties being encountered by the parent company, if that is the correct term—Iappreciate that it may not be—should have been disclosed by the ASX? In other words, youshould have made them disclose it.

Ms Grose—I think that would have been a matter for ASX’s supervision of Bridge as a listedcompany.

Senator CONROY—No, you are in charge of supervising the ASX, which have a financialrelationship of some 15 per cent equity, so their share price is affected by anything that happensto Bridge/their parent company, and nothing was disclosed. You say it is too late. I amperplexed by the fact that something which could impact on the share price of the ASX was notdisclosed to the market, and you seem to think that that is okay now.

Ms Grose—No, I am simply saying that we raised it as an issue with ASX as part of oursupervision of them, and we are satisfied with the response that they gave. They did not need todisclose something specifically to the market.

Mr Tregillis—In other words, we followed the normal procedures that ASX would follow fora listed company to formally request clarification whenever there was anything to ASX’sknowledge that it should, as a listed entity, disclose. On this occasion we were satisfied with itsresponse. That is the process, really. We followed that process in this case, so it was not as if wedid nothing in relation to the press reports.

Ms Segal—I think it is worth noting that this was actually written before those press reports.

Senator CONROY—Sure, I appreciate that. You have now followed up on these furtherpress reports and still consider that there are no issues about releasing information to themarket? You are confident that the ASX have complied with the continuous disclosure regimewith one of their financial partners?

Mr Tregillis—We have pursued the matter and are satisfied that, in terms of ASX disclosure,they have satisfied their obligations.

Senator CONROY—In terms of your comment about whether Bridge have disclosed, thevery point of the conflict of interest is whether the ASX are going to make one of their financialpartners disclose. I am not suggesting that they would not; I am just saying that the potential forconflict arises, and so the disclosure by Bridge, I would have thought, falls directly to you also.


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Ms Grose—The role that we have undertaken is simply to be there to ensure the integrity ofthe process. So in any situation in which ASX might need to exercise a discretion, we have arole.

Ms Segal—That then comes into the role of ASX advisory review.

Senator CONROY—Yes, but it is non-existent yet. This is your job.

Ms Segal—Yes. I am just pointing out where we are going.

Senator CONROY—I am just concerned at Ms Grose’s comments that it was more a matterfor the ASX to have a discussion with Bridge. I could not disagree with you more strongly. Thewhole point of your regulatory position is that it is actually your job to supervise an issuebetween the ASX and its own financial partners.

Mr Tregillis—Under current law and arrangements, we do not directly supervise Bridge.There is nothing in the current Corporations Law that, in fact, gives us any power to do so.

Senator CONROY—No part of your MOU involves you policing their financial partners?

Mr Tregillis—What we have put in place is arrangements where, if ASX is exercising anactive discretion, that is when we become involved. But ASX remains the primary supervisor ofBridge DFS.

Ms Segal—In paragraph 48 of our submission, we have tried to describe the mechanism thatis in place that ASX have agreed to. As part of the agreement with us, they will consult with uson any issues that affect Bridge under the listing rules that require an exercise of theirdiscretion.

Senator CONROY—That is my point. I actually think that what you have written there ismore accurate than how you describe it. That may just have been the words you used. That isthe more appropriate approach than perhaps the words you may not have chosen carefully,given how the debate has gone.

Ms Segal—I think the bigger point is that these arrangements that have been put in place todeal with the potential conflicts that have arisen due to ASX’s commercial arrangements—dealtwith in paragraphs 46, 47 and 48—are such that they are, in a sense, company specific. That isnot necessarily a satisfactory way to go, given the potential reach of business activities, which iswhy ASX has recognised that as the formation of a new structure which would deal with that.We are supportive of that and we will be oversighting and monitoring that. It is a developingsituation that had not been envisaged and that needs to be covered. That is why we aresupportive of ASXSR.

ACTING CHAIRMAN—Thank you very much for appearing before us this morning andfor your submission.


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[12.05 p.m.]

HAMILTON, Ms Karen, General Counsel and Company Secretary, Australian StockExchange Ltd

HUMPHRY, Mr Richard, Managing Director and Chief Executive Officer, AustralianStock Exchange Ltd

ACTING CHAIRMAN—Welcome, Mr Humphry and Ms Hamilton. Mr Humphry has anopening statement which he will table. In addition to that, would you like to make a fewopening comments?

Mr Humphry—I am appearing here today with Karen Hamilton, our general counsel andcompany secretary, because Karen also has responsibility for coordinating our supervisoryactivities. We think this inquiry is particularly timely and important because, just at this timewith the dynamic and rapidly changing global environment, there are many issues that areemerging that have not faced markets in the past, and it makes some sense, we think, forAustralians through their parliamentary representatives to regularly review the framework ofmarketplace regulation. If I had one suggestion, it would be that this does need to be revisitedon future occasions.

The basic purpose of Australia’s capital markets is to supply capital to companies at thelowest possible cost and thereby contribute to the growth in the economy and employment, butthe ASX also has to operate a market which is fair and best protects investors. It does this byeffective supervision in conjunction with ASIC, which carries the authority to regulate. I amdrawing the distinction between ASX as a body which carries out supervision againstcontractual business rules and listing rules, as opposed to ASIC, which has the responsibility forthe Corporations Law.

In the Morgan Stanley world index, which guides asset allocation by global fund managers,Australia accounts now for about 1.2 per cent of the global investment flow. This sobering factsuggests that, when it comes to the task of mobilising capital that this country needs to developand prosper, we are not big enough to afford the luxury of any complacency or inefficiency.Indeed, it is essential that our markets respond rapidly and in a flexible manner if we are togrow and remain relevant for our investors. The regulatory framework is a key determinant inour response speed. As Lori Richards, of the US Securities and Exchange Commission, put it ina speech last year:

Our securities markets operate under a ‘self regulatory’ system. Markets serve an important public interest, and deservepublic oversight; but markets are also innovative and fast moving, and easily stifled by the heavy hand of government.

She was speaking of course about the United States, but the point applies equally to Australia.The model we have developed since the 1970s in Australia emphasises a productivecollaboration between the government regulator, ASIC, and the market operator, in this case theAustralian Stock Exchange.


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The demutualisation of the exchange has not changed this basic principle, and it has notimpacted on our motivation to continue to discharge our supervisory obligations. Nevertheless,there are some issues that have arisen as a result of our change of governance. We do take oursupervisory responsibility and obligations very seriously. Our systems of supervision areextremely robust, and they are a key to our success and to maintaining our licence. Indeed, asfederal parliamentarian Kelvin Thomson has observed, ‘The ASX has a commercial interest torun an orderly and efficient market.’

As a measure of this, we estimate that the cost we incur in supervision—to the extent that wecan isolate it, because it is integrated with all of our functions—runs to some $30 million perannum, or roughly 30 per cent of our total outlays. Of that, broadly half of it would be in directcosts and the other half in associated indirect costs. I mention in passing that those who chooseto provide market related services which are not regulated in the same way benefit from but donot contribute to these costs.

International stock exchanges are responding to the global environment now bydemutualising and diversifying their activities. Many are listing—including the stock exchangesin Hong Kong, Singapore, Sweden, France, Italy and Germany. Even in the United States,Nasdaq is preparing an IPO. At this stage, Australia is at the forefront but it has to continue tolead if it is to remain internationally competitive. Our written submissions have dealt at lengthwith our supervisory activities, and I will not summarise them here, other than to refer to ourmost recent initiative—the creation of the ASX Supervisory Review Pty Ltd. That is aimed atfurther promoting consistency of supervisory outcomes and timing while affording an extradimension of transparency and accountability.

We are pleased that, in addition to the appointment of Mr David Hoare as chairman of ASXSupervisory Review, Michael Vertigan from Tasmania, Elizabeth Boros from Melbourne andRobert Nottle from Melbourne have been appointed as directors, and a fifth external directorwill be appointed shortly. The board has already sought and been provided by Karen Hamiltonwith a briefing, and they have background material undergoing study at the moment. Becausethis initiative is essentially an internal review mechanism, although the directors are appointedat arm’s length and reports are available to ASIC, the initiative would be very wellcomplemented, we think, by the conferral upon ASIC of a broad and explicit power in theproposed legislation to undertake active surveillance or compliance assessments of all marketoperators, including the ASX. We believe ASIC should be afforded the flexibility that targetsuse of that power having regard to the risks it believes may be associated with each marketoperator.

There is no world’s best practice supervisory model that can remain static in such a dynamicenvironment. ASX will continue to develop and refine its supervisory systems in this rapidlychanging environment. The deliberations of this inquiry will be watched closely, not only withinthe Australian marketplace but internationally where many markets are currently examiningissues of supervision in this new and rapidly evolving environment.

ACTING CHAIRMAN—Thank you, Mr Humphry. When do you expect SupervisoryReview to be up and running?


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Mr Humphry—I would expect that as soon as the fifth director has accepted, and we haveextended the invitation to that person. We would hope within the next couple of weeks,certainly within a month.

Ms Hamilton—Indeed, it had its first board meeting on 14 March, where it started to get aninduction to ASX. The next meeting is scheduled for 19 April, and it is hoped with effect fromconclusion of that meeting it will start its oversight role for review group entities.

Senator CONROY—So the meetings are monthly?

Ms Hamilton—It will start off monthly so it can get on top of the diversity that issupervisory activity, and thereafter quarterly.

ACTING CHAIRMAN—The Financial Services Reform Bill was introduced into theparliament last week. Both Senator Conroy and I are on the Joint Committee on Corporationsand Security, and the bill has been referred to it. One of the issues that is proposed is to increasethe ownership limits for your organisation from five to 15 per cent. Will that materially helpyour organisation forming alliances with other organisations globally?

Mr Humphry—I think it will contribute to it, but the alliances or linkages that we have withother stock exchanges will come about because of the desire to trade orders. However, it willassist us in being able to take cross-share ownership.

ACTING CHAIRMAN—Will 15 per cent be sufficient to do that?

Mr Humphry—We believe that the provision is adequate at this time. We are attracted to itbecause it is consistent with that applying to banks, and we think that is therefore probablyappropriate. I might note that the original decision taken by the parliament to limit it to five percent has effectively been copied around the world, so it will be interesting to see whether this 15per cent now leads to a change in policy.

ACTING CHAIRMAN—It will set the scene again.

Senator CONROY—Were there any discussions prior to the passing in the parliament aboutthe five per cent level?

Mr Humphry—The five per cent, as we understand it, arose in the course of internal debatein the House, not one in which we participated. We were not proposing any limit at all. Youunderstand that we see ourselves as a market operator and as a listed company. We wouldexpect ourselves to be subject to the same rules as every other listed company.

Senator CONROY—So you are not aware of any trade-off arguments in that politicalprocess whereby commitments were given about five per cent for demutualisation?

Mr Humphry—I cannot recall any of those taking place. Can you, Karen?


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Ms Hamilton—If there were any, we were not privy to them. We were not party to them. Weclearly laid out in our demutualisation material, which was made available to the public, that theboard of ASX was not recommending that any particular limit be imposed, but if the parliamentin its wisdom saw fit to impose one then we thought it should equate to the bank shareholdinglimit.

Senator CONROY—I understood that you started at laissez faire and came in at 15 andended at five, but I thought that ASX were involved in discussions. I am a Queenslander, andfascinated to be told that. I will show him the Hansard.

Mr Humphry—Actually, the five per cent was a bit of a surprise to us. It came out of theblue.

Senator CONROY—I noted you were in the audience for some of the earlier questioning, soI would like to take up with you some of the issues that I raised, in a generic sense, certainly inregard to some of the media comment. I am sure you will take every opportunity to set therecord straight. Can I start with the Computershare complaint. It is a public submission, so I amsure you have seen it. As ASIC and I discussed, all we had in front of us was the one-pagedocument. Could you take us through the circumstances from your perspective on that series ofseminars?

Mr Humphry—Firstly, I must emphasise it was a seminar; it was not a formal regulatorybrief. This was organised with the Chartered Secretaries of Australia. It dealt with ASX On-Line, with ASX developments and trends—this is more broadly—and it included the proposedlisting rule amendments and continuous disclosure obligations. When that seminar was finishedand that program was adhered to they said that concluded the seminar and—I do not think theComputershare submission says this—they were then invited to leave. If they wished to stay,they could receive a briefing from Orient Capital. So it was not quite as has been presented toyou.

Senator CONROY—You might want to explain the difference between a briefing and aseminar. I am not familiar with the difference, so I would appreciate you clarifying that. Inhindsight, would you do it again?

Mr Humphry—I suppose I would answer it this way. I would be happy to separate the two ifit makes people feel more comfortable, but the difficulty is logistics. When you try to involve aforum in which you get all of the secretaries together, you will go through a period of covering awhole raft of issues, some of which will be related to the supervisory role and others of whichwill relate to other developments that might be occurring. I am comfortable about separating thetwo functions.

Senator CONROY—Separating them by a period of five minutes or separating them outaltogether?

Mr Humphry—No, I am talking about separate forums, because I think it will assist peopleat least if they have that view of the ASX. I need to emphasise that a lot of the terms that areused involve regulation. We have no powers of regulation. We have listing rules and we havebusiness rules, which are contractual arrangements with companies that list with us. It has been


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the practice of the Corporations Law to rely on those rules in order to give a flexible expressionto the intent. The Corporations Law acts to back up those by sanctions. We are not resiling fromour responsibilities here, but we are trying to point out that we are not an extension ofgovernment, we are not a government agency. We are running a market as a market operatorand we are licensed. It could be that if you have different stock exchanges operating in Australiathey will have different listing rules and different business rules. I just wanted to point that outfor you.

Senator CONROY—I am not quite sure what you were trying to say there.

Mr Humphry—You said the context in which the complaints have been raised is that we aresomehow mixing regulatory business with commercial business—

Senator CONROY—Are you suggesting that because it is not regulatory therefore it isokay?

Mr Humphry—There was no breach of rules in that. It is all to do with perceptions and whatpeople are comfortable with. If people are more comfortable with having two separate seminars,we will run two separate seminars. It is really about the evolving perception of the ASX that weare dealing with here.

Senator CONROY—I think that is an absolutely fair comment.

Mr Humphry—It is a cultural thing.

Senator CONROY—People are used to you having one particular role and in the last threeyears you have completely changed the nature of the role.

Mr Humphry—A complete mystery to me is that when we were a mutual we were ownedentirely by the brokers, and yet we regulated the brokers. That was not considered to be in anysense a problem. We have broadened our base. We have become more accountable under thenew regime than we ever were in the past. Yet it is really only and solely due to this perception.So I raise it simply because it is an interesting situation.

Senator CONROY—I guess that is one point of view. How many shareholders do you havenow?

Mr Humphry—There are 17,000 and all except 1,000 are individual members of thecommunity.

Senator CONROY—All but 1,000?

Mr Humphry—Yes. We are saying that the vast bulk of our shareholders are individuals andprivate investors in the Australian community—and some international. There is very little byway of institutional holding of the ASX.

Senator CONROY—How many brokers were part of the old mutual?


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Mr Humphry—There were 606 brokers and organisations which received 166,000 shares.You will be interested to know that that is down now to below 40 per cent of the totalshareholding.

Senator CONROY—I was going to ask about that.

Mr Humphry—That has been a very satisfying and pleasing development, and I see it as aform of democratisation of the exchange. It is much more a stock exchange now owned by thecommunity.

Senator CONROY—What was the initial value of one share when the 606 were given theirallocation?

Mr Humphry—There was no value ascribed because they owned the exchange—theysimply allocated the shares. When we listed the shares initially, I think they were listed at $4.12.That was the opening price and it followed from there.

Senator CONROY—Where are we at now?

Mr Humphry—Currently ASX is about $12.70.

Senator CONROY—You may not be able to answer this but, with hindsight, you would becomfortable recognising the argument about the perception of conflict? I appreciate that youmake a distinction between a regulatory role and the fact that you do not believe it is aregulatory role, but in accepting that there are listing issues to cover that area and your businesspartnerships, you would be comfortable in the future not running separate—

Mr Humphry—I am happy with that. I think it is a sound way of going forward.

Senator CONROY—I am trying to remember in what order I talked about the provision ofinformation to the market. Given that I already have a subscription to said journal unsolicited, Ijust wanted to get your response. While you do not want to respond to every cheap shot thatever gets thrown at you, I think you might want to respond to this one, although not the morepersonalised nature of some of the attack in it. Steven Maine—I do not know whether any ofyou bother to subscribe to the publication, and hopefully if you do not mention his name youwill not get a subscription—talked about selling information that should be provided for free,charging companies outrageous fees to list a new monopoly and clipping the ticket for about $5every time some small punter buys or sells a share and then said, ‘That is why your $25,000membership is now worth about a million dollars.’ This is the point I was most interested in. Hesays the US markets provide a lot more free information than the ASX, which is a regulator thathas become a profit motivated monopoly. I am interested in the question of the disclosure ofinformation. You heard some of the discussion before, so if I have missed anything there andyou want to add to the discussion that took place earlier, please do.

Mr Humphry—Yes. Firstly, the general practice internationally now is for free informationto be released about 20 minutes after market. In a practical sense, it is going to be interesting tosee whether that can be shortened. The only way in which we can disseminate information tothe community—this is distinguishing between signals which are sent out by information


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vendors and retail investors who may be seeking this information for nothing, and bearing inmind that they can always purchase this information—is through the web and the Internet.There is a certain finite capacity within the web for getting information out. I would say they aregetting it about as fast as we could probably serve it to them. There is no other way that I canconceive that we can actually, in real time, get information to the community.

If the standard internationally moves to predominantly immediate access then we wouldclearly take that into consideration. But I think it is a mistake to think that the ASX somehowgathers information in a costless way and then sends it out and somehow clips the ticket. Wehave to reorganise that information and compile it in a way so that it is a signal which is goingout in a coherent manner. The cost of actually gathering all that information, coordinating it andstreaming it—we have about a dozen signals that we send out—is not something which iscostless. If the community says we will have that information for nothing, what that will tend tomean is that the total cost of all of that provision of information will simply arise through someother mechanisms, through trading fees or whatever.

Senator CONROY—It may go to $6. He talks about $5.

Mr Humphry—To do a $5,000 trade for an investor, the actual charge to that investor, andwe put the charge through the broker and the broker adds it to their fee, is just less than $1.40.That is if you go and buy $5,000 shares. If you buy $10,000 shares, I think it is about $1.58. Sothere is a lot of misinformation about the ASX. A lot of people are confused on what brokerscharge and what the ASX charges. I think we have the second lowest exchange charges in theworld. So, while people keep arguing for lower costs, we are already right near the bottom. Youwill find that other exchanges charge five basis points with no cap, so you can be charged $100or more for a trade. Even for the largest institutional trades, we cap them at $17.50.

Ms Hamilton—I guess the only other point to add to that is that we have been quite active inencouraging listed companies to embrace the concept of informing their own investors directlyand put material on the web site immediately they have released it to ASX.

Mr Humphry—That is a good point, the corporate governance—particularly that annualgeneral meetings be videoed and released. There are about 850 companies that now maintainweb sites.

Senator CONROY—Is there any move to web casts? I know parliament does it. The mostbizarre individuals spend their time at 1 o’clock in the morning watching Senate estimates.

Mr Humphry—They must be mad; that is all I can say.

Senator CONROY—Brian is with me here, and I have wandered back to my office at 1o’clock and had a phone call from somebody at 1 o’clock in the morning to say, ‘That is veryinteresting what you have just been discussing,’ and I have been scratching my head saying,‘What on earth?’ because they are based in Melbourne.

Mr Humphry—We would like to encourage companies to do that, because if you have gotpotentially a situation in which our market is undergoing rapid change, for example, some


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correction is occurring, you can get enormous volumes coming into our web site. If we couldspread any of that around just in a practical logistic sense, it would be highly desirable.

Senator CONROY—Looking at having the companies do it rather than foist it on you.

Mr Humphry—Yes, they can put their company announcements there. Also they canmaintain a history of them for people.

Senator CONROY—Similarly, do you think a web cast of some more general analystbriefings would solve some of those issues that ASIC and other regulators around the worldhave got concerns about?

Mr Humphry—Yes, I think that is highly desirable. I give these briefings myself. I havethem videoed and then put onto the web. It is not just to inform people but so that people knowthat there is not something being said in other forums which they are not aware of.

Senator CONROY—If it is advertised on the company web site, ‘There will be a web cast ofan analyst’s briefing at 3 o’clock this afternoon,’ any punter can just tune in—who has gotaccess to the Internet, of course.

Mr Humphry—That is an attractive concept.

Ms Hamilton—Indeed, there was a statement of principles produced last year which runsthrough the essential principles which you should observe in relation to continuous disclosureand analysts’ briefings, and it has handy hints like: immediately post up to your web site, don’tanswer questions which might reveal price sensitive information and, if you inadvertently do so,make sure that is brought to the attention of the greater investing public.

Senator CONROY—I do not know whether your market price dropped back with theannouncement by Mr Hockey on the adjourned debate issue. There was an unfortunate sequenceof events. Could you take us through the sequence of events from your perspective? Therecertainly was some media criticism of the ASX at the time, so I am offering you the opportunityto take us through the events from your perspective.

Mr Humphry—My recollection is that the minister made contact with the chairman of theAustralian Stock Exchange and informed him that there was to be an announcement—I think itwas in the next 10 minutes or so. The chairman attempted to contact the ASX but wasunsuccessful. It was just a question of timing. Immediately the management became aware—

Senator CONROY—And you became aware, by seeing it up on one of the screens?

Mr Humphry—We picked it up on one of the screens. Immediately we became aware, weissued a release. We rang ASIC to say that we needed it issued urgently and did so. Since thenwe have asked that any future cabinet, whatever party is in government—this applies to anyonewho is a position to make an executive decision—is conscious of this and that announcementsthat are made are notified to us. That is quite critical.


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Senator CONROY—So direct to the exchange—that is, whoever the CEO is?

Mr Humphry—Not directly to an individual director, because that raised for us a secondarypoint; that is, if that particular individual happened to be associated with any broker house,whether that raised questions of their having prior knowledge. It puts the individual in aninvidious position. We took steps with ASIC to ensure that that was also—

Senator CONROY—So you now have an understanding between, say, the executive andyour office about how those sorts of issues would be handled in the future?

Mr Humphry—Correct. It really is a very important point. It is a question of whetherparliament believes it is subject to these rules. I believe it should at least acknowledge that it is.To be fair, only recently I was notified by Mr Hockey’s office as to when the legislation was tobe tabled in the House and the release made. That then allowed us in turn to make a release tothe market.

Senator CONROY—Senator Gibson indicated that there was a briefing on the operation ofthe new board—which, of course, I could not get and which I will impose myself upon you toget at some future point. Given that some of these issues blow up at relatively short notice, I aminterested in those governance issues. I will be unfair to Computershare, who will be appearinglater, and use them as an example. Let us say that Computershare perceive they have aproblem—and it could be an incorrect perception, driven by their own business circumstances.How do you see a board that only meets quarterly dealing with the day-to-day problems.

Ms Hamilton—They will actually act outside the formal board meetings. The role of reviewfor conflicted entities will be a 365 days a year proposition. So, any time we are making adiscretionary supervisory decision in relation to a review group entity that chooses to adopt theconcept of ASX supervisory review oversight, they will know about that decision and have anability to contribute to it. Currently, Computershare has not accepted the invitation for thatadditional protection.

Senator CONROY—I am interested in the concept of additional protection. I presume ifthey have a complaint they go direct to ASIC at the moment?

Ms Hamilton—If they have a complaint and they are not satisfied with a decision taken bymanagement, there is an external review tribunal already set up. The ASX listing appealcommittee is a group of external industry practitioners who review management decisions whenthe listed entity is unhappy with those decisions.

Senator CONROY—As they have not taken up the opportunity—as you described it—theymay decline to take up any of those opportunities as well, for whatever reasons of their own,and say, ‘I’m going to ASIC.’ In essence, ASIC have a 365 day a year supervisory role as well.Do we have duplication between this new board and ASIC in that they are both doingessentially the same thing?

Mr Humphry—We set up this body because we believed that we needed an internal reviewmechanism. The difficulty arises from the fact that you cannot separate the supervision of themarket from the ongoing operation of the market—the two are integrated. For example, when


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Jim Berry has an alert through the surveillance system, he will contact the listings officer whowill contact the company to make sure an announcement is supplied or else we may halt tradingin that particular company. It all has to happen in real time. We wanted to have a body that wasat least at arms-length but could report on activities and, particularly, how we might improveour procedures. We have indicated that all of those reports will go to ASIC so that ASIC hasaccess to them. But, to complement that, ASIC needs to have the proper authority to be able tocarry out any external review. I do not believe it has that adequate provision in the legislation atthe moment. The FSR bill—

Senator CONROY—Does the FSR bill solve that problem as far as you are concerned?

Mr Humphry—I think it partly solves it because it is says that they must audit the ASX atleast once a year. As I said in my opening statement, I would prefer it to have a more dynamiccapability to do that.

Senator CONROY—I appreciate that.

Mr Humphry—We have already said to the ASIC that we would invite them in if they wish;we will do it by invitation.

Senator CONROY—‘Just come in any time you want.’

Mr Humphry—Yes, because it is not about us trying to hide anything; we do it all now. Thedifficulty is that a mystery surrounds supervision. We would prefer to see it as transparent aspossible.

Senator CONROY—So you do not see that any of the roles of your new board areduplicated by what the ASIC does?

Mr Humphry—I think of it in the same way as I would think of audit, where an internalaudit review is required for risk management but you also have an external audit for probity.

Senator CONROY—If companies, as you have indicated, decline to take up the opportunityof the internal audit, does that leave you feeling that it is a waste of time? Is it frustrating foryou?

Mr Humphry—No, we will just continue to supervise them. We have made the offer to themand they have declined, if they have decided to decline. We had a similar situation. We offeredComputershare the opportunity to be supervised by the ASX. They said they would prefer to besupervised by the ASX, so that is what we do. The choice is theirs. The system remainsconstant, irrespective of the arrangements for external review, but I do not think that wouldprevent us from saying separately to ASXSR that we would expect them to give specialattention to these companies.

CHAIR—Dr Turnbull has made a submission to the committee and has made arecommendation for greater transparency on a peer-to-peer basis to ensure market fairness andefficiency. I know in your supplementary submission you have made the point that globalmarkets are moving in the same way as you have gone. Doing what he proposes would provide


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opportunities for arbitrage traders to operate. Are there any other points you would care tomake?

Ms Hamilton—As set out in our submission, we believe that the platform, which you saw ademonstration of today, is at the transparent end of the global spectrum in relation to markets.We do not believe that the kinds of sentiments expressed in the Turnbull submission have anybasis in fact.

Senator CONROY—We are traversing market sensitive issues here. I am, hopefully,soliciting some information without getting us into the same problem. I was interested in thefuture developments and whether, given some of the possible opportunities or necessities thatyou are faced with, you think the regime you have now would be sufficient to survive those newchallenges or opportunities.

Mr Humphry—The best way I can answer that is to say I think there will be continuingdevelopments. I do not believe that it is going to be possible for us to say, ‘That sets us up forthe next four to five years.’ The environment is so dynamic and so volatile that it is difficult tonail anything down. So when we made our statement announcing that David Hoare would bechairing the ASXSR we made the point that this was in a sense the first step along the way.There is no consensus internationally on this development. A whole lot of experimentation wasbeing tried. All of us were interested in all of our developments. What we are trying to do overtime is to develop some form of harmonised approach which will be best practice. I think that isgoing to be a fair while in coming.

While I have the floor, can I just make this comment: Senator Conroy, you raised a questionwith ASIC regarding Bridge DFS and I thought that I should advise you that there wasnotification to the market by Bridge. If they had not done that and we had to take action toquestion them, in that instance, we would have notified ASIC.

Senator CONROY—You would not consider it to be appropriate for you to be trying to dothat in that circumstance—the notification to ASIC is the way it would go?

Mr Humphry—The way it would happen is that we would approach Bridge DFS saying,‘This issue requires notification,’ but we would also notify ASIC, because we have a 15 per centholding in Bridge DFS.

Senator CONROY—That is entirely appropriate.

Mr Humphry—One of the issues following demutualisation that has been interesting forme—because I did not believe it could get as wide as it has—is that there seems to be a fairrange of areas where there is a perception for a potential conflict.

Senator CONROY—Yes, we are largely talking in terms of perception rather than actuality.Being in politics, we are often in that situation. You, yourself, have been involved. There isalways a challenge.

Mr Humphry—I felt it was important because there was a reporter who wrote in one of thenationals—


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Senator CONROY—He has written a couple of stories—it is not just one.

Mr Humphry—In fact, when we contacted that individual, he agreed with us that it was notfactually correct. I just wanted to put that on the record.

Senator CONROY—Are the secretariat staff separate employees? I appreciate that you havegot a board. Are the secretariat’s employees within the ASX or are they separate? I appreciatethat that may have been part of the briefing this morning, but—

Ms Hamilton—It was not.

Senator CONROY—I am interested in the funding, how it would work and whose job itwould be to phone up Mr Hoare and say, ‘Look, we’ve got an issue.’

Ms Hamilton—ASX has entered into a formal contract with ASX Supervisory Review inwhich it says that staffing arrangements are entirely a matter for them. If they want support byway of formal secondment from our staff then we are happy to provide that, but if they want torecruit their own staff then, equally, they are at liberty to do so. At the moment, the companysecretariat, because we are really in an induction phase rather than hands-on, is being providedby my staff, but shortly that will transfer to a separate individual who will be servicing ASXSupervisory Review alone.

Senator CONROY—So there is somebody based in the building?

Ms Hamilton—There will be somebody in Sydney who is servicing ASX SupervisoryReview alone. Whether the board want them to actually be on our premises or somewhereelse—

Senator CONROY—I am just conscious of wanting to keep them—as we have talkedabout—close to the market—

Mr Humphry—But answerable to the board.

Senator CONROY—but answerable to the board. Having them close to the market andaware of things is something you have argued very strongly for.

ACTING CHAIRMAN—The briefing this morning was on—

Senator CONROY—Covered some of these things?

ACTING CHAIRMAN—No, was on the existing supervision within the ASX, not the newcompany.

Senator CONROY—Sorry, we are asking questions about the new company now. Would thefunding for staff in the secretariat come directly from the ASX?


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Ms Hamilton—The ASX has committed to provide funding which will allow the reviewgroup company to effectively perform its functions. The contract sets out and confirms whatthose functions are. It also confirms that we require, at a minimum, that the company producean annual report in which it will comment as to whether it is satisfied with the adequacy ofresources and funding, and acknowledges that the report is to be made publicly available to theASIC.

Senator CONROY—They have no capacity, I guess, to raise their own funds?

Ms Hamilton—That is right.

Senator CONROY—So they are reliant on the ASX?

Mr Humphry—We do not claim that this is an independent body, for that reason. But, again,it is worth advising that the appointment of directors does not take place simply by the ASX. Itrequires names which are approved by the ASIC—or, at least, names to which they raise noobjection—and we do inform the minister. We cannot remove any of those directors unless theASIC agrees.

Senator CONROY—One last issue and, again, it could potentially traverse market sensitiveinformation. I flag that so we are all being careful. I think you have probably seenComputershare’s main submission, as opposed to their supplementary one. In it they talk aboutyou vertically integrating share registration information and distribution and they talk about thecompetitive issues involved. Without wanting you to flag where you might be going—obviously, you are a business and if you see a market opportunity you are in breach of your ownduties if you are not out there trying to maximise your position—do you see any areas that youshould not go into?

Mr Humphry—The only areas that I think I would be cautious about would be those whichwould really inhibit our supervisory role. It does not mean that we would not look at a structurewhich might allow us to still perform those types of duties. What I have in mind is that there is aconstant demand for an arms-length operator to provide a back office function for brokers. If wewere to do that as part of the ASX and also to supervise ASX brokers in whole, I would have tosay that that would put us in a difficult position. I have spoken about this with other exchanges,and the way they are doing it is to set up a completely separate company with other partners andto have it at arms-length, so that their interest in it is not by way of management of thatcompany—they are the sorts of things.

If you look at the developments to date, they have really been to extend beyond the narrow ofjust a trading environment. Most stock exchanges are just trading places. We have addedsettlement, with CHESS as a clearing and settlement function. We are really extending in bothdirections along the investment cycle. Bridge DFS is about order routing, capturing the ordersfrom the point at which they emanate from an investor. At the other end, the holding area, theregistry is the custodial end of the cycle. None of those activities that we were engaged in limitin any sense any other competitor in the marketplace; they all have equal access to our systems.There are no restrictive practices, that I am aware of, that would inhibit a competitor cominginto those markets. I think it would be fair to say that. I guess I am saying that I totally rejectthose sorts of comments.


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Senator CONROY—Are there any circumstances in terms of a merger alliance in the futurewhere you could see the need to absolutely segregate out those market supervisory roles thatyou currently play? If there are none, please say that no, you could not see that. But is there acircumstance down the track where you could see that it would be necessary for a separation?

Mr Humphry—I would say, ‘Probably not at this point.’ If I could just elaborate: there aredifferent types of ways in which exchanges can get together. If you have a full merger along thelines that we were envisaging with the New Zealand Stock Exchange—and I must complimentASIC here, because they were quite diligent in their approach to how the supervisory rolewould work in the discussions, which incorporated the New Zealand Securities Commission aswell—I would think that one of the most difficult problems to overcome would be how to agreeon what would be a single regulatory regime to apply to a single market which encompassedtwo sovereign states. At this point in time, my view is that they are show-stoppers. I just do notsee stock exchanges being able to merge, for that very reason. However, you can link marketsand still achieve the combined depth and liquidity in a market. We are trying to do that with theSingapore government at the moment. Our preference is for the Singapore Monetary Authorityand for the Australian Securities and Investments Commission to mutually recognise each otheras running orderly markets and therefore to allow an Australian investor to go through oursystem directly and trade within the Singapore market. We are putting this proposition togetherbecause we think we can provide greater protection for investors. We can provide streamliningfor trading, and we can also give effect to settlement. There is nothing to stop an investor rightnow from buying a share in Singapore Airlines by going through the brokers.

Senator CONROY—But they have to be ‘buyer beware’ in terms of where to buy; whereas,at the moment, we all have confidence—

Mr Humphry—That is right. We are seeking to create a regime which actually provides a fargreater certainty of their trade being executed. What we are setting about is something which isactually in the interests of protection of the investors.

Senator CONROY—Are there any fundamental issues in terms of the protections toshareholders that you guys look after with ASIC and that you see that we would have to have asbottom lines, no matter whether it was Singapore, Hong Kong or New York?

Mr Humphry—I suppose I feel that our system contains some fundamental requirementsthat I would not be happy about operating in without those things. I have to say most countriesthink that their systems are the best. That has been the experience that I have had talking toother countries. From our point of view the continuous disclosure is critical, and a lot revolvesaround that particular single requirement.

Senator CONROY—As you know, some would say I have an unhealthy interest inaccounting standards. There is a lot of debate internationally about it. The last report I got wasunfortunately depressing in terms of trying to get that harmonisation. Some of those sorts ofissues—

Mr Humphry—I think all of these things are inhibiting not so much the trading taking placebut the free flow of information which would provide greater knowledge for the investors. It hasbeen 20-odd years now that I have been involved in the debate on trying to get harmonised


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standards. I think we are going to wind up with international accounting standards that arereally US standards. I think that is the way the compromise will be. It cannot come soon enoughfor me because it means that, if we are going to have in the future American investors tradinginto the Australian market, which would be a positive to increase our liquidity, then we need tohave information provided in a format which they recognise. Similarly for Australians who aretrading into other markets. So I am a strong advocate of internationally harmonised accountingstandards but, if the troubles that have opened up are any experience to go by, I would say weare long way from—

Senator CONROY—I will be as grey as you by the time it happens, you reckon?

Mr Humphry—Yes.

Senator CONROY—Were there any other issues that were raised earlier that you felt theneed to respond to? I know you were taking a few notes, but is there anything that I have notasked about that you would like to respond to?

Mr Humphry—I think that we have covered everything. In particular, I think the ASIC madethe valid point that there are different rules applying in different regimes. Although the FSA haspicked up some responsibilities for listing rules, the functionality is still with the London StockExchange. So I feel really in the UK they have moved more into line with our regime ratherthan having a completely separate one. But it is an issue which gives rise to another point, thatis, that many of our listing rules are legacy rules that almost predate, I think—and some of themdo predate—the Corporations Law. I know that Karen is looking at the question of whethersome of those rules would be better placed back with the Corporations Law and that the listingrules would then relate more to the operation of the day-to-day market. We would like to see itgo that way.

ACTING CHAIRMAN—On behalf of the committee, thank you very much, Mr Humphryand Ms Hamilton, for appearing before us this morning. Also thank you for inviting thecommittee to come and visit the ASX this morning. It was excellent.

Mr Humphry—Thank you for coming.

Proceedings suspended from 12.54 p.m. to 1.38 p.m.


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O’BRIEN, Mr Mark, Investment Board Committee Member, Investment and FinancialServices Association

RALPH, Ms Lynn, Chief Executive Officer, Investment and Financial Services Association

ACTING CHAIRMAN—Welcome. Do you wish to make an opening statement?

Ms Ralph—Just briefly. The committee is well aware that the IFSA represents about 70investment managers. We estimate approximately $860 billion of Australian equities are held byour members. Depending on what day of the week you look at the market and how you value it,that is probably one-quarter of the Australian equity market. We play a major role in the capitalmarkets here and obviously, for that reason, take a keen interest in the oversight and regulationof the Australian Stock Exchange and other exchanges. You have our submission before you. Asan introductory comment, our view is that we are in a rapidly changing environment forexchanges and capital markets. On the one hand, that means we need to be vigilant in terms ofhow they evolve. On the other hand, we also have to appreciate that this is an evolution which ismoving, albeit reasonably rapidly probably in historic terms, and none of us quite know where itis heading. In that respect, we see it as a process which requires a degree of flexibility to seewhere markets can best lead us. That is the view that informs our view on the regulation on thestock exchange and the various issues that the committee is looking into.

ACTING CHAIRMAN—Thank you. Do you have any further comment to make about theproposed supervisory company which has been announced by the ASX? They have announcedthe chairman, and we have learned this morning they have had their first board meeting, in fact.

Ms Ralph—I guess it is fair to say that when the demutualisation of the Stock Exchangeoccurred a lot of issues about how the exchange would run in the future were raised andconsidered. At the time, obviously, the bill itself was subject to wide consultation. I think it isfair to say that post the demutualisation there were maybe only one or two instances wherepeople had some concerns about issues in relation to conflict of interest, and in response tothose—albeit, I must say, a very limited number of instances—the Stock Exchange hasestablished the new supervisory board.

It is fair to say that regulators and exchanges around the world, as exchanges demutualise andmove from a membership based model to a corporatised model, are looking at how best to startto regulate these exchanges into the future. I think it is also fair to say that at this point theredoes not appear as yet to be one model that is emerging as the leading view of how you shoulddo these things. I think a lot of debate is still happening. I think the ASX, having been the firstcab off the rank, have had to effectively plough new fields on their own in a lot of regards inthis area. So we certainly take note of their initiative to establish the supervisory review boardand to put together a layer of oversight which I think will give the marketplace increasingconfidence. We also acknowledge that, as part of those changes, ASIC’s ability to come in andaudit the exchange’s regulatory powers has increased as well. So those two things incombination we would see as a very productive first step in terms of the exchange continuing toever increase the confidence that their users have in how they actually regulate the market. Wewould say that the jury is out as to how it will work, and the proof, as they say, is always in the


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eating. We will certainly take a keen interest in how the board starts to actually undertake theirresponsibilities and with what transparency they actually do so. I think our view is generallythat we think it was a good step of the exchange: they were responsive to some concerns beingexpressed about the marketplace. Being the first cab off the rank they have had to pick a modelfor how you do this. They have selected a model and now it is up to them to make that work.Certainly as major institutional investors we will be quite keenly watching and ensuring thatwherever we have any concerns we will be expressing them both to the new supervisory reviewboard as well as to the Stock Exchange and, if need be, to ASIC itself.

ACTING CHAIRMAN—I guess that also applies to us as representatives of parliament.

Ms Ralph—Yes, of course.

ACTING CHAIRMAN—We will have to keep an eye on it probably through our parallelcommittee of the Joint Committee on Corporations and Securities.

Senator CONROY—I note you mentioned in your submission the fact that the ASX, or apartner which they have, entered into a business and that they are now trying to charge you foruses of indices. Can you operate within these indices without their consent? Have they got aneffective monopoly that your funds and members cannot really get into unless you pay this fee?Maybe you could explain how it works.

Ms Ralph—I will explain what effectively happened. Obviously, for many, many years theAustralian Stock Exchange produced a range of indexes which tracked the movements at themarket. Probably the all-ordinaries index is the one we are all most familiar with, but they had avariety of subsets of index focusing on either industrials, resources or various industries withinthose indexes. It would maybe be close on 18 months or two years ago when they effectivelynegotiated the sale of the production of those indices, as well as the sale of a range of data toStandard and Poor’s.

Subsequent to the sale, Standard and Poor’s have now approached the industry on the basisthat they believe they hold intellectual property in those indices and therefore have legalgrounds to charge people for their use in various ways, particularly in relation to themanagement of indexed funds, which are based on the S&P indices. The debate the industry ishaving with S&P over whether or not they do actually have intellectual property and, therefore,a legal right to charge us is probably not necessarily an issue for this committee per se. Theissue we wanted to raise in our submission was that in the past, rightly or wrongly, the marketsand investors had come to see various bits of information as part of the markets operating,whether it was an index or the information coming out of the exchange or the companyannouncements emanating from the exchange. The markets over the years, I believe, haveaccepted that that was part of running an exchange and that, for an exchange to work, investorsneeded access to that sort of information.

Senator CONROY—Your submission describes that as a public good.

Ms Ralph—Yes, that is how we would see it. Since the demutualisation it is fair to say that,with an increasing focus on the bottom line, the Stock Exchange are looking for various ways tomaximise the returns on their assets and the operations which they run. They are looking at a


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variety of ways, including this one, to increase their profitability. It is fair to say that in theexample of S&P in other countries around the world the indexes have not been run by theexchanges; they have been run by private organisations such as S&P. But here in Australia, Iguess, we all got very used to the fact that we could access important information about themarkets—company announcements, indices and those sorts of things.

Senator CONROY—You cannot access them now unless you pay the fee? Is that how itwould work?

Mr O’Brien—That is essentially the principle under which the new arrangement is beingproposed. It is really about the fact that there is an understanding out there in the community asto what a benchmark level of performance of the Australian stock market is. The reference isnormally to the all-ordinaries index or the S&P all-ords. You do have alternatives. You canquote the MSCI Australia or you can quote another proxy for performance of the market, butthe one that tends to get picked up and is understood most easily is the one that has been aroundforever, albeit now with S&P at the front. It is a bit like the weather forecast. It is essentially apublic good to the extent that you use the weather forecast in promoting your products andservices. Do you have an obligation to pay the weather bureau? It is an argument that is basedaround the legal issues surrounding that particular interpretation.

One of the issues that comes out is that the ASX approached various members or institutionsprior to making public that it intended to sell the indices to S&P and started the process ofseeking fund managers’ agreement to pay a fee. It was subsequently then clear that it wasintending to enter into an arrangement with S&P. What was essentially a public good and notcharged for under the old demutualisation structure subsequently became a revenue generatingitem as a demutualised company. That is fine, but in the circumstances if you choose not to usethat argument or pay a fee for the use of those indices, then you are either challenged to go offand create a new one and the industry comes up with an independent one, with all the associatedcosts of doing that, or you seek to educate your clients that there is another way of reportingperformance. In some respects it is difficult, and we come down to the legal arguments as tohow that intellectual property is used.

Senator CONROY—I am intrigued. If they bought the index and then just rebadged it, thereis a lot of intellectual property in S&P—

Mr O’Brien—Yes.

Senator CONROY—Did they make substantive changes to the structure of the index?

Ms Ralph—If you recall, around the time these changes took place the Stock Exchange itselfoversaw an update to the index. That is when the new all-ordinaries 100s and 200s was created.As you may recall, there was a public outcry about how that all happened. Eventually it gotsorted out. Those changes were all made subsequent to the ASX handing those indices over toS&P. Of course, now that they are S&P’s, S&P have the right to effectively manipulate thoseindexes in the way they see might best meet the needs of their customers. I guess the issuereally comes down to the fact that, on the one hand, the ASX see things like market informationas an asset which they can generate a return from. On the other hand, as investors we see thatinformation as something that makes the wheels of the marketplace move.


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Senator CONROY—We have a lengthy discussion with the ASIC and the ASX about thequestion of market information earlier today. You will be pleased to know that they also sharethis concept of market information being a necessary thing to provide.

Ms Ralph—I guess that at the end of the day my members are big enough and strong enoughto pay the odd bill if they have to, but we represent only a quarter of the marketplace. Anotherquarter is represented by individual shareholders, and I think they simply do not have thewherewithal to pick up the costs in the same way.

Senator CONROY—How does it work in America? There are private indexes in America:how do small shareholders cope in that circumstance?

Ms Ralph—The index still gets reported on the 6 o’clock news. Charging for the index isreally targeted solely at investment managers who are using that as some form of benchmark forthe portfolios they are running. In the US and in other countries around the world they haveestablished intellectual property rights—at least their customers have agreed to pay them; I amnot actually sure on what basis they have agreed to pay them. But you can imagine a time whenaccess to company information, data about price movements, et cetera could become quiteexpensive. We are moving into a pay environment now and our members might say, ‘I supposewhat we are paying for data stream feeds now is reasonable, but there is no guarantee that atsome point in time these do not become very expensive even for us.’

ACTING CHAIRMAN—But the market is becoming more open even for tiny investorswith electronic trading, and as those prices have come down the big brokers doing this havebeen offering more and more services to get more and more customers. Could you see themarket actually working to provide that service at a very low cost to small investors?

Ms Ralph—One would assume that information such as the Stock Exchange is putting outshould actually get down to zero; that is, zero coming out of the Stock Exchange, not justnecessarily zero for the individual shareholder at the end of the day. I think it is fair to say thatthe brokers, fund managers or the listed companies themselves are now going aboutdisseminating that information potentially for each of their investors as well, but that is not costfree for them to do that.

Mr O’Brien—The basic data that is generated by transactions in the market you generallypay for whether you are accessing that information through a licence or taking a streamed datasource. It is really the services that are added to that information that have a potential togenerate improved performance or improved investment returns. It is the core data and theaccess to the core data that is the primary principle which is the issue in this.

ACTING CHAIRMAN—Therefore I could understand the argument for some intellectualproperty about an analysis and a particular structure and the algorithm going with it. It doesmake sense in that one sense anyway, particularly for all the funds managers who use that forbenchmarking on a day-to-day basis.

Mr O’Brien—I guess in the sense that you could come up with any proxy of performance ofthe stock market on a particular day, that data history that exists with the all-ordinaries indexprovides confidence for people seeking to reference their opportunity relative to what has


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happened in the past. The great difficulty of starting afresh is that you have got enormous start-up costs to establish a new performance benchmark for the market. So there are quite substantialbarriers, if you like, to putting that in place. It is not the inability to do it.

ACTING CHAIRMAN—I understand.

Ms Ralph—Having said all this, it is only fair to point out that market forces at workbetween at least my members, the institutional investors and the Stock Exchange are still prettystrong and the Stock Exchange does not get away with anything that we do not want it to getaway with. So market forces are working here and I guess we would hope will continue to workeffectively.

Senator CONROY—The ASX has a listing rule re corporate governance, I understand.

Ms Ralph—Yes.

Senator CONROY—When did they bring that in? Has it been around for a while? Is it four,five or 10 years?

Ms Ralph—When you say the one on corporate governance, are you talking about ones inrelation to disclosure in annual reports and MDNA?

Senator CONROY—I understood they had one that encompassed a number of things. Thereason I was asking was that, despite the ASX having these listing rules that cover the corporategovernance issues, your organisation still very strongly campaigned for changes to theCorporations Law on a range of governance issues which I can only presume in some wayindicates you were not happy with even the level of compliance or the scope of the ASX ListingRules.

Ms Ralph—I am not sure whether that is necessarily a correct conclusion that you can draw.Our view is that an effective corporate governance regime needs certain protections inlegislation, certain protections in listing rules and then we go a step further and put some bestpractice guidelines out, and you are familiar with the IFSA’s blue book. I guess we would saythat there is an appropriate place for any particular protection to sit. We do not want them all tobe sitting in the listing rules; in fact, there are some things we do want enshrined in legislation.Alternatively, there are some things where you want some flexibility and listing rules providethat, and then you want maximum flexibility and some forms of best practice standards. Thefact that we still lobby for certain things in legislation is a function of our belief that there arecertain things that should be minimum standard, absolutely enshrined, no questions asked, andthere for long periods of time, and legislation is the place for them to be. I think that there willbe times where we say certain things are better off in the listing rules because they give a bitmore flexibility. We do not always get our way and some things that we would maybe like tosee in legislation we can live with in the listing rules and vice versa. You cannot presume thatwe lobby for something in legislation just because we do not think the listing rules work or thatthey are not good enough or whatever.

Senator CONROY—The reason I asked that is that in the UK some of the listing rules—andit is not a complete match—have been transferred to the FSA as a response to some of the


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market changes that are happening over there. Do you have a view as to whether or not thelisting rules could be transferred across at any stage? I appreciate that they do not all match;there are some areas that are not directly comparable.

Ms Ralph—That is a very hard question because it is hard to answer that in isolation of howour system is currently working. I think it is fair to say that you can look around the world andsee trends whereby people are examining the effectiveness of self-regulation—and to a certainextent the ASX Listing Rules are a form of self-regulation—and questioning whether or not allof that should be undone and shifted into legislation. The UK is a foremost leading proponent ofthat because it had a big self-regulatory regime covering not just the exchanges but everyone.Effectively the government has taken that all back in-house. So it had its outsourcingexperiment and it has pulled that all back in. You could say that maybe it has gone to the otherextreme, which is potentially equally as unsuccessful as the other extreme that it just got itselfout of.

Therefore, whilst I acknowledge that this debate goes on, I think in economies and incountries where the community—be it the institutional investor or the individual shareholder—loses confidence in their markets, then the solution to restore that confidence is to pull thesupervision back into the government’s hands. One hopes then that institutions and investorsretain their confidence in the government’s ability to actually do that, monitor it and supervisethrough legislation. Here do we think the balance is right or wrong? I have to say that probablyin general our view would be that the market works pretty well here in Australia, people havereasonable confidence in it. That is not to say that it is perfect by any sense of the imagination.Do we think that there needs to be a shift in response to some problems, concerns or lack ofconfidence? I would be surprised if my members felt that there should be some sort ofconscious shift in the balance between listing and regulation and legislation at this time withoutsome evidence that there was some serious problem and/or serious breach in the perceptionsthat people had about how the market was operating.

Mr O’Brien—I think we also need to be careful that we avoid a box-ticking mentality oftransferring, if you like, requirements across to legislation before it is absolutely clear that theywere actually going to add something to market confidence. We would be much morecomfortable with understanding the basis on which a company reports on whatever it is doing.It gives us insight into the way in which it is using the assets that it is charged with, rather thanpurely ticking boxes because there is a legislative requirement to do so. Clearly in some parts ofthe law that is needed but, when we are sort of getting across into corporate governance relatedissues, a lot of it is about attitude. It is about the attitude a company takes to managing anddisposing of the duties it is charged with on behalf of all investors. You really want to get insidethat attitude. The prospect of it merely being caught in legislation requiring box ticking possiblygives a false sense of security about where the corporate attitude on these things is going. It willnot reduce the need for the marketplace to make independent investigations of whether thosechecks that are made are actually borne out in practice. I think you can already see the marketstarting to take independent action, in the sense of identifying where best practice exists—usingwhatever criteria you want to define that. Gradually, through time, I think you will seemanagement rated for that, and share prices and other benchmark performance will include thatmarket adjudication in the way in which it is reported.


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Ms Ralph—I will confirm Mark’s point. I think it was just before Christmas when ArthurLevitt, the outgoing chair of the SEC, said that corporate governance is not about rules butabout attitude. Within IFSA, we are now starting to look at how even our own approach inrelation to best practice does in fact, unfortunately, focus heavily on rules. We are starting tohave the internal discussion about what we can do to start to bring the focus, dialogue anddebate more onto the attitude part of the equation.

Senator CONROY—In terms of the regime that the ASX are in the process of establishingwith the new supervisory board, you make the point that you support it as it is proposed at themoment as an appropriate response in light of Australia’s current position. Do you consider it isindependently appointed?

Ms Ralph—Right now?

Senator CONROY—This new board that has been created.

Ms Ralph—No. As it constructed now, you could not define it as independently appointed.

Senator CONROY—Do you think it would be more appropriate for it to be independentlyappointed?

Ms Ralph—I do not necessarily think that independent appointments is the only way you endup with good people. I have seen appointments for a variety of organisations that were in theoryindependently appointed, and the results were not necessarily positive. We would think thatthere is enough at stake here for the Stock Exchange, in terms of brand confidence in theirbusiness, for them to do their best to appoint very competent people who can act independently.We would like to believe that can actually happen. I would be loath to think that anyone takingon an appointment—whether it is an appointment by the Stock Exchange or anyone else—wasnot prepared to act independently on such a serious body. We feel that there are some verystrong and potentially very public structures that sit around this thing that will, by and large,mean that the market will judge, firstly, who is appointed and, secondly, how they actuallyconduct themselves—and judge quite harshly, I would imagine, because of that mechanism.

Senator CONROY—In what way would the market judge?

Ms Ralph—We are prepared to publicly support the initiative and how it is working, butthere is no guarantee, for example, that our industry and our association would continue tosupport the model if we felt that it was not working well.

Senator CONROY—The ASX described it this morning as an internal review mechanismnot an external review mechanism.

Ms Ralph—Yes, and, given that ASIC sits on top of that whole structure with the opportunityto audit, I guess we think that that is not a bad way to start to give people confidence—in muchthe same way that internal audit works in conjunction with external audit on a company to giveextra layers of confidence. In doing so, I suppose there are people who are involved even moreclosely in understanding how that business actually works and, because of that extraunderstanding, can add an extra layer of scrutiny. Sometimes a one-step or two-step removed


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external regulator or external auditor comes with a different sort of view and a differentperspective.

Senator CONROY—The IFSA has longstanding strong views about the need forindependent directors on boards—not the tick-a-box approach in terms of ‘you must have X orY amounts’—as well as independent review mechanisms. This is in no way described, even bythem, as an independent review mechanism. In fact they made the point right at the end thatthey do not even pretend to describe it as independent, because they are paying the salaries ofthe secretariat. So it is not independent, in any way, of the organisation. Having said that, doyou think there is a need for an independent review, given ASX’s potential conflicts of interest?

Ms Ralph—My understanding is that that is exactly the function that the ASIC is there toperform.

Senator CONROY—You used the words ‘in light of Australia’s current position’. Givensome of the initiatives and investigations that the ASX have under way—and we weredisappointed that Mr Humphry did not announce some new merger with the NASDAQ thismorning; we were looking forward to that—like the alliance they are seeking with Singapore,and they have attempted a virtual merger with New Zealand, do you think this structure theyhave established is the appropriate mechanism if one of those alliances or strategic partnershipsdevelops? They could develop it tomorrow. I was joking when I said Mr Humphry did notannounce it this morning, but he could have gone back to the office and announced it.

Ms Ralph—I guess that comes back to what I said in my opening remarks. We do not knowthe form that any of these particular alliances, virtual mergers or whatever will actually take andwhat sorts of activities the alliances will cover. I do think that is why we currently hold the viewthat this is an evolutionary process. The sort of oversight that the Stock Exchange will have fiveyears from now probably will not look the same as it looks today, but we do not know theanswer to the question because we really do not know where this is all heading. So what do youdo in light of that? You can create a much more formalised legislative structure that locks insome sort of oversight which does not end up being suitable for the forms of alliances that theytake down the track and we have to fix it all up five years from now, or you can do what theexchange is doing, which is trying to respond to the current position in consultation with thepeople in the marketplace.

Senator CONROY—You could set up an internal review.

Ms Ralph—They are still subject to legislative review by an audit by the ASIC, and theremay come a time when you say, ‘When they do an alliance with Singapore, what sort of jointaudit should happen between the Singaporean authorities and the ASIC, and how should thatwork?’ Again, until we know what sort of alliance we are talking about—what sorts of products,what sort of trading and what sort of inter-relationship of ownership might go along with thosealliances—it is incredibly difficult to forecast what the best regulatory structure may be and tolock something in now. That is why we think that the supervisory review board is a step fortoday, and my best guess is that five years from now it may look different.

Senator CONROY—You are the main protector of the institutional investor. You are outthere voicing their views and concerns. There must be some minimum standards or guidelines


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that you would want to see—you must have given it some thought—if, say, Mr Humphry hadgone back this afternoon and announced that it is fixed with Singapore or that he has done thedeal with the NASDAQ; I think they have signed a joint understanding. There must be someminimal level of performance criteria, standards or guidelines—I do not mind what you want todescribe them as—that you want to see in a regulatory regime down the track. You cannot justsay, ‘Everything is on the table until we see which particular form it is in.’ There must be someminimum levels. As you say, the ASX cannot get away with anything at the end of the day thatyou do not want them to.

Ms Ralph—By and large the minimum standards are enshrined in the legislation already, inFSR, which even extends that a bit. Obviously we have not had a chance to pore over everyprovision of the bill that was tabled last week.

Senator CONROY—Inevitably. You are not alone.

Ms Ralph—Our view is that that is where the bulk of the protections sit. The coregulatorynature of the arrangement, where the ASIC takes a role and the exchange takes a role, hasworked for many decades. I guess we are saying that, until we see either a substantial reasonwhy it is not working or the new arrangements the Stock Exchange is embarking on are sodifferent that other sorts of structures need to be put in place, we would think the legislation,FSR, delivers the framework for the protections they have.

Mr O’Brien—As a market user we would question why the ASX bothered to do this unless itintended for the supervisory board to have some degree of public transparency. The wholeinstance or the need for it is really based about retaining confidence in the ASX’s role as a listedentity with a profit motive, as distinct from its regulatory role and the way it shares with theASIC. It is in the best interests of the ASX to make sure this thing has a degree of publicaccountability associated with it. I am not so concerned about who may be on the supervisoryboard, but I think it needs to be capable of managing clearly and openly the potential conflictsof interest that are perceived to exist. They may not actually exist, but the perception of themexisting should be something that they take on board, otherwise you question, ‘Why botherdoing this? This is just an internal body accountable only to the existing entity.’

At the end of the day it has a great opportunity to promote the model the ASX has embarkedon of having a commercial entity operating closely with the actual market regulator through anorganisation in the middle which essentially reflects and represents the interests of all marketusers. Then I think you have to ask what is the appropriate resourcing, what are the reportingstructures and all those sorts of things. I would like to think that this initiative should beapplauded in terms of doing something to getting out there and trying to do this. We need togive it a chance to work, but it is important that the public has confidence in its role.

Senator CONROY—There are companies that feel that the ASX is in competition withthem. It was explained this morning by the ASX that a number of internal review mechanismscurrently are available if they are unhappy. The companies that feel that there is conflict choosenot to take them up. Why do you think that a company that currently refuses to deal with aninternal review process is suddenly going to want to deal with a different internal reviewprocess? Would you have confidence in just changing the group of people who are doing theinternal review process?


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Mr O’Brien—I think it comes back to the very same point on confidence to the extent thatyou can be reasonably assured that therefore the issues will be dealt with, that the process ofreview is not constrained by resources, that the people involved are capable of getting to thefax—

Senator CONROY—They are paid for by the same people.

Mr O’Brien—There is no reason why that cannot work if they essentially are there managinga process which they believe is in the public interest. At the end of the day, if they have aproblem with the resources or getting access to the systems or the data that they need to fulfiltheir job, you would expect them to say so.

Senator CONROY—But the perception of arms-length protection, even the ASX hasdescribed as an internal review mechanism—

Ms Ralph—If these competitors want arms-length protection, they have the option to go tothe ASIC. I think only they could answer why they would think that is a useful solution forthemselves.

Senator CONROY—I am trying to gain an understanding. Computershare will be the next.They obviously have a number of issues with the ASX. I may be doing the ASX a disservice,but I think it was Computershare who said they had chosen not to take up the current internalreview mechanisms. My question is: why does anyone think that Computershare would botherwith a further internal review mechanism? So, in essence, it has not solved the problem. TheASIC has this role anyway. Your response is, if they are still unhappy, they go to the ASIC, butthey are saying, ‘If you set up another 12 levels of internal review, that would not satisfy ourconcerns about the inherent conflicts of interest. So we’re just going to go to the ASIC.’ Yet, asan investing community, you are saying that you think this extra step of internal review issufficient, whereas one of the companies is saying, ‘We’re not interested in it.’

Ms Ralph—The supervisory review board was not set up just to solve the conflict of interestof three competitors of the ASX. My understanding is that it was set up for a much broaderpurpose, which was also to give confidence that the commitment to the Stock Exchange and theoperation of its regulatory role on all companies was being performed adequately in light oftheir potentially conflicting goal of making as much money as possible. In the first instance,from our point of view, the primary benefit of the supervisory review board is not to deal withthree potential competitors’ conflicts of interest with the Stock Exchange and may be more inthe future, but more broadly to give confidence to the broad market that even in a profit-makingenvironment stock exchanges are filling their regulatory functions adequately across the entiremarket place. For those companies which do have direct commercial conflicts with the ASX, atthe end of the day they are best placed to say why they feel the way they feel and why they feelpotentially that there is a final umpire, called the ASIC, which they can actually talk to.

Senator CONROY—This new body is described as a 365-day operation, which tends toimply—that is certainly the impression I have from my briefings on it and from this morning—that they believe that part of our role is to try to deal with those inherent conflicts between thethree which you have described, but I am confident that the ASX and Mr Humphry are prettydynamic and they will move into any market niche that they think they can move into. Today


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three may be the case, but tomorrow it will be four, and there is no limit. I think there is onlyone. I asked Mr Humphry whether there are any areas he felt they should not go into and heidentified one. That leaves an awful lot of other areas. I am intrigued by what is a traditionalarms-length view that you have always espoused with being so comfortable with anorganisation which is not at arm’s length. The ASIC has described it as part of its role of dealingwith those day-to-day conflicts, whereas the Computershares of this world are saying, ‘That isjust not appropriate.’

Ms Ralph—As I said, I am not really sure I can speak for that group of companies and whatthey feel is sufficient to give them confidence. When we look at the broad supervision of themarket, which is what we are primarily concerned with, we think this is an added layer ofprotection which we never had before. We were not really complaining before. We thought theASX was doing a reasonable job of supervision of all the listed companies, and this is an addedlayer that goes beyond that. As Mark has pointed out, provided there is some transparency aboutwhat they do and how they do it, we think that is extra value add for all of us. That is also not afree good. We are conscious that all of these things do cost money. Relative to the potentialbenefits, we think that is probably a reasonable way to go. As I said, as far as the confidencethat competitors may or may not have in the supervisory review board is concerned, it isprobably best left for them to discuss what their concerns are.

ACTING CHAIRMAN—That finishes our questions. Thank you very much, Ms Ralph andMr O’Brien, for appearing before us and for your submissions to the committee.


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[2.24 p.m.]

TURNBULL, Dr Shann, Principal, MAI Services Pty Ltd

ACTING CHAIRMAN—Welcome. Do you have any comment on the capacity in whichyou appear before the committee?

Dr Turnbull—I have been trading in the industry for 38 years.

ACTING CHAIRMAN—Thank you for your submission. Do you wish to make anyopening statement to complement that?

Dr Turnbull—I have a summary of six points which I wrote out for the internationalcommunity and which have been posted by the leading shareholder activists in the world inWashington at The Corporate Library, which is run by Bob Monks and Nell Minow. The firstpoint is that all companies, including private companies, should make a public disclosure on awebpage, free of charge to all users, of all statutory requirements. It is a way of privitising thedisclosure process, so that we do not have to pay fees to the ASX and their agents to find outwho directors are and what returns have been done. This applies more particularly to all listedcompanies. The second point goes to the introduction of sunlight trading to reveal counter-parties before a trade is executed; so that you know who you are dealing with, which is the basicrequirement in any business activity. The third point is that insiders should disclose that they aretrading before they trade. They have got to disclose afterwards. Why not do it before, so that themarket is informed and aware?

The fourth point is that there should be disclosure of the ultimate beneficial owners and/orcontrollers of all shares traded and a public register of any changes. Again, investors want toknow whom they are dealing with and who the other shareholders are. The fifth point goes togovernment determination of listing rules until private sector corporate governance ratingsystems evolve to identify retail ‘investment grades’ equities. The sixth point is that anywebpage should be licensed by the government as an authorised exchange of securities,provided that the issuer meet standards no less rigorous than currently imposed by existingpublicly licensed exchanges in regard to standards of disclosure and investor protection,investor accountability and other processes to further the public interest. In that way, we getcompetition to the ASX, and you would have the markets deciding where they want to trade.

I would like to fill out the second point about sunlight trading, in answer to the first term ofreference of the current framework. I had 10 points there. The fundamental rule in business is toknow whom you are dealing with, and this is not available when trading shares through theASX—or most other exchanges in the world, for that matter. This allows brokers and dealers totrade ahead of their clients anonymously. Markets can be manipulated by anonymous parties.Insiders can anonymously take advantage of those with less information. Market participantshave no basis for evaluating the integrity of any transaction. Shareholders can change the extentof their holding secretly. Shareholders are not informed about the identity of other shareholders.Directors can become unaware to whom they are accountable. Directors and other insiders areinhibited from dealing in their shares at any time. Market self-regulation is denied. Regulationbecomes dependent upon official monitors and becomes less liquid because of the restriction onthe ability of insiders to trade, and the market becomes less efficient.


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These issues are not just technical ones. Seeing that Australia is now the leading shareholdingcountry in the world, I believe this has political implications, such as why there is a feeling ofalienation amongst your voters, who are going to minority parties. We are getting what PeterDrucker 25 years ago called ‘pension fund socialism’, which allows corporations to beunaccountable to anyone. We have nominee capitalism, where the identity of those to whomcorporations are accountable is kept secret. Most of the nominee owners do not float their sharesand so are poorly accountable, which creates a system of negligent capitalism. So I think thereare major public issues involved. Corporations are controlling a large sector of the economy;they are not politically accountable. This is a chance to change things. Thank you.

ACTING CHAIRMAN—Have you seen the supplementary submission from the ASX?

Dr Turnbull—No, I have not.

ACTING CHAIRMAN—It is unfair to ask you about it then. It is available. Severalparagraphs in the supplementary submission from the ASX comment on your submission. If Iremember correctly, in essence it is basically saying that what you are proposing is contrary towhat is happening with all the stock exchanges globally.

Senator CONROY—The greater concentration of power that is taking place.

ACTING CHAIRMAN—Another point that was made was that declaring buyer and sellerprovides arbitrage opportunities, particularly when one party is large and the others are small.

Dr Turnbull—I accept that the securities industry is very much like a lemming; it wants todo what everybody else does. In my submission I make the point that the Stock Exchangelisting rules originated when there was a monopoly by brokers that controlled and made therules for self-interest. I was a participant during the securities in the M. Henry Nicholl deal,where the Stock Exchange changed the rules to suit itself because a majority of the committeehad changed but had sold short and would have been liable for millions of pounds, as I think itwas in those days, unless they changed the rules. So, throughout the world, stock exchangeshave been created by brokers to further their own self-interest. Our regime is quite advancedcompared with that in New York where they have middlemen and dealers. We havetransparency of depth and breadth of market, which they do not have in New York. So we areworld leaders in many respects; and I am just encouraging us to set the pace some more.

The philosophy is self-regulation. If you study the science of governance, which is thescience of information control, there is a basic law that says you cannot regulate complexitycentrally. It has to be amplified or supplemented by empowering other people to help youregulate. That means empowering investors with the information, the will and the power to actto protect themselves, blow the whistle and take recourse in various ways—through the ASIC orthe common law courts. The rhetoric of the Treasury of the economic law simplification hasdone the very opposite. We have got one of the most complex and prescribed laws in the worldbecause they want more and more regulation and more detail, rather than empowering theshareholders and other stakeholders with the information and capability to look afterthemselves. That is what I am submitting here—that we can apply that.


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ACTING CHAIRMAN—Yes, except there is a big difference between chasing the taxes outof people and the law required to regulate that and people pursuing their own, if you like, selfinterest in investment, be it directly or via their superannuation funds or group managementfunds.

Dr Turnbull—There is a view published in this morning’s Australian where the chairman ofthe ASIC was quoted as saying, ‘The NRMA problem—it’s up to the shareholders to solvethat.’ The shareholders do not have the information inside, they do not have the will becausethey are so dispersed, and, if they had both of those, they still do not have the power to domuch. I think a government that wants to look after the majority of its electors in this countryought to change the rules to empower their voters to look after themselves better. Self-regulation is something that I thought would be appealing.

Senator CONROY—I will read you a quote from the ASX’s submission. They wereresponding to your sunshine suggestion. Firstly, can I ask: is the sunshine model anywhere inthe world?

Dr Turnbull—Yes, it is required for unregistered stock by the SEC. Huddart, Hughes andWilliams published a paper last year, Sunshine trading by corporate insiders: implications forpublic disclosure.

Senator CONROY—They talk about a number of balances between transparency, fairnessand efficiency in arguing against your proposal. They say:

Independently of liquidity migration, within a market it is also well accepted that beyond a certain level of disclosure,transparency negatively impacts the overall efficiency of the market due to the increasing costs that are borne byparticipants and which then translate into an increased cost of new capital to companies ...

Do you have a response to that?

Dr Turnbull—There are a couple. This business about new capital to companies: there is alot of hyperbole about the liquidity of markets and new capital. The total new capital is maybejust one or two per cent of total transactions, first of all. At the new capital stage, that is whenyou have a prospectus provision—and much more sunshine than you do otherwise. Also, thelearned lawyers in America make the point that there is a whole argument for banning insidetrading is to further the self-interest of the regulators as it blows up their bureaucracy to controlit and monitor it. That is in a report here, The law and economics of insider trading: acomprehensive primer, by Professor Bainbridge, which records these arguments. You aretalking about industry insiders promoting their own power, prestige and influence, rather thanthe voters out there that you have really got to look after. I know your voters out there, whateverthe Stock Exchange may say, are interested to know who they are dealing with.

Senator CONROY—They go on to say:

Further evidence of the cost of transparency comes from studies into block trading behaviour, where increasedtransparency tends to lead large traders to withhold liquidity from the market as a tactic to reduce their transaction costs.As all market structures seek to balance the requirements of all participants, it is arguable whether an open-ended level oftransparency is itself intrinsically fair.

And then they say:


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It is certainly not efficient.

Dr Turnbull—The paper by Bainbridge that I quoted says that you need to have acompromise between efficiency and fairness. They put forward the argument of deregulatinginsider trading, because they say it is much more economically efficient, but then that does notfly because of the fairness argument. You have to go back and look at those voters again, andthe block traders are normally the institutions. We have just heard that IFSA controls 25 per centof the market, I think, and they have 90 members. Is that democracy?

Senator CONROY—They argue that the rest of the world is moving towards higher levelsof anonymity compared to the ASX, and they quote a number of examples—the NASDAQSuper Montage market will be completely anonymous; the Deutsche Boerse Xetra market hasboth pre and post trade anonymity; the eight European stock exchanges; and the ECNs, such asInstinet, Island and Brut, are all based on anonymity.

Dr Turnbull—And this would mean the more anonymity you have, the more opportunity formanipulation, insider trading. It is insiders protecting their own interest. The greatest anonymityof course in Europe is that about 98 per cent of all shares on issue are bearer shares, so it isphysical transfer. The company has got no idea. They would have no share registers. They donot know who their owners are, who they are accountable to. They are just like negotiablesecurities so they are locked up in the bank vaults and the banks are given the power to votethem. That is obviously very attractive for tax reasons and other sorts of activities.

I think if you talk about transparency, there is so much rhetoric to talk about transparency,except where it counts most—that is, for the retail investor, knowing who they are dealing withand who else are shareholders of the company they are in. I like to know who else is my partnerin a company. Some companies I do not want to have as partners. Brokers have asked me, ‘Willyou invest in XYZ company?’ I said, ‘Who is the ultimate controller?’ They told me and I said,‘No way, Jose. I know that they exploit the little shareholders.’ It is very important to know whoyou are dealing with and who is going to look after you. A lot of people follow Warren Buffetbecause they say, ‘If it’s good enough for him, I’ll follow him.’ It is no doubt contentious; youjust have to see where the political mileage is for you.

ACTING CHAIR—I did not see reference to the Bainbridge paper in your submission.

Dr Turnbull—No, it only appeared after my submission. My submission was in Februaryand this got released only about two weeks ago.

ACTING CHAIR—Could you leave the details with us so we can look at that?

Dr Turnbull—Certainly. There is another paper explaining why the institutions do not wantto vote their shares. That is by the executive director for Henley Management College.

Senator CONROY—We do not have a problem. The IFSA report says that everyone votesall the time.


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Dr Turnbull—I have heard that report. I think it is a result of who they surveyed. I do notknow the details. If I can just quote a few comments by this Emeritus Professor Bernard Taylor,from the Henley Management College. He says:

Corporate pension fund trustees are discouraged from taking active governance roles by their own managements whobenefit from general shareholder passivity. Insurance companies usually have their own fund managers who competewith independent fund managers for the highly profitable major corporate pension fund business. They are generallydisinclined to hold managements accountable where this might threaten the retention of existing accounts and the seekingof new ones. Both groups have a vested interest in seldom closely questioning directors’ remuneration etc. lest the samecritical scrutiny fall on their own directors. The result is largely absentee ownership with managements exercising powersin default that properly belong to owners.

Senator CONROY—Is that a fancy way of calling it a club?

Dr Turnbull—No. It is just lines of mutual interest. He goes on to say:

... corporate management has control of their own firms’ pension funds and “few managers want their pension funds to bemore active in the corporate governance of other firms than they want their own stockholders to be in their firm”.

So this way you have to look through the industry advice you are receiving around this tableand look to other people.

ACTING CHAIR—We would be pleased to have the details of those two papers, so thesecretary can circulate them to the members of the committee.

Senator CONROY—On page 2 of your submission you say:

In Europe the power to make listing rules is now in the process of passing to government officials.

ASX made the point this morning and in their supplementary submission that in the LondonStock Exchange example transfer is not as it seems from the simple statement, ‘listing ruleshave passed’. They argue that the prospectus and a number of the functions are already, in asense, in Australian hands—or always were ASIC government related—and all that hashappened is that, as I think they described it, ‘London have moved to match us’.

Dr Turnbull—Not from talking to Gay Wisbey, who is the executive in charge of listing inthe FSA. I met with her and her two colleagues in London last November and attended aseminar earlier last year on the operations of the FSA, which is very contentious because its willmaking rules involve quite a different regime. They pointed out to me that they are required todo this under the membership of the economic union and that the various directives coming outof the economic union require them to line up their regulatory procedures. So it is even goingone step further than just the national government. There is great debate about to what thedegree national governments can have variations from what the economic union directives are.

Senator CONROY—The ASX make the point in their submission that:

The transfer of the competent listing authority function from the London Stock Exchange to the Financial ServicesAuthority is not an example of ASX retaining powers other demutualised exchanges have had removed from them. Thattransfer did not involve the LSE relinquishing the role of admitting a company and its securities to trading on the marketoperated by the LSE.


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Dr Turnbull—That could well be so.

Senator CONROY—They continue:

Historically, prospectuses were in the purview of the LSE. This responsibility has been transferred to the FSA UK ListingAuthority (UKLA)), which oversees the initial listing process and reviews and approves the prospectus sent to potentialinvestors. The London framework is of course part of a broader framework comprising mandatory European CommunityDirectives.

So they are making the point that, even though it sounds like there is that transfer going on, inactual fact Europe are coming to a roughly similar position to us where there is governmentoversight of this segment but all of the other segment is still really with them—which is, theyare saying, roughly comparable to Australia.

Dr Turnbull—I see the listing rules as too complex and ineffectual to protect investors. Youreally need a whole different strategy of building in the requirement that publicly listedcorporations adopt corporate charters which have ethical constitutions. At the moment,company law and the stock exchange listing requirements allow unethical constitutions wherethe only time shareholders can bring directors to account is at the annual general meeting. Atthe annual general meeting, this should be under the control of the shareholders, but there are nostanding orders on how general meetings of companies are held. The chairman can decide whohe admits to the meeting, who he listens to and how long they speak for. Typically, chairmenthen discuss matters before the chair. The textbooks on ethics say a chairman should never enterinto any debate before the chair.

I think it is embarrassing for directors to be placed in situations where they are perceived tohave conflicts of interest. It is very difficult for them to control meetings. It would be muchbetter for the board to appoint somebody who is not associated with the company to chair themeetings to allow all directors to be accountable to shareholders. It is a deficiency of our lawlisting rules that we allow those unethical practices, which apparently Austrade is nowexporting to our South-East Asian neighbours. The government, in developing constitutions forTelstra and the Commonwealth Bank, have endorsed those unethical procedures in theirconstitutions.

Senator CONROY—Are there independent—I am cautious to use that word because there isa concept of ‘independent director’—chairmen in other countries that are not associated—

Dr Turnbull—No, it is very much the other way round. In America typically the chiefexecutive is the chairman as well.

Senator CONROY—It is more concentrated.

Dr Turnbull—Yes, it is more concentrated. There are offbeat examples of unlistedcompanies where they are very particular about that. You will find that nearly all employeeowned companies have somebody that is independent, because they cannot work if the conflictsof interest are perceived. They just collapse in a screaming heap. That is why we do not havemany. It requires having two or three centres of power, a division of power and checks andbalances like the American constitution.


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Senator CONROY—I understand there is some work being done by various organisationsabout conduct of general meetings and AGMs. Hopefully, you will get a chance to make acontribution to that at some point in the public debate, because I agree with you that it is animportant issue.

Dr Turnbull—That is news to me, and I welcome it. You do it in parliament, you havestanding orders, orders for debate, to be accountable—

ACTING CHAIRMAN—Sometimes.

Senator CONROY—Senator Gibson is notorious for flouting standing orders.

ACTING CHAIRMAN—Senator! I will not say any more.

Senator CONROY—I am under parliamentary privilege; defamation does not work here. Iunderstand there is something happening on that front. As I have said to others, I could notimagine us debating on the floor of the Senate whether or not we should accept four speakersfor and four speakers against. Hopefully, there is enough goodwill around that people can comeup with a best practice model so that those sorts of conflicts are at least minimised, certainly inyour eyes and in other’s eyes.

ACTING CHAIRMAN—Your recommendation 1 states:

As a condition for any company being allowed to remain registered is that it be required to provide on a web page forpublic inspection without charge all the information which it must make publicly available by law or by any regulator.

In what time frame? You said earlier in this session that you believe that should apply to allcompanies and then you said that we should start off with all public companies. Let us takepublic companies for a start. Do you think that is a practical thing? As I understand it, about 850ASX listed companies do run their own web sites now. Within 12 months or a couple of yearsone would expect most of them would have their own web sites.

Dr Turnbull—I am suggesting that is a listing condition and that they be allowed to tradetheir own shares on their web site.

ACTING CHAIRMAN—I understand that.

Dr Turnbull—That the government would licence them to be a special purpose stockexchange.

Senator CONROY—That is a fairly substantial deregulation.

Dr Turnbull—So people do not have to pay listing fees. I think it is inevitable that is wherewe will be in five years time. All this consolidation and change, the dynamics they talk about, isevidence that you have a major structural change in the securities markets of the world.

Senator CONROY—Do you think they are just clinging to—


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Dr Turnbull—They are clinging to an old model that is becoming technologically obsolete.You have auction sites now on webpages. You can buy all sorts of things on webpages. But withsecurities you need to have proper disclosure. You might find that people prefer to trade theirsecurities on a webpage where you know who you are dealing with. You might find that marketforces will sort it out very quickly.

ACTING CHAIRMAN—Is there anything else you want to place before us?

Dr Turnbull—No, I think you have given me a very good hearing. Thank you very much.

ACTING CHAIRMAN—We were pleased to see you. Thank you for your submission. Ihope you will give the secretary the details of those two papers. Thank you for appearing beforeus this afternoon.

Dr Turnbull—Thank you.



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CHAMBERLAIN, Mr Dudley Keith, Senior Executive, Member of International StrategicBusiness Development Group, Computershare Ltd

GRIFFIN, Mr Peter John, Non-Executive Director, Computershare Ltd

ACTING CHAIRMAN—Welcome. Do you have any additional comments you would liketo make about the capacity in which you appear?

Mr Griffin—I am a one-time investment banker and stockbroker. I have been a member ofthe Australian Stock Exchange. I chaired the predecessor organisation to the Investments andFinancial Services Association, ISFA. I am a non-executive director of a number of publiccompanies, including Computershare Ltd.

ACTING CHAIRMAN—We received your submission. Do you wish to make an openingstatement?

Mr Chamberlain—I would like to open my remarks by giving you a direct quote:

I appreciate that Computershare has now been faced with the potential for conflict of interest between the ASX as acommercial enterprise and ASX as a self-regulatory organisation on two separate occasions in the two years since thecommercialisation and self-listing of ASX. The tension between these two roles is a matter that ASIC watches closelyand regularly discusses with ASX in our capacity as both the oversight regulator of ASX’s regulatory activities andsupervisor of ASX as a self-listed entity.

That is a direct quote from a letter received from Alan Cameron, the then chairman of ASIC, on30 August 2000. It cites two occasions, but there may well be others we are unaware of.

I now turn to the submission, in which we focus on practical and commercial matters, ratherthan the legal framework. The key points we make are that the ASX undertakes a broader rangeof businesses than most stock exchanges. In most other markets, for example, the clearing andsettlement infrastructure is owned outside the exchange, often by market participants who run itas a co-owned utility. The ASX has a monopoly—both in the strict legal as well as practicalsense—in trading, clearing and settlement of Australian securities in Australia. ASX’s moves tovertically integrate its practical monopolies into areas where there has traditionally beencompetition, such as share registration and information distribution, are likely to have the effectof significantly reducing competition in those markets, with inevitable costs to consumers andreductions in levels of service and innovation. Finally, ASX’s moves into business areas whereit makes and enforces the rules create irresolvable conflicts of interest.

The last point is probably worth expanding on, as we believe that this is significant. We arenow in a situation where a publicly listed company, the ASX, is able to make rules that maywell supplement the law but are potentially capable of being anti-competitive in nature. Byhaving the power to make and implement business rules and prescribe technical processes, theASX have the potential to create actual commercial benefits for the ASX and rules that couldfavour the technical platforms of their commercial adjacent businesses, such as APRL—whichis the share registration service—Orient Capital and Bridge.


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From these factors, we assert that the only viable solution to the situation that ASX has putitself in is for the ASX’s regulatory and monopoly infrastructure businesses to be ring-fencedfrom its commercial activities and/or dismantled through legislative intervention. It is worthemphasising at this point that our comments apply to all commercial organisations whocurrently offer technology and services into the securities industry. This could well includestockbrokers. We recognise that it has a particular effect on Computershare, largely because theimmediate signs of ASX strategy are to vertically integrate its services in a space that wecurrently occupy—namely, registry, share register analysis, investor services, cross-borderservices, trading systems, surveillance systems, order routing and so on.

We at Computershare have absolutely no problem with competition—in fact, we compete inall the international markets in which we operate—as long as all those we compete with startfrom a level platform. Our commercial argument asserts that this is not the case in Australia,where the ASX are able to use the advantages gained from their monopoly to compete unfairly.Equally, the ASX are privy to information on both companies and on proposed changes to ASXrules that are capable of creating commercial advantage for the ASX. As well, they will oftenhave information on proposed future changes to technology that we will be later expected tointeract with.

On practical matters, we have brought to the committee’s attention the inevitable issue of theconflicts of interest that have arisen as the exchange has moved into commercial arenas that italso regulates. In our conclusion we put forward a possible set of solutions, but in the finalanalysis this is not strictly within Computershare’s remit. It is much more within the domain ofthe regulators to provide an adequate and acceptable solution to ensure that the contestableelements of the ASX businesses are not in conflict with its market and regulatoryresponsibilities, and to ensure that in contestable areas it is unable to draw advantage from itsmonopoly.

In closing, I would like to spend a few brief moments providing some recent examples thatillustrate many of the points we have made so far. To set the scene, it is worth quoting at thistime from the ASX’s own listing rules. In the explanatory notes on admission, in chapter 1, itstates inter alia:

The Stock Exchange may grant admission even though not all requirements have been met.

It goes on to state:

ASX may refuse admission even though the requirements have been met.

They can refuse that admission even though everything else is okay as far as the listingapplication is concerned. Under the section headed ‘Rules that apply to all securities,’ inparticular at clause 2.9 it states:

Quotation of an entity’s securities is in the ASX’s absolute discretion. ASX may grant quotation on any condition itthinks appropriate. ASX may grant or refuse quotation without giving any reason.

Let us keep that at the back of our minds as I recount a recent example concerning an offer for15 per cent in an Australian service company. In that case we, Computershare, were approachedto take a minimum holding in this company. We later established that we were in competition


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with the ASX; at the same time, this company was seeking admission and quotation on theASX. We lost, and the ASX gained its 15 per cent holding. We can only wonder. To furtheremphasise the possible outcome of the conflicts of interest, the US parent of that same companyis now seeking to sell its 55 per cent share. Let us speculate for a minute on exactly how theASX will conduct itself if it were to make an on-market or an off-market offer, given its currentconflicting interests of being a stock exchange, a market regulator and a potential substantialacquirer of this company.

A more recent example that brings into sharp focus the conflict between the ASX as acommercial organisation versus its role as a regulator and exchange can be illustrated in thedemutualisation and listing of NRMA. The tender for the resulting share registry managementof this significant company purported to be competitive. The presentation provided by the jointventure company APRL—which, you will recall, is the share registry business jointly owned byPerpetual and the ASX—was attended by ASX executives at the very highest level who sat atthe table in support of APRL’s bid for the business. This clearly sends confused and mixedmessages to the potential client. Are they dealing with a regulator who, you may recall, hasabsolute discretion in admitting companies for quotation; or are they dealing with a commercialarm of the ASX? Why would APRL bring along a most senior executive from a majorshareholder? This is certainly not a strategy employed by Computershare in its attempts to winbusiness in an open and fair competitive environment. Indeed, I would argue that theprospective client might be a trifle confused if we were to routinely bring along seniorexecutives of our major shareholders into our formal bids for business.

Finally, included as an addendum to our submission you will find an example of the way inwhich the ASX as regulator is able to attract the attendance of listed companies to sessions onchanges to the continuous disclosure rules and then to expose these attendees to a pitch by themanaging director of Orient Capital for the analytics business of these companies, telling themthat Orient is the provider of analytic services for the ASX. Of course the ASX bought a 50 percent share of this company prior to these roadshows.

I began this address with a quote and, if you will forgive me, I would like to finish with oneas well. This time it comes from an article in the Australian Financial Review on Tuesday, 19February 2000 written by Stephen Bartholomeusz, a most reputable financial reporter. Timedoes not permit me to read the entire article, entitled ‘ASX in conflict between profits andpublic disclosure,’ so I have chosen to take the relevant extract. He reproduces part of thecontent of the ASX web site as follows:

ASX regards timely disclosure of relevant information as being of prime importance in the operation of an efficientmarket. The release of this information enables investors to make well informed decisions about the past and prospectivefinancial performance of listed entities, changes of management, major acquisitions or disposal of assets and othermatters which are likely to influence the price or value of their investment.

That is what the ASX says on their web site. Bartholomeusz goes on to say:

It sits oddly with the ASX practice of delaying the posting of market prices and company announcements on its web sitefor 20 minutes. The information is available earlier—but only if investors are prepared to pay for it.

ASX currently charges $5 for file access and 40 cents per page for full announcements for facsimile delivery. The perpage charge rises to 80 cents after 21 pages.


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The ASX’s practice of editing company announcements and then asking investors to pay for the full texts of the originalannouncement, highlights, if you like, the tension between its role as a regulator and a for-profit listed entity.

It also betrays some confusion about the role and responsibilities of the ASX within a regulatory system that places suchemphasis on timely and fulsome disclosure to the ASX by companies—but places no responsibility on the ASX toactually on-pass that information immediately and completely to all investors.

In his concluding paragraph, Stephen goes to the nub by saying:

The basic problem, however, is that even after improving access to corporate information, by editing companyannouncements and by charging those who want immediate access to the full-unedited version of those announcements,the ASX creates two classes of investor—those who can afford to pay for instant and complete information and thosewho can’t.

For our part, we are keen that in Australia we do not create two classes of issuer: those who canmake the rules and those who potentially could suffer the consequences. There seems to bewidespread acceptance, particularly within both ASIC and ACCC, that the transition from amutual to a fully listed company has created conflicts of interest for the ASX. The key questionis how long this situation will remain, until legislation creates an impartial environment withinwhich we can all work comfortably and fairly. Senators, I thank you for your attention.

ACTING CHAIRMAN—Thank you. Do you have a copy of that for the committee, please,Mr Chamberlain?

Mr Chamberlain—Certainly.

Senator CONROY—If I may just be a pedant, Steve Bartholomeusz writes for the Age andthe Sydney Morning Herald, not the Financial Review.

ACTING CHAIRMAN—Yes.

Mr Chamberlain—I might have to correct that, because I might have taken the wrongauthor’s name; but this was out of the Financial Review for certain.

ACTING CHAIRMAN—The ASX has announced it is setting up an arms-length company,ASX Supervisory Review Pty Ltd, to create a situation whereby the supervision is basicallyseen to be somewhat at arm’s length from the organisation. Do you have any comments to makeabout that proposal?

Mr Chamberlain—There are a couple of comments. We took a look at this because we wereinvolved with our SFE bid. The advice I have received from my colleague at Computershare,Mark Elliott, was that we felt that the terms of that were inadequate largely because, firstly, wewere unable at that time to establish who the members of that board may have been. It isvoluntary, not compulsory; and we take the view that all issuers are affected and that thereshould not be created two classes of issuer, and the model only contemplates need based onlimited criteria where the ASX, by their definition, believe there may be a potential conflict.Overall, we felt it was an approach that was an ‘our problem’ rather than a ‘their problem’concept.

ACTING CHAIRMAN—I am not sure I understand what you mean by that last part.


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Mr Chamberlain—They were setting, I guess, a mechanism through which they woulddecide when something was in conflict and address it, rather than what we are looking for,which is a much more objective filter, if you like, for establishing whether behaviour by theASX is anticompetitive.

ACTING CHAIRMAN—Yes, but also the Financial Services Review Bill was introducedinto parliament last week and was immediately referred to a committee which Senator Conroyand I are on, the Joint House Corporations and Securities Committee, for review shortly. In thebill, the proposal is that ASIC would have the role of auditing the supervisory review company.

Mr Chamberlain—That is information that has not been put in front of me at this stage.

Senator CONROY—I am interested in one of your dot points which you read out, but it isalso in your submission where you talk about ASX moving to ‘vertically integrate its practicalmonopolies into areas where there has traditionally been competition’. I think you used thewords ‘compete unfairly’. Can you explain to me how, if these areas are contestable and there iscompetition now, they are moving into them, and how they are ‘likely to have the effect ofsignificantly reducing competition’ if they are just another entrant?

Mr Chamberlain—If they were just another entrant?

Senator CONROY—Maybe one of your examples, you believe, gave an explanation as tothat. You probably assumed more knowledge from me—I would not want to speak for SenatorGibson—than I possibly have to understand the point you are making.

Mr Chamberlain—It is demonstrably not just another competitor coming into themarketplace. The ASX have a position within our marketplace which, if unregulated, givesthem access to a lot of information that we out in the competing world are otherwise not privyto. For example, we operate a registry service. We have a technology interface into CHESS,which is the wholly owned settlement system of the Australian Stock Exchange. There are waysin which the Australian Stock Exchange may know about rule changes that they maycontemplate. I am not saying that they will, but they may—and they have the opportunity to—make those rules favourable to their technology platform and unfavourable to ours. It is that sortof mix that creates the environment within which we could be disadvantaged, as well asmuddying the waters in terms of the role which they play in the marketplace. Are they playingregulator, or are they playing commercial organisation? That is why I pointed out the NRMAexample as one which puts a very senior executive at a table, pitching for business andsupporting APRL in that move; and that just seems inappropriate, to say the least.

Senator CONROY—Who attended?

Mr Chamberlain—As far as we are aware, it was Dick Humphry.

Senator CONROY—Who is?

Mr Chamberlain—Who simply represents an organisation that is a major shareholder ofAPRL, and who I do not believe is on the board of APRL. So it is that sort of mix that goes onthat we are concerned about. The Orient is another example. I am not going to bore you with the


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details, because I think it is all in front of you there, but again that is a classic example of theway in which an exchange can act. They may regret that they did that, but they did it. They maysay that it will not happen again; but, unless there is anything definitive to stop that fromhappening, how do we know that? I honestly believe that the mood from the people that I speakto around the marketplace tends to be that we have all recognised that a conflict of interestexists, but what we are doing at the moment is saying, ‘Let us be nice about it and assumeeverybody is going to do the right thing.’ I guess we would assert that that may not be the wayforward.

Senator CONROY—Do you think there is a potential for conflict of interest to arise in termsof varying listing rules, where companies that may have a choice between doing business with,say, Computershare or Perpetual are seeking in effect to vary a listing rule or have one waived,and there is a perception that if you are doing business with the ASX’s company it could arisethat you may be more favourably treated, even though they are separate arms and probably thepeople do not realise that it is happening, like those famous Chinese walls which are soeffective all around the world in so many companies? Do you think there is a potential conflictin those circumstances?

Mr Chamberlain—I do, and that conflict will remain so long as there is no certainty aboutthe way in which their contestable areas work with their regulatory areas. I cannot ever see asituation arising where, unless there is a clear differentiation between the two, we will everachieve that—at least not openly and knowingly.

Senator CONROY—Do you think it is fair? If Richard Humphry were sitting here now—and he was here earlier, as you know—he would say, ‘Of course, we would never do businesslike that.’ But do you think it is a question of the impression it creates in the mind? With theNRMA, for instance, to use your example, they are sitting there faced with Dick Humphry, thatis the ASX, connected with operation; and there is Computershare: is it the perception in theminds of others, rather than even, say, the ASX?

Mr Chamberlain—I think so. I would probably answer that by saying that in 45 years ofdriving I have never had a speeding ticket, but does that mean I have never sped? For me, as Isay, what I am seeking here on behalf of Computershare is a level of certainty about who it isthat we are dealing with in that competitive environment.

It is not just that, you know. I am also concerned about the ability of a listed company toactually be able to make rules. For example, if the law says you have 14 days to notify for achange in directorship but the listing rules say that you have two days, which one of those twois going to apply? It is no matter that it is probably a good thing that you have to notify in twodays: it is a clear case where you have got a conflict between the rule and the law. In this case,because of the power they have under the listing rules, the listing rules will take sway over thelaw. It is that and a whole swag of other grey areas that have emerged.

It is no surprise. The ASX have led the way in choosing to both demutualise and list. Theywere the first stock exchange in the world to do that and I suppose it is quite natural that comingout of that we are going to have to sit down and consider these matters. One would hope thatwhat we will do is come out with a reasonable solution that provides certainty to all the playersin the market, because it is not just Computershare. Every time they stand in the market


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representing the issuer, the conflict arises. Whenever they move into a business—remember,they are in a for-profit, commercial business and they are responsible to their shareholders andnot the brokers anymore—they are going to move into space currently occupied by commercial,competitive organisations. We have got to, in my view, create a proper level playing field withinwhich that can occur.

ACTING CHAIRMAN—Your company is operating in many places in the world—

Mr Chamberlain—We are.

ACTING CHAIRMAN—There are now a lot of exchanges that have corporatised or are inthe process of being corporatised. Have you perceived similar problems in other places?

Mr Chamberlain—There are not too many in which we now operate where the exchangeshave actually listed. They are listed in the UK but the UK regulatory system is quite different,as we have put in our submission. One must recognise that the regulatory organisations therehave taken the delegated responsibility for a large chunk of work that currently the ASX areinvolved in here. They have already, to an extent, answered that particular issue of theregulatory conflict: that competitive conflict will arise, as it has done here.

ACTING CHAIRMAN—The competitive conflict is really, I suspect, a Trade Practices Actmatter. Have you raised these concerns with the ACCC?

Mr Chamberlain—Yes, we did.

ACTING CHAIRMAN—What happened?

Mr Chamberlain—We received a response which was not too dissimilar from the one that Iquoted to you from Alan Cameron’s letter. It is a matter that they are looking at. I think withinour submission we actually may have alluded to the fact that they came back to us and asked,‘How do we do this?’ It is on page 12 in our submission under the paragraph ‘Conclusion’where we say:

... the issues covered in this submission with ASIC and the ACCC when the ASX Perpetual share registry joint venturewas first announced. The question we were asked at that time was “What can we [the regulators] do about it?”

I think that question is still being asked.

Senator CONROY—You make the point earlier in your submission that the competitionregulators, in particular, have responded to what you describe as ‘similar analysis’ in a couple ofthe utility services—say, gas and electricity. Would you be comfortable with a model that sawthis as ownership of infrastructure, as opposed to the ASX being distributors of services?

Mr Chamberlain—Yes. We would be comfortable with that model.

Mr Griffin—I am speaking broadly here, but you have a real public policy issue. Successivegovernments have, in a sense, allowed the perpetuation of a particularly unusual monopoly on aworld scale that has not only the trading platform but also the clearing platform and the


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regulatory platform all within its own box. You are now seeing the tip of the iceberg of a seriesof commercial ventures which, if I were a shareholder in it, I would expect it to do. You aregoing to have a lot of major issues like this into the future unless the clearing components andthe rule making components are ring fenced. That is what we are really saying. Elsewhere in theworld the clearing components are usually owned as a mutual by banks and other financialinstitutions and the regulatory or rule making part of it is often done by the ASIC equivalents.The exchange indicates that it has a problem in that regard, as well. But the clearing side is thebig difference between here and elsewhere in the world, and that business is very profitable. Soyou have a position where there is, in effect, a grant of monopoly that is creating very largeprofits from which those profits have been re-invested in these contestable businesses.

Senator CONROY—You see an effective subsidy from the monopoly generated profits inthis area being used to subsidise service provision in other areas?

Mr Griffin—I would see a lot of cash being thrown off from the monopoly clearing housethat will either go back to the shareholders of ASX in the way of dividends or will go into newbusinesses. If it goes into new businesses, by definition they have a long-tail investmentcomponent into those businesses.

ACTING CHAIRMAN—We heard evidence this morning from the ASX that they have thesecond lowest transactions costs in the world. They quoted $1.40 for a $5,000 transaction and$1.58 for a $10,000 transaction. Would you care to comment on that, Mr Griffin?

Mr Griffin—We cannot see the absolute mix of where the earnings or cash generation isfrom the outside, but we would believe that there is a large generation from the clearing side.Therefore, my comment would be that it could be lower.

Senator CONROY—Is technology going to win this debate in the next few years? Is thisreally the last cry of a dinosaur trying to hold on to the dinosaur age?

Mr Chamberlain—I think technology will win, but whether it is this debate or not is anotherquestion. Clearly we are already in changes which are largely driven by technology.

Senator CONROY—ECNs in the US do not give a stuff what the New York Stock Exchangesays.

Mr Chamberlain—Absolutely not. But for what it is worth, I think the climate withinAustralia does not attract ECNs in the same way that it does in the States.

Senator CONROY—ASX got smart early to avoid the creating of ECNs, whereas the NewYork Stock Exchange is a true dinosaur.

Mr Chamberlain—It is worth saying that I would be happy to compete with the ASX on alevel playing field. I am not afraid or worried about competition in that sense, I think it is agreat thing—it is a good thing for the user, it is a good thing for the service provider. It is not anissue for me. I am happy to do that and I will wage my Computershare any tick of the clockagainst the ASX and the APRL, but I want to be able to do that on a level playing field. I knowthe sense of what we are now saying seems to be that we are pushing forward a vested interest


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argument, and to the extent that the ASX is moving its business into our territory, clearly weare. But that is not the issue. The issue is a much bigger and a much broader one. It is all theother businesses and all the other companies that are going to be affected by this muddling ofregulation versus commercial activity. I just want to make that point. The short answer to you isthat technology will be the winner at the end of the day and it will be, hopefully, on a levelplaying field where we can all compete.

Senator CONROY—When you talk about the ring-fencing concept, would you see theclearing house being ring-fenced in a way that no profits or moneys could be transferred fromthe ring-fenced side into the competing business side? Would you then be comfortable that youare not being the victim of unfair competition tendering on the back of a government grantedmonopoly?

Mr Chamberlain—Certainly, on that basis, that is absolutely right. It places the ASX in aposition that is quite similar to that in the UK, the US, Canada and other areas of the world.

Senator CONROY—Do you think the ASX would be able to raise enough funds to be goinginto those businesses without the money generated by the clearing house?

Mr Chamberlain—That is a very good question, but one would hope that if they—

Senator CONROY—Would they be able to raise money with zero expertise in these fields,to be able to go into those businesses?

Mr Chamberlain—They will have, and I think they will develop it. That will be their role asa commercial organisation, as much as it is ours right now.

Senator CONROY—You say in your submission, and you have made the point a couple oftimes, that Computershare does not see any reason why companies with which ASX competesshould be forced to accept different regulatory arrangements that apply to the rest of the market.Are you talking about the fact that they are regulated by ASIC or is there something else therethat you are talking about?

Mr Chamberlain—That is the reference to the ASX Supervisory Review Pty Ltd proposal.

Senator CONROY—ASX indicated earlier that there are a number of internal reviewmechanisms that they already have in place if people are unhappy with various decisions—listing rules, particularly. They are available now. They indicated that you guys had decided notto take up the opportunity to pursue that. Would you be any more comfortable with that nowyou have seen this different mechanism? I know Senator Gibson described it as ‘arm’s length’. Iwould have characterised this new mechanism as an internal review—and I think ASXcharacterised it as that. They are not attempting to describe it as an external review. Are you anymore comfortable now you have seen who is on the board and how it is developing? It will havean independent secretariat in a notional sense. The money for the secretariat is provided by theASX.

Mr Chamberlain—That is something I would like to take on notice. I am not trying to dodgethe issue but I really do not know enough about the way that board is constructed or how they


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plan to operate it. What it does smack of to me is the classic compromise—to try to make thebest of what we have now got. What we are seeking is something probably somewhat moreradical than that, something that provides us with certainty on the way forward. If you were toask me that question I think I will probably couch it by saying that it would be a second bestoption.

Senator CONROY—Are you surprised that organisations like the securities institute andIFSA have put in submissions basically supporting the new structure even though they may nothave all the details? It is sort of evolving as we go. Are you surprised that various organisationshave supported the status quo, if I could put it that way?

Mr Chamberlain—No, I am never surprised at organisations supporting the status quo. Theyare not standing in the competitive environment as we are and others will be in the future, andprobably have not got the insight into exactly what can happen and has happened in the past.

Senator CONROY—A number of them have described in their submissions the ‘pragmaticsolutions’ that ASX have come up with.

Mr Chamberlain—I do not deny the ASX’s motive in trying to create pragmatic decisions.We are arguing that they are not necessarily the right ones for the business going forward. Wewant to see some certainty and we believe that certainty can be achieved only through properregulation and not through arrangement or informal or internal processes where the word‘discretion’ arrives in the terminology of what is happening.

Senator CONROY—Thank you.

ACTING CHAIRMAN—Thank you very much, Mr Chamberlain and Mr Griffin, forcoming before the committee today, for your submissions and for a copy of your openingstatements.

Mr Chamberlain—It is our pleasure.


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[3.36 p.m.]

ROFE, Mr Alfred Edward Fulton, Chairman, Australian Shareholders Association Ltd

ACTING CHAIRMAN—Welcome. We are pleased to see you again. We have received asubmission from you. Do you wish to make an opening statement?

Mr Rofe—I will highlight a few points in our submission. We have given some backgroundto the ASA. The two points I would emphasise are these: our role is to represent individualinvestors as opposed to the institutional investors, which are represented by IFSA; and,secondly, although we have regular contact with other industry bodies, we are financiallyindependent. Our viewpoint is completely independent and, for example, we have nogovernment or industry funding. On the role of individual investors, I would like to quote acouple of figures from our submission. The first is taken from the ASX share ownership updatesurvey: as at November 2000, approximately 40 per cent of Australian adults—in other words,approximately 5.7 million Australians—directly owned shares. The second is from a reportpublished by IFSA, and the figure also appears in IFSA’s submission: as at September 2000,private investors comprised nearly 26 per cent of the Australian domestic equities market, indollar terms, as compared with 23.5 per cent owned by Australian funds managers. The talk of‘mum and dad’ investors sometimes creates a false impression.

On the other hand, individual investors do still suffer a number of disadvantages comparedwith institutional investors, particularly in relation to access to and cost of information. In thatregard, I commend to you Ross Catts’s submission. Ross is a member of the ASA, but this is anindependent submission prepared by him. I saw it only this morning, but it does summarise verywell some of the difficulties which individual investors face in gaining access to information.

I would like to make a couple of comments about the scope of the inquiry. When we aretalking about market supervision of Australia’s stock exchanges, I do not think we should focusnarrowly on the ASX or even on stock exchanges in the narrow sense. If we look at what wemight think of as the stock market in broad terms, there are perhaps six different marketsinvolved. First, there is the market for listings in which the ASX competes with otherexchanges. Second, there is the market for securities which are bought and sold on stockexchanges. Third, there is a market for broking services, where different stockbrokers, onlinebrokers and full service brokers are competing with one another. Fourth, there is a potentialmarket for clearing and settlement services, although at the present time we have a statutorymonopoly. Fifth, there is a market for share registry services and, finally, there is a market forinformation.

It is important to clearly distinguish those because, for example, when people say that theASX is okay because we are competing in a global market, that might be a global market so faras listings are concerned. An Australian company is not limited to listing on the ASX. It can liston Nasdaq, on Toronto or London, as quite a number have done. But when we look at individualinvestors, at the present time they cannot readily invest on markets outside Australia. There areexchange controls and registry questions and one thing and another like that. It is very


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important to distinguish these markets and to distinguish domestic competition from globalcompetition.

The other background point to make is that a number of bodies, not only the ASX butcertainly the ASX, play a regulatory role as well as their market role. In spite of what DickHumphry may say, the ASX is a regulator. It makes what amounts to delegated legislation and itgrants waivers and exemptions from that legislation. It enforces those and the rules made byother bodies, such as the Corporations Law. Just in that regard, I might mention a couple ofareas where, in effect, the ASX has the function of monitoring Corporations Law provisions. Iwill mention four of them: disclosure of directors’ shareholdings under section 205G, proxyvoting disclosure under 251AA, substantial shareholder notices under 671B and continuousdisclosure under section 1001A. If you look at the press reports over the last six months youwill see a number of instances where there has been a failure to ensure compliance with thoseprovisions by either the ASX or ASIC. That is one problem we are experiencing with thecurrent regulatory structure. I will stop now because you have some questions to ask me. Imight pick up some other points later on.

Senator CONROY—I know you have been here most of the day. Would you like tocomment on any of the issues raised earlier? I appreciate the point about the ASX’sCorporations Law position. I appreciate that clarification. Were there any other issues youwould like to make a comment on?

Mr Rofe—I might just make a few points about ASXSR. This is from Dick Humphry’sevidence. First of all, he described ASXSR as ‘an internal review mechanism’. Secondly, hesaid, ‘We do not claim that this is an independent body.’ That is important. It certainly may playa role but it cannot really be classified as an external supervisory body. I do not know whether itis worth while referring to any of the provisions in the latest version of the FSR Bill.Summarising very briefly: there are provisions dealing with market operators, and clearing andsettlement facilities. In each case there are a set of more or less parallel requirements: first, anobligation on the licensee to have adequate arrangements for supervising its particular function;second, provisions for an annual report to ASIC on the extent to which the licensee hascomplied with its obligations; third, there is the minister’s power in either case to require aspecial report; and, finally, the requirement for ASIC to assess the licensee’s compliance withlicence conditions. Those are very important provisions. I do not think they are in the samedetail in the original draft bill.

Certainly my perception over the last 12 months or so in relation, particularly, to managedinvestments is that ASIC has been playing a more active role in monitoring and supervising theoperations of various industry organisations. For example, there have been a number of caseswhere they have obtained enforceable undertakings as a result of which bodies have got anexternal review, say, by some of the large accounting firms and so forth. I think this is animportant role which ASIC may play in relation to market operators and operators of clearingand settlement facilities. I think it is a question of whether we need some extra monitoring body.I do not really think ASXSR satisfies that.

I mention in our submission the market surveillance panel in New Zealand, which is asomewhat broader based body than just five supposedly independent directors. Anotherpossibility might be that the Corporations and Securities Panel could play a wider role under the


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ASIC Act. It has the functions that are given to it under the legislation. Perhaps, rather than setup another body, it might play a role here because, as I said earlier, we are not just talking aboutthe ASX. We have already got the Newcastle Stock Exchange, the derivative exchanges, and soon. Rather than having separate supervisory bodies for each of these things, perhaps an overallindependent supervisory body may be a worthwhile idea.

ACTING CHAIRMAN—Some members of the committee were at the Stock Exchange thismorning and spent time with the supervisory unit. They ran us through some actual examplesfrom very recent times, chasing attempts to manipulate the market. They made the point verystrongly—with live evidence before us, a rerun of screen material of just days ago—that theirsupervisory unit has to be working very closely with the market on a real-time basis. Otherwisesome of these attempts at manipulation which were illustrated to us this morning would not getpicked up. Do you agree?

Mr Rofe—Certainly, I would very strongly support that. From what I have seen of JimBerry’s operation there, it is very good and it plays a very important role. I would not suggestthat should be moved to an outside body, because there must be a body monitoring the marketon a moment-to-moment basis. I am really talking about broader issues like some of theseconflicts of interest, some of the provisions about enforcement of listing rules, aboutamendments to the listing rules. That is the sort of area where I think there is room for someexternal form of review.

ACTING CHAIRMAN—As I understand it, the setting up of this company, the ASXSupervisory Review, was basically to put Jim Berry’s activities under control from a separateentity.

Mr Rofe—I do not see that as the major problem because, as I say, from what I have seen, itseems to be working pretty well. When an anomaly appears in the market, he rings up thecompany’s people and they send out a query to the company and that seems to work pretty well.Sometimes one feels that in the past where it has perhaps broken is when the problem has beenreferred to ASIC. We sometimes seem to get the answer back, ‘We are really rather short offunds. We cannot deal with every complaint we get,’ but that is a separate issue, I think.

ACTING CHAIRMAN—The impression I had this morning from Jim and his team was thatthe responses from listed companies today, relative to a year ago or a couple of years ago, isvery much more responsive. As a consequence, when they have queries, the companies respondvirtually immediately. They basically have queries on a very regular basis, and the informationgets passed on to ASIC, but only a few of them actually get referred to ASIC for further action.

Mr Rofe—Yes, I do not see that as a major issue.

ACTING CHAIRMAN—It is important that we understand where you see the problem.

Senator CONROY—Like you, my understanding was that this new board was createdprimarily as a response to criticisms of conflict of interest. That was certainly my understandingof it. That is what I believed was the reason for its creation.


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Mr Rofe—That is certainly the sort of impression that we have had: the problems, as you say,with self-listing and potential conflicts resulting from some of these business links. I should putin a bit of a plug in relation to the securities and clearing operation. I do see it as a problem. Upto now we have had the effective statutory monopoly but, even if that is abolished, I think thereis still a practical monopoly situation, in that it is going to be difficult to set up a competingclearing and settlement facility.

Senator CONROY—Surely one of the big US clearing houses will move in if it sees anopportunity.

Mr Rofe—That is a possibility.

Senator CONROY—I accept your point, but it could be hard for a small Australian business.Computershare might decide to do their own—to set one up and be a practical competitor.

Mr Rofe—That is right, although I think Austraclear does the clearing and settlement in NewZealand. At the present time we have the problem of having an issuer sponsored register and abroker sponsored register. If you brought in another organisation, I think—and perhaps theChartered Secretaries may have something to say about this—it will make it increasinglycomplex for listed corporates. From a practical point of view, I do not think they wouldencourage that. This clearing and settlement aspect is a potential impediment to additionalcompetition. You can say that companies can have their own web sites on which they can have amarket for shares, but the market for shares is one thing—the clearing and settlement is reallythe fundamental thing whereby you have confidence that when you purchase something and youpay your money you will in fact get title to your shares.

Senator CONROY—You would have heard us discussing earlier in the day the question ofthe ASX providing information to the market, and Computershare outlined a couple ofexamples of charging for products that are basically an edit of an existing announcement.

Mr Rofe—That is right.

Senator CONROY—Do you have view on this? Is it a public good? Should it be chargedfor? Is 20 minutes enough for small shareholders to be able to respond? Should it beinstantaneous?

Mr Rofe—I think you can legitimately draw a distinction between what you might callcorporate information—information that is provided by companies pursuant to their obligationunder the Corporations Law—and market information, which is information about how thestock market is operating. Certainly in the case of corporate information—which is providedwithout charge by companies to ASX in satisfaction of their statutory obligations—I do notthink they should be making a profit out of on-selling it to someone else.

Senator CONROY—Do they do that now? I was trying to delineate between those twosituations very inexpertly this morning.

Mr Rofe—I think Dudley Chamberlain quoted some figures about what it costs to getinformation—I think it was a $5 fee and 44c per page including GST—and Ross Catts has


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similar figures in his submission. Whether one would go as far as Shann Turnbull’s suggestion,that all corporation information should be provided by, say, ASIC on a public access web site, Iam not sure. Our current approach is that, as a condition of listing, all listed companies shouldbe required to maintain a web site on which they publish statutory information—annual reports,continuous disclosure information—as soon as it is released to the ASX. As more than two-thirds of companies are already doing it, there is no good reason why all listed companiesshould not have a web site. If you are a schoolboy you can have your own web site on whichyou can have your web page and all that sort of thing. For a corporate it is not an issue.

Senator CONROY—You believe that the information that is provided compulsorily shouldjust be available instantaneously, if possible, and at no cost?

Mr Rofe—Yes.

Senator CONROY—What about the 20-minute gap?

Mr Rofe—I guess, from an investor’s point of view, it depends a lot on what sort of investoryou are. If you are a Warren Buffet type investor who looks for value and then holds your sharesfor the next 20 years, 20 minutes here or there in most cases is not going to make a difference. Ifyou are a day trader, of course, it is important, but perhaps if you are a day trader you may beprepared to pay for it. Ideally, if what I am suggesting follows, if the information was publishedon a web site simultaneously with its release to the ASX, that 20 minutes for companyinformation would go away. You would still have the question with market information. Withmost online brokers that I have come across, if you subscribe to their online broking service,you get the real-time stock market quotes.

Having said that this basic corporate data should be made available free of charge, that doesnot close the door to a lot of value-added services that information providers do make. They cancalculate various ratios, rank companies and all that sort of thing. It is not taking away theirmarket; it is just saying that basic data should be freely available because I think it is part of theefficient functioning of the market.

ACTING CHAIRMAN—Am I right in assuming that probably only a small proportion ofyour members would in fact be day traders and, therefore, be concerned with real time?

Mr Rofe—Yes, I could not really say what proportion and, of course, it probably varies fromtime to time. When there is a booming market, everyone is a day trader. After they have boughtsome shares and they go down in price, they decide they are long-term investors.

ACTING CHAIRMAN—Senator Conroy, do you have anything further?

Senator CONROY—No, I think that covers most of it. Mr Rofe, do you have any otherpoints that you have not had a chance to make? Were there any points made during the day thatyou would like to comment on?

Mr Rofe—I cannot think of any burning issues. I think that is probably all I have to say atthis stage.


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ACTING CHAIRMAN—Thank you, Mr Rofe, for coming and appearing before us again.Thank you for your submission.

Mr Rofe—We look forward to seeing you again for the FSR Bill, no doubt.

ACTING CHAIRMAN—Indeed.


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[3.59 p.m.]

FALCONER, Mr Ian, Chairman, Legislation Review Committee, Chartered SecretariesAustralia

RENNIE, Mr John, Member, Victorian State Branch Councillor, Chartered SecretariesAustralia

SHEEHY, Mr Tim, Chief Executive, Chartered Secretaries Australia

ACTING CHAIRMAN—Welcome. We have received your submission. Do you wish tomake an opening statement?

Mr Sheehy—We do. First of all, thank you for inviting us to give evidence today; we arealways pleased to put our views forward. Just by way of background, Chartered SecretariesAustralia is the Australian division of the Institute of Chartered Secretaries and Administrators,which is an international professional body with over 46,000 members worldwide. Here inAustralia we are the peak membership body for corporate governance and compliance and feelwe are fully qualified to respond to your inquiry. In this country, we have over 8,000 membersrepresenting major publicly listed companies on the Australian Stock Exchange. Both Ian andJohn are representative of our membership group. Members of Chartered Secretaries deal on aday-to-day basis with the ASX, ASIC and the ACCC and have a working knowledge of theoperations of the markets, the ASX listing rules and Corporations Law.

Your first question in your letter of 14 December was about the advantages and disadvantagesto the market. We see the ASX in their role as a regulator as a well-funded market operator withexperienced staff and a global perspective. The experience they have built up within the ASXenables them to provide practical guidance to listed companies to facilitate compliance withASX listing rules, thereby preserving what we see as the integrity of the Australian equitymarkets.

The ASX has in place a number of established committees and tribunals that includemembers external to the ASX, and this was long before the Supervisory Review Board wasannounced. The ASX engages in extensive consultation when any changes are proposed to ASXlisting rules. For example, last month, through our body, Chartered Secretaries Australia, theASX made presentations on this year’s proposed listing rules changes in most Australian capitalcities. Over 250 people attended in Sydney, over 200 people attended in Melbourne, and I canassure you that not all of their proposed changes were met with a positive response.

Senator CONROY—Your seminars have been a matter of some discussion during the day.

Mr Sheehy—Good, I am pleased to hear that.

Senator CONROY—For all the wrong reasons.


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Mr Sheehy—We will get to that later. As a listed entity on the exchange, ASX is subject tothe same degree and level of scrutiny we think as any other listed entity. There are numerousmemorandums of understanding in place with ASIC to ensure that someone is auditing theauditor.

In terms of disadvantages, we do acknowledge that there is a possible perception that aconflict of interest may exist with respect to the ASX being both the market regulator and alisted entity in its own right. However, and we note that you did point this out earlier in the lastsubmission, they have endeavoured to find a solution which is practical and pragmatic byputting in place the ASX supervisory review. We believe that this solution chosen by the ASXdoes not add additional layers to the supervisory process and will not add additional cost. Youhave made mention of the fact that the ASX is exceptionally efficient in the course of itstransactions and we would not want to see this added to.

We believe the requirement that the majority of the board be non-executive, independentpersons will go a long way to ensuring the supervisory function is truly independent. We notethat the board is chaired by Mr David Hoare, a person who has the highest respect and standingin the Australian financial community.

We believe this new supervisory entity should be given a minimum of two years in operationbefore any further imposition of regulation is imposed. This will enable all those concerned tohave time to evaluate the new structure. We think the two-year idea is a terrific idea.

You asked us also questions on implications of the demutualisation and proposed alliances.As stated in our submission, we have always been of the view that any initiative that enhancesthe standing of the Australian share market is of interest to both investors and listed companies.As is well known, our share of world equity markets is extremely small. Any initiative thatpreserves the liquidity and depth of the domestic capital markets is essential. The recentproposed merger between BHP and Billiton is a prime example of maintaining the depth of theAustralian capital markets, where the new merged entity will press ahead with a dual listing inorder to facilitate the efficient trading of its shares around the world. We applaud initiatives likethis and would like to see more of them.

Australia needs a vibrant capital market to foster economic growth. Alliances with otherexchanges will have a positive influence on this. Finally, you asked us whether trade practiceslaw is deficient in ensuring a competitive stock exchange. We are deeply concerned that tradepractices law may act to disadvantage the ASX by restricting its growth and hence its efficiency.As stated above, efficient domestic capital markets are essential for Australia. As stockexchanges around the world form alliances and increase the efficient distribution of surpluscapital, so too must the exchange.

In summary, we believe that Australia’s equity markets and the ASX, since theirdemutualisation, are operating effectively and efficiently. We acknowledge a possibleperception of a conflict of interest. However, we see no substance to support that perception. Webelieve it is most important to preserve Australia’s already too thin capital markets and thatthere is no need for additional layers of supervision. We believe the newly introduced ASXSupervisory Review Pty Limited is a practical model and will be able to supervise Australia’sregulatory function to ensure a fair and orderly market. Thank you.


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ACTING CHAIRMAN—I assume you were here earlier when Computershare were givingevidence?

Mr Sheehy—I was not.

Mr Rennie—I heard half of it.

ACTING CHAIRMAN—They were quite critical of the current situation proposed with thesupervisory company set up within ASX and basically pushing for greater governmentintervention in the marketplace. From your perspective—and you are working practitioners inthe business—would you care to give us advice about where you see the situation?

Mr Falconer—We see the supervisory review company as being independent. It is a bit likean internal audit function within a company.

Senator CONROY—An internal audit function, by definition, is not independent.

Mr Falconer—It reports to the finance director. It is not independent, but in terms of the wayit operates the internal audit function has a pretty strong role in most companies. Although notindependent, it is sort of regarded that way by having direct reporting relationships to a veryhigh level.

Mr Rennie—In our company the internal auditor reports to the audit committee of the board,which entirely comprises non-executive directors.

ACTING CHAIRMAN—That is a fairly common arrangement.

Mr Rennie—There is quite a degree of independence in the role of the internal auditor.

Senator CONROY—This has come up a couple of times. ASX this morning did not try topretend in any way, shape or form that this proposal was anything other than an internal review.It is not independent. It is not even a pretence or an attempt to be independent, but there seemsto be a perception. Certainly when I first heard of the proposal I assumed it would be a littlemore independent than it has subsequently turned out to be.

Mr Falconer—Yes. We talk a lot about a state of mind but someone like David Hoare, aschairman, is not a pushover when it comes to these matters. I do not think people would take onthat job thinking they are just going to be a puppet of ASX.

Senator CONROY—I was interested that you did not describe it as an extra layer ofprotection. That is funny because IFSA described it as the exact opposite. They described it as acostless extra layer of protection. I remember Ms Ralph’s words specifically. She said it is an‘extra layer of protection’ at no extra cost.

Mr Sheehy—I said that what we do not want to see is an extra layer of protection because ofthe inevitable increase in cost that would come with that. We see this as a greater level of suretyand security. In that sense, yes, I can see it is another level, but it is not an external level—


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Senator CONROY—For who? For the ASX or for the market participants?

Mr Sheehy—For the market participants.

Senator CONROY—ASX made the point this morning that there are a number of currentinternal review mechanisms for a company that is unhappy with decisions and that they hadoffered this opportunity to Computershare and they had declined. Again, they have describedthis as an internal review process, and Computershare are again declining. How are the marketparticipants demonstrating their confidence with this new mechanism when they do not evenwant to touch it with a barge pole?

Mr Rennie—Can I just make a comment about Computershare, because I actually amcompany secretary of Pacific Dunlop and Ian is company secretary of Rio. Computershareperform registry services for us and, as you know, the ASX has formed a joint venture withPerpetual and they will also be performing registry services. Dudley Chamberlain was at painsat the closing part of his presentation to say that he was not speaking from self-interest. I thinkthe point that we would like to make in that context is that, firstly, the Melbourne branch hassurveyed all the major company secretaries in Melbourne, and there was no disquiet at allexpressed by any company secretary with the way the ASX is handling these matters, but therewas a very real concern that, if any new layers of cost were imposed, it would very quicklymultiply. This submission was actually written in Melbourne before being approved by Tim.Therefore, there is a very real concern that, if the alternative view is taken, it will be costineffective. In other words, that is why in our submission—

Senator CONROY—The problem is this is practically ineffective. If the companies thathave got the complaints are saying, ‘You’ve got to be joking,’ you are actually paying extramoney through your process of paying for these five or six directors plus the secretariat for aprocess that no-one who has a complaint is actually going to access.

Mr Rennie—What I was trying to say is that Computershare was not on the panel that putthis together; their share registrar was aware of it, but not the Computershare management. Ofthe companies who were party to this—and there were about 25 company secretaries—none ofthem voiced that as a concern.

Senator CONROY—None of them have been placed in the same position as Computershare.

Mr Rennie—I am trying to turn it around. What I am saying is that I think the committeewould be aware, and Dudley Chamberlain made it quite clear, that he may be interpreted asspeaking out of self-interest, but the companies that completely had no self-interest did not raisethat as any concern at all.

Mr Sheehy—Also, while Computershare is a company, it has a particular situation vis-a-visthe ASX. To use Computershare as an example for all Australian companies is stretching it abit. It has a competitive relationship with the ASX, which Pacific Dunlop would not, nor would99.9 per cent of all other listed companies.

Senator CONROY—It seems to me that there is a paranoia in some areas that this is aboutlooking to try to find a way to do something in terms of regulation, and therefore the mantra


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seems to be, ‘Oh my God, no, because that might mean more regulation.’ Can I invite you tolook beyond that to talk about the public policy position, which is what we have to try tograpple with, not the cost issue, which I appreciate you guys have got to be absolutelyconscious of. Again, I put to you: if a market participant is not interested in accessing a furtherlevel of internal dispute resolution, has anything been solved? This morning I think ASX, IFSAand others said, ‘Well, the final arbiter is ASIC.’ ASIC are going to need extra funds if they aregoing to get into the position, so the cost comes anyway, because ASIC need extra funds andthat has got to come from somewhere. At the end of the day, that will be all of us collectively oryou guys individually. The answer seems to be, ‘If they’re still unhappy, they can always go tothe final decision maker of ASIC.’ There is a cost in both sets of circumstances. Can we just usethe silly assumption that it is all cost neutral and we are looking at the public policy aspect.

ACTING CHAIRMAN—Before you go on, though, I do not think what you are suggesting,Senator Conroy, is quite that clear. What these people are saying is that, from their evidence,most of the listed companies are happy with what is proposed and do not see any significantcost increase coming their way. Computershare had a different view—but you tell me, SenatorConroy, I am interpreting what you are saying.

Senator CONROY—Of the 25 companies, how many of them were in competition with theASX?

Mr Rennie—None.

Senator CONROY—Correct.

Mr Sheehy—That is my point. That is where Computershare is coming from.

Senator CONROY—We completely accept that Computershare did not try to hide the factthat they have a vested interest in it, but equally 25 people who are not in competition say, ‘Welike the current situation.’

ACTING CHAIRMAN—But in a public policy sense, in order to put the cost in perspective,we need to understand that it is probably only a very small number of companies who would notbe happy with what is proposed.

Senator CONROY—I guess that is just tough, then.

ACTING CHAIRMAN—No.

Senator CONROY—Suddenly one of Australia’s biggest companies at $4 billion has grownfrom nowhere.

ACTING CHAIRMAN—No, but they were happy to deal with ASIC. What these people aresuggesting is that most of the companies would be happy with dealing with the ASX solution.

Senator CONROY—Right up until the day, I am sure, that they were going into competitionwith them.


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ACTING CHAIRMAN—Is that the case?

Mr Sheehy—We acknowledge that there is a perception of a potential conflict of interest.That is obvious. Blind Freddy can see that one. The ASX has come forward with a proposedsolution. We are saying, let it run for a while, that two years was a clever length of time, and letus see whether it is independent. I was not here, and I am a little surprised that Dick Humphryhas said that it is not independent. Certainly it has been explained to the market as beingindependent.

Senator CONROY—Yes, I agree. I do not think I am misrepresenting Mr Humphry, as theHansard will show, but, like you, when it was first mooted it was explained that this is what isgoing to create the independent watchdog so that we do not get into these conflicts of interest.

Mr Sheehy—But we say let it run for a while and let us see whether it has any teeth. There isa lot of discussion at the moment about how adequately it will be funded. Let us see whether itis adequately funded and resourced—and we do not know the answer to that question yet—andwe will see whether they put their money to it or they starve it. Are you facing huge complaintsabout the way the market runs?

Senator CONROY—Can we go to one which unfortunately involves your own organisation?One of the submissions from Computershare—and I have discussed it with ASX this morning—revolves around your seminars in which you advertise ASX On-Line, ASX developments andtrends, proposed listing rule amendments, continuous disclosure and obligations. At the end ofthat, a newly created partnership with the ASX was given the opportunity for a 30-minutepresentation about their services. Mr Humphry said this morning that with hindsight heprobably would not do it again.

Mr Rennie—I think it would be a great pity if he did not do it again because, while the ASXis the regulator for the market, it is very important that company secretaries understand what isrequired of them.

Senator CONROY—Maybe I have not explained clearly. He would not do a joint functionwith you outlining these issues. He would not turn up with his business partner at the end of it;he indicated that he would not do that again. I welcome and encourage you and the StockExchange to do this 100 times.

Mr Rennie—Are you aware that at our national conference in Brisbane last yearComputershare also did a 50-minute session? They took us through all the facilities.

Senator CONROY—They were not advertising it discussing the proposed listing rules,which is regulatory—

Mr Rennie—I hope this is how it has been explained to you, because we have also put in asubmission to the Stock Exchange, but each year around January they put out an exposure draftof the listing rule changes that are proposed to come into effect on 1 July. As an institute, werequested them to meet with us. If you were to read our submission—and we would be veryhappy to give you a copy—you would see that there are about five points of major conflict,including two points where we said that under no circumstances could we accept the proposal. I


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know Mr Turnbull and Mr Rofe, if he is here, would be supportive. We are certainly verystrongly opposed to something which we perceive is not in the interests of the market, but to saythat that was wrong I think is a pity.

Senator CONROY—Again, you have misunderstood what I have said. I encourage you torun joint seminars with the ASX every day for the next 10 years.

Mr Rennie—And we run them with Computershare.

Senator CONROY—Can I put to you that having the ASX turning up talking about theirproposed listing rules is a regulatory function.

Mr Rennie—It was to explain the draft exposure document and take questions from ourmembers.

Senator CONROY—Do you think if you said you were going to do it, 250 of your memberscould turn up without Dick Humphry present? It is about business. If the ASX announced theywere running a half-hour seminar tomorrow to promote the services of Orient, do you think 250of your members would turn up?

Mr Sheehy—Those seminars were put on around the country. Each one was run a littledifferently. I acknowledge, because I am aware of what happened there, that more time wasspent on ASX online as a commercial than we as a professional body would have liked. I amnot going to pretend. But it did vary around the country. We ran them in Melbourne, Sydney,South Australia and all around the place. It was not a 30-minute commercial in each of thecapital cities, I should add. We tread a fine line on a sponsored program which we do not want acommercial at. Nevertheless, being a professional body, we have to have some sponsors at sometime and we want to have topics which are of interest to members. I do acknowledge that themixing of those particular ones, the mixing of the listing rules at a time when the documentswere out there for public consultation with what I think was probably a little bit longercommercial than would have been appropriate, we could deliver better next time.

Senator CONROY—I hope that clarifies what I was referring to. I was not in any waysuggesting that you, your association and the stock exchange should not run those. I totallyencourage them.

Mr Sheehy—No-one was there for the commercial. They were there for the listing rulesdiscussion.

Senator CONROY—Mr Humphry has indicated with hindsight he would not do it again.

Mr Falconer—A lot of the participants at those conferences welcomed the discussion onASX Online because it as going to be a benefit to the companies in making quickannouncements to ASX. I certainly found it very interesting. I guess it could have been seen asan advertisement. You also must remember we have had the president and chairman of ASICalong talking about proposed changes to the Corporations Law.


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Senator CONROY—No, this is tying together the ASX and its regulatory functions with itsnew business partner, and there is a direct tie-in there between the two. I have got no problemwith Computershare wanting to sponsor one of your lunches, because they are all coming therefor your seminar and the seminar may even have an ASX spokesperson there. It is the issue thatthe ASX took the opportunity to sandbag your members. That is actually my view, not that youguys did but that the ASX took the opportunity to promote its own services, which are in acompetitive environment now, at the expense of people getting home half an hour earlier—eventhough they were offered the opportunity to leave if they wanted to, I understand. That was justthat issue that came up. I am sorry, Mr Rennie, if I misexplained where I was starting from andwhere I was going. I am conscious of that. I did not want in any way to cause offence to yourorganisation or to yourselves.

IFSA believed, and Mr Humphry made it clear, that it is an internal review mechanism, it isnot external. I agree with you, Mr Falconer. It was certainly explained to me originally asexternal. In terms of governance, as you say, you are the experts in governance. If this is aninternal review mechanism, do you see that therefore it is the end of the process in terms of theASX and that therefore, as Ms Ralph said, they should just go off to ASIC if they are unhappyor do not want any part of those internal reviews, or should there be an independent body that isin between them and ASIC? Do you have a view?

Mr Sheehy—Our view is we stay with this. To set up another body at this point in time iswhat we say not to do. If you do need an external body for what are probably the rareoccurrences where a company is not satisfied with this review process, whether it be internal ornot, and to avoid setting up another body, then I think ASIC is the appropriate place to go. I donot think that the additional funding that ASIC will need to deal with the rare occurrence whenthis comes up would be equivalent to the cost of setting up yet another body and all the stuffthat goes with it; and they will not have to print additional stationery.

Mr Rennie—I would like to add, as we have said in our submission, that one of theadvantages we have always seen in our dealings with ASX—whether it is getting approval fordocuments or getting approval for notices of meetings or waivers—is the speed with whichASX is able to deal with the matter. Without in any way casting aspersions on ASIC in the pastor at present, to meet this type of proposal ASIC, in my opinion, would have to be equallyprompt. I think that the committee would require an assurance from ASIC that this new layer, ifit were to be imposed, was not going to slow down the process.

Senator CONROY—There is not a new layer. There is no proposal from this side of thetable for a new layer.

ACTING CHAIRMAN—I think we have got the point across.

Senator CONROY—I think this is saying that the one that has been proposed is adequate.There is no proposal from Brian.

Mr Falconer—John’s point is that the ASX understand the companies and they haveappointed officers to look after each company. That speeds up the process because the personknows about the company. We go for regular approvals of notice of meeting and so on and,because they know where we are coming from, you can get it in half a day.


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Senator CONROY—Do you think there could be a potential—and I really want toemphasise the word ‘potential’—problem or conflict? If you as a company had a choicebetween Computershare and Perpetual now and there was the perception that you could go withPerpetual—and you are also in the process of seeking a waiver—do you see that there is apotential for conflict there? It is easy to get a waiver if you have—

Mr Falconer—I do not think so. We had Computershare but we used ASX Perpetual for theNorth takeover to sort of try them out. We have gone back to Computershare. That is not to saythat ASX Perpetual did not do the job, but it did not have any impact. Because ASX had aninvestment, it made no impact. It was the same with their shareholder analysis service—theyhave an investment there. We have switched between them and Computershare Analytics,depending on who is offering—

Senator CONROY—I appreciate that to get a waiver you just need to buy them a cup ofcoffee—it is below threshold to get a waiver.

Mr Rennie—It may be in some cases, but quite often you go through a firm of solicitors whodo not disclose which client they are acting for. So ASX may not know who the client is. So Iwould say that the risk of any form of bias towards ASX Perpetual clients is zero.

ACTING CHAIRMAN—On behalf of the committee, thank you very much for appearingbefore us today. Thank you for your submission and for your prepared statement, which we willget copies of.



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HORTON, Mr Ian, Principal, Boardroom Partners

ACTING CHAIRMAN—I welcome Mr Ian Horton from Boardroom Partners. Thecommittee has received your submission. Would you like to make an opening statement?

Mr Horton—I have a couple of remarks to make. In my view, the ASX has a pivotalfrontline role as a regulator of Australia’s listed companies, even though they have limitedpowers. They have the important responsibility to underpin the integrity of our equity marketsand to give confidence to investors in the market—local and overseas investors and large andsmall investors. Because of that, Boardroom Partners believe that certain aspects of theactivities of the ASX can best be carried out without the pressure of competition.

The ASX also engages in some other activities that are commercial in nature and in whichthere is competition. In our view, these activities do not complement the primary role of theASX, which is the one I outlined above. We also have the view that, if you were starting today,the ASX would not be a listed entity; indeed, a case could be made for public ownership of theExchange and for certain aspects of it to be controlled in public ownership. A majorconsequence of the above is that a gap exists between the expectations with respect to the ASXmonitoring of listed companies and what is actually being done. That gap of expectations hasthe potential to be a problem in the future.

ACTING CHAIRMAN—I am a bit surprised at your suggestion that a Stock Exchangeshould be a public entity. I just wondered how much experience you have had with publicentities and the efficiency of same.

Mr Horton—I must say I was a bit surprised when I jotted it down, because I did not put it inthe submission. Essentially what I am saying is that some of the roles the ASX carries out areregulatory in nature; therefore it needs to be controlled by the regulators, hence the government.Indeed, certain aspects of that could be taken care of in public ownership. The history of theExchange would certainly not suggest that that is the right sort of ownership for it, but I thinkthe role of the Stock Exchange in Western economies now is quite different from what it waspreviously. It is a fundamental part of our economy now. So many people depend upon itswellbeing for their retirement benefits and whatever that that aspect of its role needs to operatevery effectively. I have not had a lot of experience, in answer to your question.

ACTING CHAIRMAN—I would suggest that supply of bread is pretty fundamental to thenation in an economy, but that is all done in private hands. In evidence today, CharteredSecretaries said that they were happy with ASX’s proposal of an internal audit group,Supervisory Review Pty Ltd, and also, associated with that, the Financial Services Reform Bill2001, which was introduced into the parliament last week. In that, it is proposed that ASIC willbe the external auditor to the operations of the Exchange. Chartered Secretaries said that, fromtheir listed companies’ points of view, they are happy with that proposal and would not wantany other separate entity interposed on the system. What would be your response to that?

Mr Horton—I would not be an advocate of another entity becoming involved. I am keen tounderstand where the role of ASX stops and the role of ASIC starts. I think that area has been a


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bit grey, and it is an area where there could be a problem if investors get into trouble and wantto know who to turn to. They can turn to a regulator for problems that may have been self-induced and it is quite clear who does what and how.

Certainly the proposal to introduce the internal audit function, as it has been described, is astep forward, but it will only ever be an internal function while it is an internal function, Isuppose. So it will never get total acceptance as an independent body, in my view, regardless ofthe calibre of the individuals involved in it.

ACTING CHAIRMAN—Some members of the committee were down at the ASX thismorning and we were given a presentation by the supervisory unit, including the reproductionof screens from the very recent past of a couple of alleged attempts to manipulate the market.The point that came strongly out of that was that that activity—which is basically real-time,chasing it minute by minute, day by day—has got to be part of the actual real-time system of theexchange and could not be done a long way away.

Senator CONROY—Yes, those computer links are just loaded.

ACTING CHAIRMAN—So when they were suspicious of something, they immediatelyrang the regulatory arm—if ‘regulatory arm’ is the right term; anyway, the relevant arm—of thestock exchange, who then rang the companies concerned, be it the brokers or the companies,and got a response within a very short period of time. It is very important for the exchange thatthat be working efficiently.

Mr Horton—In my view, it is a very important part of the exchange’s role, and maybe theASX have not spent a lot of time selling the virtues of those activities. But the point thatconcerns me is that, to do that effectively, they have to spend money, and it is not an area wherethey are going to get a return. Being a listed entity now, investors are looking for a return ontheir investment and there is that conflict.

ACTING CHAIRMAN—An additional point they made this morning was that the largerbroking firms are now employing people—in fact, trying to poach people—from the stockexchange who have been involved in this supervision role and then doing their own supervisionwithin the broking houses to ensure the integrity of their system. So there is a mechanism in thecurrent system which is tending to work better as time goes on.

Mr Horton—Once again, I would say that I do not think the virtues of that work are beingsold effectively enough and it is potentially creating confusion in the marketplace.

Senator CONROY—Can I just deal with a couple of these points. No-one at this stage haseven suggested such a thing—it seems to be the great fear—but computers do work outside thestock exchange building, don’t they? It is possible to establish a computer link with thecomputers in the stock exchange? Telephones do work out of the stock exchange, so you canpick up a phone from anywhere. In fact, companies nowadays use India for call centres—instantaneously, if they need to. So it does not matter whether the computer is set up in the stockexchange building or not, does it? It just happens to be convenient because it is low rent andlow cost to have it in their own building. But they could set it up in Kathmandu if they wanted


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to and, providing it was real-time computer access with a phone that worked, exactly the samefunction could be served?

Mr Horton—I would guess so; I am no computer expert.

Senator CONROY—You mentioned in your submission:

In the course of their activities, the ASX collects considerable amounts of information, which is bought by othercommercial vendors for resale and used by regular users of the ASX’s market in shares.

We had some discussion earlier today with the Stock Exchange, ASIC and others about thenecessity to provide information to the market as an important part of keeping the marketinformed and the fact that, at the moment—and some services are charged for—there is a 20-minute delay. Have you any views on that issue?

Mr Horton—It is information which is supplied in the main by the companies themselvesand is effectively then resold, or packed and resold, or given to other entities to use in their ownactivities. It is an important part of the marketplace to find out what is happening in the area ofcompany announcements, director shareholdings, substantial shareholdings—all the issues that Iguess are market sensitive information. It is important that information does get out into themarketplace. It is a question, I suppose, of whether the ASX has an obligation to share that withthe rest of the investment community or whether they should make a profit in doing so. That isnot clear in my view.

Senator CONROY—I do not know if these are the exact words, but you said earlier that yousee the ASX as a frontline regulatory body.

Mr Horton—Yes.

Senator CONROY—Certainly the impression I have got from my own discussions, and Ithink from this morning’s submission from the ASX, is that they do not see themselves as aregulator at all.

Mr Horton—I believe that is correct, yes.

Senator CONROY—I agree with your perception—and certainly I laboured under it forsome considerable time—that they do actually perform some sort of regulatory function. Doyou think that comes down to the point you make on page 4, where you say that they indicate intheir annual report:

... other than suspending a listed company’s securities, ASX has no disciplinary powers in respect of companies or theirofficers.

Mr Horton—I think that is the problem.

Senator CONROY—They have only got the ultimate sanction, in effect?


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Mr Horton—Yes. A lot of time and effort goes into developing listing rules fororganisations. The companies that then become listed would spend a lot of time and effortensuring they comply with them. But if there does become a problem with a listing rule, thenthe ASX can withdraw the listing privilege. That is basically it, as I understand it.

Senator CONROY—Does it surprise you that the ASX have never asked for anything otherthan that ultimate sanction? Should there be a graduated series of penalties that would make iteasier for them to police it, or do you think they do not really want the job of policing it, as theyseem to indicate?

Mr Horton—It is hard to know what their motivation is. Certainly, though, as a commercialentity there is—as I said earlier—a cost involved in this that may not sit well with the needs ofthe shareholders. I suppose it has always been a little unclear—and not only in its currentformat. It has always been a little bit unclear to me just how the ASX sees itself. What does itthink its major role is, what do others think its major role is and what do the investors, inparticular, think its role is in protecting their investment in various companies?

ACTING CHAIRMAN—I do not think it happened when the ASX gave evidence heretoday, but certainly when we were down there this morning it was made plain to us that there isa graduated response, including warnings, fines and then delisting.

Senator CONROY—That seems to be inconsistent. Which annual report were you quotingfrom?

Mr Horton—The last one I saw was the ASX 2000 report.

Senator CONROY—We might be able to sort that out. If that is what they have written intheir annual report, as opposed to what they—

Mr Horton—They are statements I have heard them make, or that have been attributed tothem, anyway, in previous lives of mine.

Senator CONROY—You talk about wanting it to fully discharge its role. Given that—asthey indicated this morning and previously—they do not see there being any role for them there,I guess you would not necessarily see this board as producing any serious outcome, and giventhat they are saying ‘That is not our role, this is an internal review mechanism?’

Mr Horton—The board is presumably going to cover issues such as the conflicts of interestthat are generated by its listing on its own exchange, amongst other things. If the exchange doesnot wish to adopt that sort of role, I suppose there are a few points to that. Firstly, is thatacceptable to everyone? Secondly, who will fill the gap if they do not do it? Thirdly, I think itshould be widely publicised that that is indeed the case, rather than it being grey, which is wherewe are at present.

Senator CONROY—In point 3 on page 5 you talk about ensuring that listed companies fullycomply with each of the listing rules at all times, including the important requirement to provideinvestors with a meaningful corporate governance statement. Could you clarify? You think theyare not doing that at the moment? That is not what is happening?


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Mr Horton—It is one of my particular favourites because I was involved in the discussionsat the time the listing rule came in, in that statement. I do not believe there is a lot of evidence tosuggest that companies are required to submit corporate governance statements in their annualreports that meet standards that investors would expect. There are some annual reports that Ihave looked at where the corporate governance statement is two paragraphs, which is notparticularly useful if an investor is relying on that to get a good understanding of the way thatcompany is organised.

This issue is perhaps typical of the situation. I do not think the ASX really took the lead inbringing that listing rule in. They may say otherwise, but the listing rule came into being.Certain companies appear to go to considerable lengths to put good detail about the way theirorganisations are governed, and others appear to just take a statement off the shelf and give thebare minimum. My point here is that there is no real follow-up because they have complied withthe listing rule because they have included a corporate governance statement in their annualreport.

Senator CONROY—I might give a plug here because I know there are a number oforganisations that may not have detected it. A recent amendment to the Corporations Law wentthrough parliament a couple of weeks ago that corrected a spelling error. I see some people aresmiling so they have already picked it up, but I wanted to make sure everyone in the room knewthat there is now a requirement for a board to outline the broad policy on executiveremuneration to their shareholders rather than ‘board’ policy. There was a typo there that hasbeen corrected. It is the other way around, I am told. It said ‘broad’ and actually meant ‘board.’

Mr Horton—That is another issue that is rarely done.

Senator CONROY—It is now part of the Corporations Law—it is a requirement for theboard to outline its policy on executive remuneration. That was more of a commercial, MrHorton. If the ASX is successful in negotiating one of its attempts, and it has talked about thempublicly, to form an alliance, partnership or merger with some of the overseas exchanges, doyou think the model of supervision they have proposed will stand up? Is it enough in thosecircumstances?

Mr Horton—That is a difficult one. There are a lot of issues relating to mergers withoffshore exchanges. Intuitively, it is a good idea in my view to get all the exchanges workingtogether in an environment where capital is flowing around the world. Each of the jurisdictionswould like to retain some control over the standards in their own area. Whether you end up withbest practice or the lowest common denominator is a potential issue for those particular areas.The role of exchanges and the international cooperation between those exchanges and the waythe economies have developed around the world are a fundamental plank of the economy ofthose organisations soit has to be done right.

Senator CONROY—So does your gut feeling tell you that this new revised model can copewith the next logical step?

Mr Horton—I do not feel I have sufficient grasp of the detail of the way things are going towork here to make too much of a comment on that. Maybe that is an issue that I have already


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raised—that is, further clarification, publicising and selling of the specific role of the ASX in itsown jurisdiction is probably a good start to giving the confidence to enable it to have thatbroader role.

Senator CONROY—Did you have a chance—and I appreciate you may not have—to have alook at the Computershare submission to this inquiry?

Mr Horton—No.

Senator CONROY—They outlined a number of concerns they have in terms of a directbusiness relationship and being in competition directly with ASX now—or as partners. Do youthink it is valid for them to be concerned about having to deal with a regulator who is, on onehand, their competitor?

Mr Horton—Absolutely, yes. I think there are certain competitive issues that are raised bythe nature of the ASX’s broader role that would impact on its ability to compete fairly inmarkets that are already subject to other players doing a reasonable job.

Senator CONROY—One of the points they raised was that they believe, even if you havethe structural separation, the fact that the ASX could take monopoly profits from their clearingof settlement regime and bring them across into their other business arms gave an unfair edge—being almost a subsidy coming across out of a government licensed monopoly profit. Do youthink that is a fair comment?

Mr Horton—I think it is a fair thing to be concerned about—whether it happens or not isanother issue. As I said at the outset, I do not think those activities really complement veryeffectively the major role that I see for the ASX, which is the running of the markets here. Theyare not complementing it at all.

Senator CONROY—As you said, if it was beginning again, you would probably like to goback a step. But would you prefer to see them, given that they are now listed, not be allowed togo into competitive ventures, or into other business opportunities—what you might call non-core business? Would you want to wind them back in some areas? I asked Mr Humphry thismorning whether there were any areas that he believed they should not go into, because of theirpotential. I think he described only one—he believed there was potential in their currentstructure to go into one area—which indicates that it is pretty much an open field. Do you thinkthere should be caps or limits? Is that practical?

Mr Horton—Whether it is practical to regulate or put in limits or whether the horse hasbolted, the stock market now has its own shareholders, who are out there thinking that it is agood investment and want to make some money out of it. They may well view these activitiesthat have sprung up in recent years as a vital part of that. But as I said, in my view they do notreally sit with the primary role of the ASX.

Senator CONROY—Are there any other issues you would like to raise before we finish?

Mr Horton—No, thank you.


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ACTING CHAIRMAN—On behalf of the committee, Mr Horton, thank you for yoursubmission and thanks for coming along today and appearing before us.

Committee adjourned at 5.09 p.m.

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