Outline of Proposed Exemption
On 10 November 2012 the Hon Bill Shorten, Minister for Financial Services and Superannuation and the Hon Tony Burke, Minister for Sustainability, Environment, Water, Population and Communities announced that the Government intends to amend the Corporations Regulations 2001 to allow for water rights commonly traded on Australian water markets to be regulated in the same manner as agricultural commodities such as wheat.
There is market uncertainty about whether water rights and contracts to trade these rights are derivatives, which are a type of financial product. This uncertainty extends to trade of water allocations and entitlements (sometimes called temporary and permanent trade) which occur frequently.
It is important that water market participants are certain about the regulatory framework that applies to trade in water products.
What is the amendment?
The Government proposes to amend the Corporations Regulations 2001 to exempt 'tradeable water rights' and agreements to trade in such rights from the definition of derivatives provided in the Corporations Act 2001.
A tradeable water rights refer to:
- water access rights;
- water delivery rights; or
- irrigation rights.
The definition of each of these products is available on the ComLaw website.
The proposed amendment will:
- include tradeable water rights that are conferred by government (and irrigation rights that are conferred by irrigation infrastructure operators and can be transformed into government-issued rights) and contracts to trade these rights; and
- not include contracts to trade these rights that add complex derivative arrangements. Products that have these additional derivative arrangements (such as options contracts) will be regulated by ASIC.
The final form of the amendment will be determined by Treasury following consultation with stakeholders.
What does this mean?
The proposed amendments will mean that tradeable water rights will be treated in the same manner as commodities such as wheat. Contracts that add complex derivative elements would continue to be covered by the regulation administered by ASIC. This means financial intermediaries dealing with contracts containing complex derivative elements will continue to be required to hold the relevant financial product licences.
The next step will be to have the amended regulations drafted. Once drafted, Treasury will engage with stakeholders to discuss the appropriate scope of the regulations prior to its finalisation. It is anticipated this process will take place in late 2012 or early 2013. Further details about this consultation will be provided shortly.
For more information please contact the Financial Markets Unit via firstname.lastname@example.org