An extract from The International Capital Markets Review, 11th Edition

The year in review

The commonwealth government and regulators have continued their review of the framework for regulation of the financial sector, and for the laws governing access to, and the operation and supervision of, Australia's capital markets. This process commenced in 2010 in response to the global financial crisis. In particular, the commonwealth government remains committed to the initiatives developed through the G20, the Financial Stability Board, the International Monetary Fund and other multilateral institutions to support financial stability and to foster stronger economic growth. Some of the more important recent developments are outlined below.

i Developments affecting debt and equity offeringsProduct intervention powers and design and distribution obligations

On 5 April 2019, the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2019 received royal assent to introduce a product intervention power available to ASIC where a risk of significant consumer detriment exists, and to introduce design and distribution obligations in relation to financial products, including debentures, where there is retail product distribution. While the product intervention power is currently in force, the design and distribution obligations were not due to commence until 5 October 2021. The original commencement date of 5 April 2021 had been deferred because of the impact of the covid-19 pandemic.

The design and distribution obligations apply to debentures issued by ADIs, even where no prospectus is required, and even where the issue is of a simple corporate bond. It is important to note that the design and distribution obligations apply in addition to the disclosure obligations and that the product intervention power may be exercised notwithstanding that a product has otherwise been offered in compliance with disclosure and other applicable laws.

ASIC issued ASIC Regulatory Guide 274 'Product design and distribution obligations' (RG 274) on 11 December 2020, which explains ASIC's interpretation of the design and distribution obligations. Under Regulation 7.8A.06 of the Corporations Regulations, debentures issued by ADIs and life insurance companies are financial products that require target market determinations even though such issues are otherwise exempt from the requirements to issue a prospectus. Target market determinations are written documents prepared and made available to the public before engaging in retail product distribution conduct. DDO does not impact the wholesale markets. DDO relates to the primary offer of securities in the retail markets, and obliges issuers to determine target markets of the securities. Issuers and distributors must then take reasonable steps to ensure that the distribution of the securities is consistent with that target market. However, DDO does not oblige issuers and distributors to limit trading in the secondary (listed) market. The effect of DDO on retail markets is not yet known.

On 17 June 2020, ASIC published ASIC Regulatory Guide 272 'Product intervention power' (RG 272), which provides an overview of ASIC's product intervention power.87 RG 272 takes into account ASIC's consultation on the draft regulatory guide in 2019, as well as the recent decision in Cigno Pty Ltd v. Australian Securities and Investments Commission [2020] FCA 479 that strengthened ASIC's ability to use its product intervention power and confirmed that the power extends not only to features of financial products, but also to the circumstances and conduct that allow the products to be made available.88

ASIC first used its product intervention power to ban the provision of short-term credit products unless specified conditions were complied with in relation to fees and charges.89 ASIC has also launched a consultation on a product intervention order to stop continuing consumer harm in relation to continuing credit contracts.90 Further product intervention orders include banning the sale of binary options to retail clients91 and imposing conditions on the issue and distribution of contracts for difference to retail clients.92 Thus far, ASIC's product intervention orders have not related to capital market products.

Technology and market infrastructure

In August 2018, the World Bank mandated the Commonwealth Bank of Australia (CBA) to be the sole arranger of the world's first blockchain bond, termed 'bond-i' (blockchain operated new debt instrument). In May 2019, the World Bank and CBA successfully enabled secondary market trading of this bond-i recorded on blockchain.93 The bond will be created, allocated, transferred and managed through its life cycle using distributed ledger technology.94 In August 2019, the World Bank issued a second tranche of the blockchain bond via bond-i. There have been an increasing number of blockchain bond issuances internationally; however, there have not been any further issuances in Australia.

Social impact bonds

In recent years, state governments have initiated the development of the social impact bond (SIB) as an innovative approach to financing social service programmes. SIBs are designed to raise private capital for intensive support and preventative programmes, which are suitable for funding by state governments on an outcomes basis. Australia's first SIB was the Newpin Social Benefit Bond, initiated by the New South Wales government in collaboration with UnitingCare Burnside and SVA, which opened to investment in April 2013. There are currently around 12 SIB initiatives that have been implemented by state governments and many more are underway for implementation in Australia.95

In June 2020, the Commonwealth's National Housing Finance and Investment Corporation, jointly with ANZ, UBS and Westpac, led a social bond issue of A$562 million, representing the largest social bond issue by an Australian issuer.96

Australian corporates have also issued green and 'gender' bonds to fund relevant social impact programmes. As of December 2019, the Australian market for investments that achieve social or environmental goals as well as financial returns was estimated to be around A$19.9 billion.97

In June 2021, Wesfarmers issued the first sustainability-linked bond in Australia, which raised A$1 billion.98

Impact investing and community investing increased by 72 per cent in 2018 to A$13.8 billion. This growth was driven largely by domestic green bond issuance of A$2.8 billion, with this asset type now accounting for A$8.4 billion of the data set. However, other types of impact investment products such as social impact bonds and property or infrastructure (including renewable energy funds) have also grown rapidly, from nearly A$800 million to A$2.3 billion over the same period.99

Australian corporate bond market inquiry

Despite amendments to the regulatory regime for corporate debt over the past decade to facilitate a deeper and more active retail bond market in Australia, the market remains small compared to those in similar countries.100 In February 2020, the commonwealth government announced that the Standing Committee on Tax and Revenue will inquire into and report on the development of the Australian retail corporate bond market.101

The inquiry will focus on examining the tax treatment of corporate bonds for issuers and investors to determine whether there are impediments to the issue of corporate bonds from a tax perspective compared to other forms of financing. Some industry submissions have commented on the effect of the availability of franking credits on instruments classified as equity investments for tax purposes, such as AT1 securities issued by regulatory financial institutions, compared to bonds that are classified as debt.102 The inquiry will also assess comparable policies in other jurisdictions, in addition to impediments related to the further development of the retail corporate bond market in Australia.

Public hearings for the inquiry were held in November 2020.103 No report has yet been released in respect of the findings from the inquiry.

Insider trading

In May 2021, ASIC commenced proceedings in the Federal Court against Westpac Banking Corporation, alleging insider trading, unconscionable conduct and breaches of its Australian financial services licensee obligations in contravention of Sections 912A and 1043A of the Corporations Act and Section 12CB of the ASIC Act. ASIC is seeking declarations, pecuniary penalties and ancillary orders for the hedging of large exposures, relating to the privatisation of a majority stake in electricity provider, Ausgrid. While the outcome of the proceeding is not yet known, it serves as a reminder that, in Australia, insider trading provisions are not confined to dealing in exchange traded products and extend to wholesale or OTC securities markets.104

Market practices

In September 2020, ASIC released revised practice guidelines that include ASIC's expectations of AFS licensees engaged in debt capital market transactions. These include the identification and management of potential conflicts of interest, having effective policies and procedures to identify and manage confidential and market-sensitive information, having processes to ensure information provided is not misleading or deceptive, and having active and effective supervision to monitor transactions.105

Climate change impacts

In April 2021, APRA released draft guidance for managing financial risks of climate change for consultation, with feedback to be provided by 31 July 2021. APRA has developed Prudential Practice Guide CPG 229 Climate Change Financial Risks which provides APRA's view of best practice in areas such as governance, risk management, scenario analysis and disclosure. The practice guide does not create new obligations or requirements. CPG 229 is aligned with recommendations from the Financial Stability Board's Task Force on Climate-related Financial Disclosures. The final CPG 229 is expected to be released before the end of 2021.106

ii Financial sector reformsRoyal Commission into misconduct in financial services

In November 2017, the commonwealth announced a Royal Commission into alleged misconduct by Australia's banks and other financial services entities (the Royal Commission). An interim report was published on 28 September 2018, and a final report was published on 1 February 2019, which made 76 recommendations affecting the provision of financial products to consumers.107 The government has committed to taking action on all the recommendations.108 There are likely to be further regulatory measures and initiatives that stem from the findings of the Royal Commission. The Terms of Reference of the Royal Commission largely concerned an inquiry into whether conduct by financial services entities (including directors, officers and employees) falls below community standards and expectations, and methods of combating misconduct and redress for consumers. The Terms of Reference did not extend to the prudential regulation and capital structure of financial institutions109 and matters considered by the Royal Commission did not highlight instances of misconduct in capital markets.

Australian regulators, including ASIC, APRA and ACCC, have signalled greater assertiveness and willingness to pursue enforcement action against misconduct in the financial sector post the findings arising out of the Royal Commission.110

As mentioned above, the Australian government is committed to implementing all the recommendations arising out of the Royal Commission. Since the Royal Commission's final report was released, the Australian government has implemented at least 34 of these commitments and work is still underway to implement further recommendations. Recently, the Financial Regulator Assessment Authority, which assesses the effectiveness and capability of APRA and ASIC every two years, was established as a result of the Royal Commission's recommendations.111

Bank governance

In July 2017, the commonwealth government released a consultation paper on a new banking executive accountability regime (BEAR). The Treasury Laws Amendment (Banking Executive Accountability and Related Measures) Act received Royal Assent on 20 February 2018. The new law provides APRA with new and strengthened powers to impose penalties on ADI groups, their directors and senior executives for breaching accountability obligations.112 The accountability regime commenced on 1 July 2018 for large ADIs and on 1 July 2019 for small and medium ADIs. Subordinate legislation is also now in place defining small, medium and large ADIs for the purpose of BEAR.113 In December 2020, APRA released an information paper reviewing the implementation of BEAR by certain major ADIs.114

On 4 February 2019, the commonwealth government announced that it would implement the recommendations of the Royal Commission to extend BEAR to all APRA-regulated entities, including banks, insurance and superannuation firms, and provide joint administration to ASIC as the conduct regulator. The new regime will be both an expansion of BEAR – to cover a broader range of APRA-regulated entities – and a strengthening of the obligations imposed by BEAR on institutions and individuals. On 22 January 2020, the commonwealth government released a consultation paper for this extended BEAR – now to be called the 'Financial Accountability Regime' (FAR).115

On 16 July 2021, the Australian government released the draft legislation for FAR for consultation. FAR will be jointly administered by APRA and ASIC. Provisions relating to ADIs and NOHCs are expected to commence from 1 July 2022 (or six months after the legislation receives assent, whichever is later).

The draft legislation mostly follows the proposal paper that was introduced in 2020. FAR extends the obligations imposed by the BEAR to all APRA regulated entities, and also strengthens the obligations imposed by BEAR. In particular, a wider range of people are proposed to be accountable persons, including individuals who are directors or have senior executive responsibility for any significant business divisions, dispute resolution, remediation programmes, breach reporting, compliance or internal audit. An accountable person would also include a person with end-to-end accountability for the management of each product offered by the entity (e.g., head of a business division).

Consultation on the draft legislation occurred in July and August 2021, with the passage of the legislation scheduled for late 2021. The BEAR is intended to be repealed once FAR has taken effect for those entities.

Basel III reforms and other prudential initiatives

On 1 January 2018, a new version of the liquidity standard (APS 210) introduced a net stable funding ratio (NSFR) for locally incorporated ADIs that are subject to the LCR regime. The NSFR may influence the tenor and type of funding raised by ADIs to which it applies.

Since 1 July 2015, larger ADIs have been required to calculate and disclose a leverage ratio, in addition to risk-weighted capital measures. In February 2018, APRA announced the design and application of a minimum leverage ratio requirement for ADIs as a complement to the revised risk-based capital framework and consistent with the Basel Committee's final leverage ratio methodology. APRA is proposing a minimum leverage ratio of 4 per cent for internal ratings-based ADIs and 3 per cent for standardised ADIs. APRA is proposing that these revisions to the capital framework will come into effect from 1 January 2023.116

In July 2017, APRA announced new capital benchmarks for the Australian banking system to ensure it has capital ratios that are 'unquestionably strong',117 pursuant to recommendations under the 2014 financial system inquiry. These new capital benchmarks will raise the minimum capital requirements by the equivalent of around 150 basis points for ADIs using the internal ratings-based approach to credit risk and around 50 basis points for ADIs using the standardised approach to credit risk, in each case in comparison to the December 2016 levels. The target levels are well in excess of the Basel III minimum requirement for common equity capital. In June 2019, APRA released a suite of draft prudential standards for credit risk.118 APRA is currently consulting on updated prudential standards on credit risk management requirements for ADIs to modernise current standards for more sophisticated analytical techniques and information systems. APRA released an updated APS 220 (Credit Quality), which came into force on 9 September 2020 and intends to consult on a revised version of CPS 220 (Risk Management) in 2022.119 In December 2020, APRA released for consultation changes to the capital framework, aiming to embed the 'unquestionably strong' levels of capital, as well as improve flexibility and transparency, increase risk sensitive and simplify the framework.120 These measures continue to contribute to significant issues of regulatory capital by Australian ADIs.

In February 2018, APRA released a discussion paper setting out proposed revisions to risk-based capital requirements for ADIs for credit, market and operational risk. The paper set out indicative risk weights and parameters used to calculate minimum capital requirements across various asset classes. In June 2019, APRA concluded its first round of consultations and released proposals on, inter alia, a standardised approach to credit risk and operational risk, adopting a simplified prudential framework for operational risk, counterparty credit risk, leverage ratio and public disclosures for smaller ADIs. The response paper was accompanied by draft prudential standards. APRA has amended its APS 112 on the standardised and internal ratings-based approaches to credit risk.121 APRA has also revised its APS 115 to reflect a single standardised measurement approach for the capital treatment of operational risks.122 APRA proposes aligning the implementation date of these revised capital standards with the Basel Committee timetable of 1 January 2023, with the revised APS 115 to commence for certain ADIs on 1 January 2022.123

In August 2018, APRA announced options to improve the transparency, comparability and flexibility of the ADI capital framework.124 The focus was to amend disclosure requirements and the way in which ADIs would be required to calculate and report capital ratios, without altering the quantum and risk-sensitivity of capital requirements. Consultation on this paper closed on 2 November 2018. APRA intended to consult on draft revised prudential standards incorporating the outcome of the consultation in 2019. APRA made revisions to its APS 310, which deals with audit and related matters, in July 2019; however, the proposals in its consultation were not specifically addressed.

APRA has also revised its prudential framework for counterparty credit risk for ADIs to strengthen their frameworks. APRA will adopt an adjusted current exposure method as a simplified approach for ADIs with immaterial counterparty credit risk. Revised standards incorporating this commenced on 1 July 2019.125

In November 2018, APRA commenced consultation on proposals to change the application of the capital adequacy framework for ADIs designed to help facilitate orderly resolution in the event of failure.126 In July 2019, APRA released its response to submissions, stating that domestic systematically important banks will be required to increase total capital requirements by three percentage points of risk-weighted assets by 1 January 2024, with a view to lifting this to four or five percentage points of loss-absorbing capacity over the long term. APRA has consulted on its proposed approach for the implementation of additional loss-absorbing capacity to support the orderly resolution of ADIs.127 On 9 July 2019, APRA released its response to submissions on proposed changes to the application of the capital adequacy framework designed to support the orderly resolution of a failing ADI. APRA determined that requiring ADIs to maintain additional total capital is the best course of action to support orderly resolution. However, in recognition of the concerns raised around market capacity for Tier 2 capital, APRA will set the increase in total capital requirements at three percentage points of RWA, instead of four to five percentage points.128 It is expected that ADIs would primarily issue Tier 2 capital instruments to meet these higher requirements. APRA has not accepted submissions to allow for a new form of 'senior non-preferred' bonds.

On 2 July 2018, APRA released for consultation a discussion paper regarding its proposed revisions to the related entities framework for ADIs regarding the levels of exposure to their related entities that ADIs may have.129 Revised standards incorporating the outcomes of this review will commence on 1 January 2022.130

On 15 October 2019, APRA released for consultation a discussion paper on proposed changes to Prudential Standard APS 111 Capital Adequacy: Measurement of Capital. APRA has indicated that the proposed changes aim to ensure Australian deposit holders continue to be protected when the major banks hold significant investments in subsidiaries.131 In May 2021, APRA released a consultation package including a revised draft APS 111. Proposed revisions will increase the amount of capital required to support equity investments in large subsidiaries and reduce the amount required for small subsidiaries. Consultation for the revisions closed on 10 June 2021. On 5 August 2021, APRA released a final revised APS 111 which will come into effect from 1 January 2022.132

In December 2019, APRA commenced a consultation aimed at updating and strengthening the capital framework for private health insurers. APRA's proposals aim to increase minimum capital requirements for insurers and be in line with existing capital standards applying to the life and general insurance industries. Submissions on this consultation closed on 30 September 2020.133

In June 2021, APRA released a letter to ADIs setting out a roadmap on the implementation of capital framework reforms to 2023, including timelines for consultations and suggestions on how the industry can prepare to be compliant with the revised capital framework from 1 January 2023.134 APRA is aiming to release the final prudential standards in November 2021.135

In July 2021, APRA released a consultation letter on contingent liquidity to locally-incorporated ADIs subject to LCR requirements. Because of the covid-19 pandemic, APRA believes it would be prudent for ADIs to maintain surplus self-securitised assets amounting to at least 30 per cent of its LCR net cash outflows.136

Capital frameworks for mutual ADIs

In November 2017, APRA released a response paper and revised Prudential Standard APS 111 Capital Adequacy: Measurement of Capital to allow mutually owned ADIs more flexibility in their capital management. Under the revised standard, APRA's mutual equity interest framework allows mutually owned ADIs to issue capital instruments that are eligible under Common Equity Tier 1 directly without jeopardising their mutual status. Prudential Standard APS 111 came into effect from 1 January 2018. The May 2021 revisions to APS 111 propose to clarify Common Equity Tier 1 capital is not permitted to have any unusual features that could undermine its role as the highest quality loss absorbing capital.137 On 5 April 2019, the Treasury Laws Amendment (Mutual Reforms) Bill 2019 received Royal Assent, providing, among other things, for a new bespoke mutual capital instrument under the Corporations Act 2001 for all eligible mutual entities to raise equity capital.138 It should be noted that this framework is not confined to mutual entities that are subject to prudential supervision by APRA or intending to raise regulatory capital. On 24 December 2020, Australian Unity issued the first mutual capital instrument.139

AONIA reference rate

The alternative reference rate for Australia is the Interbank Overnight Cash Rate (the Cash Rate), which is administered by the RBA. The RBA sets an operational target rate and, as the banks use the market for unsecured overnight interbank loans to manage their liquidity, the Cash Rate results from the average rate of those transactions, which is expected to meet the RBA's operational target rate.140 On 10 August 2020, the Australian Financial Markets Association, a member-driven industry body that represents participants in Australia's financial markets and providers of wholesale banking services, clarified the definition of AONIA to be the published screen rate for the RBA Cash Rate.141 Accordingly, the term 'AONIA' is another way to refer to the Cash Rate and is now coming into more common usage in the Australian market.142

Although there are no plans for the cessation of bank bill swap rates in Australia, AONIA is receiving some consideration as an alternative reference rate for debt capital market transactions. In June 2019, the South Australian Government Financing Authority issued a one-year floating rate note using AONIA as the reference rate. In December 2019, CBA led Australia's first AONIA-linked securitisation of residential mortgage-backed securities.143 In June 2020, the South Australian Government Financing Authority issued a three-year floating rate note using AONIA as a reference rate.144 Some domestic issuers now include AONIA as an option for issuances in their debt programmes.

Amendment to hybrid mismatch rules

On 25 August 2020, the commonwealth government passed amendments to Australia's hybrid mismatch rules.145 Among other clarifications, the amending legislation prevents imputation benefits being denied on a distribution on AT1 capital where the distribution gives rise to a foreign income tax deduction; instead, the amount is included in the issuer's assessable income. The amendments seek to ensure that the uncertainties associated with the impact on foreign laws do not unduly interfere with AT1 capital issuances.

Updated licensing approach for new banking entrants

In March 2021, APRA commenced consultation on an updated approach to licensing and supervising new ADIs, which outlines stronger requirements for being granted a banking licence. These changes reflect a focus on sustainability rather than the short-term ambition of receiving a licence and becoming an ADI, and may have been prompted by an ADI returning deposits and exiting the industry in early 2021. Consultation closed on 30 April 2021.146 APRA finalised its revised approach to licensing and supervising new ADIs on 11 August 2021. The finalised approach requires restricted ADIs to have more advanced contingency plans and a limited launch of both an income-generating asset product and deposit product. The finalised approach also provides more clarity around capital requirements for new entrants.147

Cyber resilience

In February 2021, APRA stated that they would be engaging independent auditors to assess compliance with Prudential Standard CPS 234 (Information security). APRA has emphasised that they expect firms to prioritise cybersecurity, and that APRA intends to take a more expansive approach towards cyber supervision.148

Impact of the covid-19 pandemic on Australian debt capital markets

The ongoing covid-19 pandemic has had a significant impact in Australia and on Australia's capital markets, as well as on the ability of individuals, businesses and governments to operate in Australia. Among numerous other effects, the covid-19 pandemic has led to:

  1. a reduction in the level of new issuances in capital markets, by both domestic and foreign issuers, in Australia;
  2. an initial increase in spreads, leading to the withdrawal of certain retail issues, followed by spreads beginning to contract, probably because of a lack of supply;
  3. an increase in liability management transactions as issuers deleverage;
  4. an expected increase in government debt, at both the commonwealth and state levels, as these governments introduced numerous measures aimed at counteracting the effects of the covid-19 pandemic and supporting the Australian economy during the resulting financial crisis; and
  5. the postponement of regulatory reform and changes in regulatory focus, details of which are provided below.

There continues to be considerable uncertainty as to the duration and further impact of the covid-19 pandemic, including in relation to government, regulatory or health authority actions, work stoppages, lockdowns, quarantines and travel restrictions. Given this uncertainty, the ongoing effects of the covid-19 pandemic on Australian capital markets are unclear.

Commonwealth government

In response to the covid-19 pandemic, the Reserve Bank established the Term Funding Facility (TFF) in March 2020, which offered low-cost fixed-rate three-year funding to ADIs to support borrowing. From 30 June 2021, the facility closed to new drawdowns and A$188 billion of funding was outstanding. The ending of the TFF may mean that there will be greater cause for bank issuances into the capital markets.


In March 2020, in response to the impact of the covid-19 pandemic, APRA suspended the majority of its planned policy and supervision initiatives,149 including deferring its scheduled implementation of the Basel III reforms in Australia by one year.150 In April 2020, the issuing of new licences was also suspended because of the significant challenges new entrants would have faced because of economic uncertainty. Owing to the covid-19 pandemic, APRA at one point recommended banks to hold minimum levels of earning retention. However, this position has since been retracted.151 On 10 August 2020, APRA announced that it will recommence public consultations on select policy reforms, including:

  1. the cross-industry prudential standard for remuneration;
  2. ADI capital reforms incorporating APRA's unquestionably strong framework, Basel III and measures to improve transparency, comparability and flexibility;
  3. insurance capital reforms to incorporate changes in the accounting framework; and
  4. the prudential standard for insurance in superannuation and updated guidance on the sole purpose test.

APRA has also begun a phased resumption of the issuing of new licences.152

APRA's corporate plan for 2021–2025 highlights a widening of APRA's perspective as a prudential supervisor from the previous year, and notes that, along with the ongoing pandemic, 'there are many other factors that are influencing the shape and risk profile of the financial system…to which APRA needs to respond.'153


ASIC has delayed a number of activities not immediately necessary in light of these significantly changed circumstances, including consultations, regulatory reports and reviews.154 ASIC deferred the commencement of the design and distribution obligations referred to above (originally scheduled to commence on 5 April 2021) until 5 October 2021 because of the impact of the covid-19 pandemic.

In response to covid-19, ASIC made several changes to its supervisory approach,155 including stepping up its market supervision work to support the fair and orderly operation of markets, supporting consumers who may be vulnerable to scams and sharp practices or who fall into hardship, facilitating the timely completion of capital raisings and other urgent transactions, providing regulatory relief, where appropriate, and identifying measures to support small business. ASIC has also released a report into allocation in debt capital market transactions, and has reminded market participants of the importance of managing conflicts of interest and complying with applicable securities laws in bookbuilds and the allocation process.156

In August 2021, ASIC committed to promoting economic recovery as one of its key strategic priorities, including by targeting regulatory and enforcement action to areas of greatest harm.157