Last week saw two New Zealand regulators put derivatives under the spotlight once again. While these two developments are unrelated and involve distinct products, they are further evidence of the global trend to subject derivatives to greater regulatory scrutiny.
Commerce Commission investigation into interest rate swaps
On 28 February, the Commerce Commission chairman updated the Primary Production select committee on the Commission's ongoing investigation into the marketing of interest rate swaps.
The Commission began its investigation in August 2012. The investigation has focused on the marketing of interest rate swaps to what would be considered the retail end of the client spectrum – principally rural and commercial clients. By contrast, prior to 2005, interest rate swaps and other OTC derivatives were offered almost exclusively to wholesale clients.
Since August, the Commission has received 42 complaints and spent over 1,000 staff hours on the investigation. Most of the complaints allege misleading marketing. In particular, many complainants claim to have been misled about the fixed rate nature of these products. They point to the ability of the bank to unilaterally reset the margin as flying in the face of the rate certainty supposedly offered by the bank.
If a bank is found to have engaged in misleading or deceptive conduct in marketing interest rate swaps, it may face sanctions under the Fair Trading Act 1986.
Takeovers Panel recommendation on disclosure of equity derivative positions
In August 2012, the Takeovers Panel issued a Consultation Paper entitled Disclosure of Equity Derivative Positions. We discussed that paper in an earlier newsletter – click here to view.
The Panel received four submissions in response to that paper, all broadly supportive of its proposals. As a result, in recommendations to the Minister of Commerce released last week, the Panel reinforced its preliminary view that law reform is desirable. Specifically, long cash-settled equity derivative positions, which are currently not required to be disclosed, should be disclosed and aggregated with long physical positions under the relevant legislation.
This reform would involve the following legislative changes:
- the substantial product holder disclosure regime (to be carried over from the Securities Markets Act into the Financial Markets Conduct Bill) should include, in the "substantial holding" definition, relevant interests in cash-settled derivatives where the underlying is a quoted financial product of a listed issuer; and
- the Takeovers Code should require both offeror and target company (and their related parties) to disclose long equity derivative positions referenced to the target's shares.
Our earlier newsletter suggested that, at least in New Zealand, this is a solution looking for a problem. For all the talk of such lofty and laudable goals as promoting the efficient allocation of resources and promoting confidence in our capital markets, there is little evidence suggesting current disclosure laws are holding us back. In the end, the fact that this proposal generated only four submissions speaks volumes for the disinterest of financial market participants in this so-called "problem".