Coronavirus (COVID-19) updates from the Australian Government

Appendix 1: Summary of Key Questions

Pricing other financial products

The Government would appreciate views from stakeholders on:

  • whether CGS is used extensively as the primary benchmark for pricing the
    debt securities of other issuers;
  • whether the interest rate swap curve is used widely for pricing debt securities.
    If not, are there obstacles to using the swap curve in the future? and
  • what other options are available for pricing debt securities? How effective
    are they?

Referencing other financial products

The Government would appreciate views from stakeholders on:

  • whether the yield on CGS is commonly used as a reference benchmark for comparing
    the yields on other debt securities; and
  • whether any major obstacle hampers the interest rate swap curve or some
    other benchmark being used as a reference benchmark.

Managing financial risk

The Government would appreciate views from stakeholders on:

  • whether there is scope for the Treasury bond futures market to be replaced
    by a futures market based on alternative instruments. What could hamper an
    alternative futures market from developing?
  • whether the interest rate swap market is sufficiently liquid at maturities
    longer than five years to facilitate interest rate risk management;
  • whether the viability of the interest rate swap market would be affected
    significantly by winding down the CGS market; and
  • if alternate risk management tools were not available, what would be the
    likely impact of this on the cost of capital for corporate bond issuers?

Providing a long-term investment vehicle

The Government would appreciate views from stakeholders on:

  • the significance of CGS as a long-term investment vehicle, particularly
    for institutional investors such as superannuation funds and life offices;
  • whether there is currently an unmet demand for CGS within the superannuation
    sector; and
  • the potential to develop alternative long-term investment instruments.

Implementing monetary policy

The Government would appreciate views from stakeholders on the declining importance of CGS in the operation of monetary policy.

Providing a safe haven in times of financial volatility

The Government would appreciate views from stakeholders on:

  • the importance of the CGS market in providing a safe haven during periods
    of financial instability;
  • what evidence there is of the role of CGS as a safe haven? and
  • what possible alternative safe havens exist and how appropriate they are?

Attracting foreign capital inflow

The Government would appreciate views from stakeholders on:

  • whether the absence of a CGS market would affect Australia's attractiveness
    to foreign investors; and
  • how important global bond indices are for foreign investment in Australia.

Promoting Australia as a global financial centre

The Government would appreciate views from stakeholders on:

  • whether the CGS market plays a significant role in promoting Australia
    as a global financial centre; and
  • whether the absence of a CGS market would affect transaction costs and
    Australia's attractions as a centre for global financial services.

Appropriate size of the Commonwealth Government Securities market

The Government would appreciate views from stakeholders on the appropriate size of the CGS market in the event that the market is to be maintained.

Options available to the Commonwealth

Option 1:  Wind down the Commonwealth Government Securities market

The Government would appreciate views from stakeholders on:

  • potential implications of winding down the CGS market;
  • the likely impact on the cost of capital;
  • the most appropriate approach and timeframe to implement a decision to
    wind down the market, if this decision is made; and
  • the likely re-entry costs (in the form of additional borrowing costs) if
    the Commonwealth withdraws from the market.

Option 2: Consolidate Commonwealth and State government debt markets

The Government would appreciate views from stakeholders on:

  • whether there is merit in reconsidering the idea of consolidating Commonwealth,
    State and Territory government debt into one market; and
  • whether this option would assist with the transition to reducing the supply
    of Government debt.

Option 3: Maintain the Commonwealth Government Securities market and fund the Commonwealth's unfunded superannuation liabilities

The Government would appreciate views from stakeholders on:

  • governance arrangements for a hypothecated asset fund that stakeholders
    suggest would insulate investment decisions from direct Government control;
  • whether funding the unfunded superannuation liability through a superannuation
    fund is a good way of dealing with the governance issues associated with substantial
    Government asset holdings;
  • the appropriate limits on holdings of any single instrument if the Government
    were to invest in debt securities;
  • the appropriate limits for equity holdings in any one company if the Government
    were to invest in equities;
  • the likelihood of Government investment distorting asset prices;
  • the impact of restricting Government investment to foreign securities;
    and
  • the increased uncertainty for fiscal policy arising from variations in
    investment returns.