The ASX is at it again: having its cake, eating it and asking government to enact legislation that ensures nobody else gets a slice.
In its submission to the finance sector inquiry, the grand old markets monopoly has called for foreign ownership restrictions to be lifted, or to keep the location of market infrastructure onshore in Australia.
If the Singapore Stock Exchange, therefore, were to return with a takeover offer, the crew from ASX could ride into the sunset with saddlebags full of cash (subject to approval by the Foreign Investment Review Board). If not, they could maintain their monopoly over clearing and settlement.
There is a crafty effort here to trip up the government with its own foreign-ownership logic of canning the Qantas Sale Act, which would pave the way for a foreign owner.
The second leg of the submission hampers competition in equities or derivatives clearing. Its petition to the Murray inquiry would see ”capital, collateral and core infrastructure” stay in Australia, and for their 15 per cent ownership cap to be lifted.
Success in this second proposal would lift the ASX trading multiple by a fair whack – great for shareholders and executives, not so fine for market participants.
The flip side is that no clearers would come to Australia because it would entail a huge cost in replicating infrastructure and staff in the antipodes. It would be like building a second Harbour Bridge while the first one is still fine and not subject to capacity constraints.
ASX is asking for everyone to be forced to operate the way ASX operates – a standard business and operating model – something in which ASX has a clear advantage. In this event, ASX could comfortably maintain its strategy of low fees on trading and high fees on everything else – the stuff, that is, where they entertain an unfettered monopoly.
Chi-X – the one player allowed into the country to compete in trading, although not clearing and settlement – declared its maiden profit last month. It did so by introducing fees for market data, services that had previously been provided free.
Some think, therefore, that ”competition” has so far meant all market participants paying more in fees, infrastructure and regulatory oversight (fees are now paid to the Australian Securities and Investments Commission as well as ASX), with Chi-X showing that the only way it can stay afloat under these circumstances is to introduce more new fees.
It’s hard to evaluate whether there’s been a net benefit because while the data and trading fees after Chi-X’s entry may be lower, pricing regulation is an academic exercise. There’s also the fact ASX increased clearing and settlement fees.
Still, if ASX is successful in this submission (with respect to local operations, not the 15 per cent), there would be little prospect of another serious competitor entering the Australian market.
This is the deluxe, triple-choc, double-cone submission with a cherry on top. It is, indeed, a requirement for regulated businesses to plead their interest, but the ideological foundations of their case are shaky. They conflate sectoral interest with national interest: what’s good for ASX must be good for Australia.
Quoting from the release: ”For Australia’s policymakers and regulators to have direct control, it is necessary that location requirements be adopted for all systemically important financial markets in Australia. This best positions Australia’s financial markets for long-term stability. Moreover, having a central financial market infrastructure is a pre-condition to be a financial centre.”
ASX has not established the case as to why policymakers and regulators need to have direct control. Nor is any evidence – other than scare tactics – provided as to how regulatory control positions Australia’s markets for long-term stability.
A central financial market infrastructure is not a precondition of a financial centre.
”Location requirements are already in place for most of the systemically important markets that are traded on the exchange. ASX recommends that they be extended to include the over-the-counter $A interest rate market. This is one of the world’s largest derivatives markets and it’s critical to the functioning of the economy. ASX’s recommendations create an outcome that is consistent with other major financial markets.”
This may be code for ”we can’t convince our customers to use our services so we want the government to make them”.
ASX raised a lot of money to build its OTC capability. It is true that OTC interest rate markets are among the largest in the world, but the $A market is not that large relative to other currencies. To enforce a special solution for the $A by regulation may only fracture the Australian market as it would be uneconomic for non-Australian banks to participate and could lead to higher interest rates (read true-blue mortgages) in Australia, all to the benefit of ASX.
”With direct controls of systemically important financial markets infrastructure in place, there is a case to remove the 15 per cent ownership restriction that currently applies only to ASX. This limit provided additional protection when the regulatory settings were less well defined. ASX has asked the inquiry for its views on the need for ownership restrictions.”
The 15 per cent ownership restriction does not just apply to ASX; it also applies to the major banks. The ASX limit was originally 5 per cent but was increased to bring it in line with the banks.
In that its clearing and settlement business essentially moves large licks of money about, ASX has some features of a bank.