ADDRESS: NZX: Address to the NZX 2010 Annual Meeting - 17 June 2010

17 Jun 2010 10:17 am

NZX 17/06/2010 ADDRESS

REL: 1017 HRS NZX Limited

ADDRESS: NZX: Address to the NZX 2010 Annual Meeting - 17 June 2010

Andrew Harmos - NZX Chairman

I intend to touch only briefly on the events of 2009, as the results for that year have been fully addressed in our annual report and the various presentations and releases we've made, including our Investor Day in early March.

I'd like to talk a little about our corporate strategy and then turn to consider some wider capital markets issues.

These are important because a healthy capital markets environment, with its various elements operating in sync, provides strong impetus to our own growth initiatives. I sense a stronger momentum than I've seen for some time around the need to drive our capital markets forward. I have a sense of real optimism about our prospects. We do sometimes encounter roadblocks and disappointments - and we do look to grow from them.

- Highlights of 2009 and Outlook

Against the background of one of the most turbulent and uncertain periods in modern financial history the highlights of 2009 included

successful execution of Besa and TZ1 carbon registry sales

functioning of NZX's debt market

a very satisfactory core operating result in itself that reflected the benefits of a diversified set of product offerings across various elements of the NZ capital markets

The CMDTF report and the reception it received from Govt also qualifies as a major highlight of 2009 - for NZ and NZ Inc and, through this, for NZX and all our stakeholders. But we do need to make sure the wider community em- braces these initiatives and opportunities - and that they are explained prop- erly: we can't afford for the community to send government negative signals largely because of poor or incomplete communication of the benefits these initiatives can bring - or because of the propagation of mischievous messages for some perceived political or ideological gain.

The outlook is positive - not from anticipated large realisations such as Besa and TZ1 - but from the organic growth and development of our market struc- ture and new product initiatives. Principally the clearing house function and our derivative product initiatives: interrelated matters which the board sees as adding material value to the market generally - and through that to NZX as market operator. More on that later.

- NZX Strategy

- Our core strategy has been well signalled. It centres around the three planks of Information, markets and infrastructure.

- An international commentator predicted some years ago that securities ex- changes would become media companies. We are not a media company but the generation, collation and distribution of information has been an increas- ing source of our revenue and profits and will continue to be so - as we build out more markets and market product offerings. Our information offerings in the rural sector represent one of our methods for seeking to build a bridge between that sector and the capital markets.

- Our market operations drive off our equity and debt markets. We are investing in and building out new markets, including the grain trading platform in Aus- tralia and traded products that reflect New Zealand's excellence in specific areas that others cannot easily replicate - especially dairy and other derivative products. These new products will drive growth in trading activity. This in turn generates its own data and information, which has value.

- Markets require infrastructure to operate. The clearing house project has been all consuming and is on the verge of launch. Our thanks go to the mar- ket participants, regulators, government and our own internal project team for its untiring commitment to bring this to fruition. We have been the only country in the OECD without this piece of infrastructure. Without this, our market op- erates with one hand tied behind its back. The clearing house will facilitate much new product development: it is essential to the launch of our dairy de- rivatives, it should result in more stock available for stock lending - it will grow participation in the capital markets. Our local brokers and a number of off- shore participants have recognised the significant potential that this offering will provide and are positioning themselves to participate fully in the product and trading opportunities. We are delighted to have been able to attract inde- pendent directors of the calibre of Pip Dunphy and Peter Lockery to the Clear- ing House board to join NZX's own Robyn Dey as governors of that business.

- The clearing house and our other infrastructure development activities have resulted in an increasing reliance on technology - and we have invested in people internally and on our board to enable us to capture access to the ne- cessary expertise in-house as well as externally where appropriate.

- Wider Capital Market Issues A cause of frustration for all of us with an interest in capital markets is the limited nature and amount of quality investible product available for investors:

? CMDTFhighlightedthereasonsforthisincluding:

- high government and local authority ownership of assets;

- a high proportion of our rural sector - our nation's backbone - in cooper- ative ownership (contrast Australian mining backbone, where large and small alike access the capital markets for just that - capital);

- government policy settings: tax and savings policies having encouraged investment in real estate and in non-productive sectors;

o lack of financial literacy.

- People have asked me what NZX is doing about bringing more companies to market. In response I explain to them what we see as NZX's role in this area:

On the policy side NZX as an organisation is active in contributing when asked on national economic policy issues - and its impact on the capital mar- kets environment. You have seen us active in the CMDTF/the tax working group and FMA Establishment Board.

It is not NZX's role to provide financial advice to companies and shareholders as to their capital raising or sale options - although we do actively respond to and meet with prospective listing candidates, it is predominantly the role of financial intermediaries and brokers to explain the various options and bring companies to market.

Our role is to facilitate access to markets, invest in and provide the infrastruc- ture and the market structures that suit the spectrum of New Zealand busi- nesses. This also includes developing and administering an appropriate rule set to regulate access to and conduct on our markets and to supervise com- pliance with that rule set.

- For capital markets to operate properly, all the elements of the "capital market cycle" must be in place. They need to work together - a bit like a "perfect storm" but in reverse and in the positive sense. This has the following elements :

Investors need to understand the importance of savings and investment. Fin- ancial literacy. A long way to go.

Investors must have the confidence to invest - the right regulatory environ- ment capturing investment advisers and dealing with access to initial and on- going information. We are on the path to restoring this confidence the Securit- ies Act review and the establishment of the FMA.

Investors must have funds to invest - this requires a coherent national savings strategy, and again, financial literacy. The Government's move in the 2010 budget to change the signals and incentives associated with savings relative to consumption is a positive step. The absence of compulsion in savings is a little difficult to understand - I don't need to tell this audience that this is one of the big reasons why there is a wealth and income gap - and frankly a fin- ancial literacy and investment sophistication gap - between us and Australia. In my judgment New Zealanders are ready for some compulsion here, albeit at a more modest level than the Australian 9% and rising. A modest starting level with a steady path of well-signalled increases would be a strong start. At present we don't have sufficient savings to compete for control of our stra- tegic businesses and assets. Too often I hear comments like - "Why is this as- set strategic - it's not as if a buyer can take the runway or the farms away with them" . This misses the whole point - the owner can move the head offices, decision making, control and intellectual property - and over time it generally does.

Companies and shareholders need to understand the relative advantages of accessing the public markets for their capital needs as well as for their exit options. This is the role of brokers, advisers, lawyers, accountants and finan- cial intermediaries - and we look to play our part. Again Australia has it in spades, with local government, national government, business, families and corporates understanding the benefits and not fearing shared public invest- ment in their enterprises.

Market infrastructure must exist and operate well - this is our space.

Savings must have the product to invest in. The lack of quality investible product, and deficiencies in the pre-requisites I've just been through - al- lowed the Blue Chips, and Bridgecorps to exist.

As to the availability of suitable product, this is where we can all play our part - Government too. The SOE debate should not be blindly ideologically driven but rather evaluated as part of an integrated economic and capital markets policy. I don't know of anyone who wants SOE's sold into foreign control and ownership and to frame the debate in those terms is mischievous - New Zealand is an out- lier in the extent to which Government owns 100% of so many key trading enter- prises: these are good stable businesses, some of which could be exposed to public minority ownership and the governance and transparency that comes with it. It is hard to criticise the Air NZ or Vector models - and those co-investment models are the ones that fit well into an integrated national savings, capital mar- kets and economic strategy.

In my introduction, I mentioned the occasional roadblock and disappointment. We have high expectations here, and do a good many things for what we perceive the good of New Zealand. We don't take coming second very well - but we do look to learn from these episodes. The outcome on our electricity hedge market proposal falls into this category. My comments are not intended as any criticism of the participants in that process. However, all too often there seems to be a disconnect between policy and action, and little regard for the second order ef- fects of decisions - short term decisions can have long term implications. There are many initiatives underway to improve NZ's competitiveness and economic rel- evance, to improve our capital markets and to attract businesses: financial hub- bing an example - yet too often decisions are made that make it hard to break out of branch office economy mode. So much is made of our Australian controlled banking system and branch office subservience - yet we don't take every oppor- tunity we can to build scale here. I can't see some of the outcomes we are de- livered here occurring over the Tasman, yet our national goal is to catch up to that moving target.

So, in summary - let's support our local institutions and initiatives - let's develop a savings policy that allows us to reduce our reliance on foreign capital that can be withdrawn on a whim - and let's have critical initiatives like the SOE debate in- troduced with leadership, with confidence and as part of a coherent and integ- rated capital markets and economic strategy for the unarguable long term benefit of New Zealand.

- Acknowledgment and thanks to management and board: The effort that our man- agement put in and the outputs that are created by this organisation remain at the highest level. End CA:00196210 For:NZX Type:ADDRESS Time:2010-06-17:10:17:27

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