Q&A: AFMA’s David Lynch

Author: Ashley Lee | Published: 28 Sep 2012
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Although many focus on its considerable presence in the mining and natural resources sectors, Australia boasts very strong financial markets.

Indeed, the country has taken a lead role in implementing international regulatory reforms: it will be one of the first countries to implement Basel III’s minimum capital requirements and hybrid issuances have already begun incorporating Basel III-mandated provisions such as non-viability capital triggers.

David Lynch, executive chairman of the Australian Financial Markets Association, spoke with IFLR on Australia’s market developments and priorities for the future.

How have Australia’s markets developed into some of the most sophisticated in Asia?

The international and commodity orientation of the Australian economy and global integration of the domestic financial sector have been important influences. Together with the deregulation of the Australian financial system in the 1980s, well before this occurred in the main regional markets, this has created demand for innovative and cost effective risk management tools and financing arrangements that were necessary to support economic development.

Reform of the regulatory framework in 2001 left the regulators well-placed to handle the challenges of a marketplace growing in complexity and sophistication. I believe the capability of the regulators has helped to maintain confidence in the competence, fairness and safety of the markets.

How would you characterise Sydney as a financial centre, and why does it attract foreign investors?

Basically, Australia attracts foreign investors because it offers the opportunities of a modern economy that is placed within a good corporate and regulatory culture. The particular strength of the resources sector, based on extensive mineral resources and sophisticated extraction techniques, as well as proximity to the rapidly-growing Asian markets is especially relevant in recent years.

Sydney’s performance as a global financial centre has not matched that of our key regional competitors. This is an area we can improve upon by prioritising this aspect of our economy when developing regulatory and tax policy. The high quality of our financial services sector and the skill and experience it embodies, especially in areas like funds management, presents a unique opportunity to tap into Asia’s economic growth. We have the right ideas to enhance our international competitiveness, as Mark Johnson’s excellent report in 2009, Australia as a Financial Centre – Building on Our Strengths , illustrates, so it is really a question of ensuring that our capability to implement reforms matches the quality of our thinking. The high value of the Australian dollar reinforces the need for Australia to get this right in the areas we can control. The Prime Minister’s Asian Century white paper is keenly anticipated as a potential catalyst for real progress in this area.

How do you expect Australia to be affected by China’s slowdown?

China was Australia’s largest two-way trading partner last year. It was Australia’s biggest export market and a major source of source of imports. Hence, the Australian economy is sensitive to China’s economic growth as it adjusts it policies to deal with a rapidly changing economy and maintain a sustainable growth path. Were a significant economic slowdown in China to occur, this would place downward pressure on commodity prices and Australia’s terms of trade. This would likely lead to weaker income growth and domestic demand but the net effect would depend on a range of factors, including the exchange rate adjustment. In addition, the Government has the advantage of policy flexibility to help smooth the effect on economic activity.

How have global developments, such as Basel III and the G-20 OTC derivatives clearinghouse rules, affected the Australian market?

Australia’s banks are well placed to meet the Basel III capital requirements but the Basel liquidity reforms are more challenging, as there is not enough high-quality liquid assets in Australia to meet the needs of the banking system. The Reserve Bank of Australia has developed a ‘committed liquidity facility’, which is compliant with the Basel rules, and provides the liquidity asset cover that banks that cannot be met through the government bond market. The Basel reforms have also been a factor in stimulating the successful establishment of a covered bond market in Australia.

The Australian government is in the process of finalising legislation that will provide the legal framework to support central clearing of systemically important OTC derivatives transactions. The Council of Financial Regulators’ open approach to managing the consultation process for this reform has been instrumental in promoting constructive industry responses. We do not yet know what the final shape of the clearinghouse infrastructure options will be, though local and overseas clearing houses have declared an interest in servicing the Australian interest rate swaps market.

What areas of the market need further development, and what are AFMA’s priorities in terms of what needs to be done next?

There is widespread interest in developing scale and capacity in the domestic corporate bond market. AFMA supports this as a strategic step in the development of our financial system. A deeper corporate bond market is desirable as a means to expand the financing options for Australian companies, increase competition within the financial system and provide investors with better access to fixed interest investments, especially for superannuation savings. This will be a long term development process that requires input from both the industry and government.

AFMA would like to see the Government implement the Johnson Report recommendations as a matter of priority. Together with reforms to financial market infrastructure currently being considered, this would provide a framework to extend the regional integration of Australia’s markets.

The Australian markets have undergone extensive and costly regulatory reform in the aftermath of the GFC and the introduction of exchange competition. To some extent, we need to catch breath on the regulatory reform front, as many of the announced reforms, like the introduction of central clearing for OTC derivatives, have some way to go in the implementation process.

We are seeking a steady hand from government in their handling of the forward reform program. In particular, new regulatory intervention should be dependent on solid evidence of a market failure and a high priority given to cost effective implementation measures.

See also

‘How Australia hybrid first clarifies Basel III implementation’

http://www.iflr.com/Article/3088063/How-Australia-hybrid-first-clarifies-Basel-III-implementation.html

‘Afma: what Libor can learn from Australia’s benchmark rate’

http://www.iflr.com/Article/3065497/Afma-what-Libor-can-learn-from-Australias-benchmark-rate.html