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The future for futures

By Fiona Rotherham

Tuesday 1st April 2003

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The Sydney Futures Exchange paid about $5 million in 1992 for the NZFOE. It's all been downhill for the local exchange since then. For example, says Colin Churchouse, trading room head of our largest futures player, OMFinancial, the SFE was more interested in pulling overseas players into the Australian market, and promotion of the New Zealand market has been scant.

By last year, the NZFOE was handling only $628,000 worth of futures contracts (an obligation to buy or sell a specific product on a specific day for a pre-set price) - nearly all involving institutions trading in 90-day bank bill futures to lessen the risk of any interest rate volatility. The Aussies pared the exchange back to just one employee, saying the move would enhance services by cutting costs. Now the SFE wants to merge our local exchange fully into Australia's.

Obviously you can't just blame the Aussies. Our small size causes a lack of liquidity that also hurts our share market. But the lesson of the demise of the NZFOE is enough to make one breathe a sigh of relief the engagement of the New Zealand Stock Exchange and its Australian counterpart has been called off.

Does it matter if we have no New Zealand futures and options exchange? Actually, yes. Local dealers may have no interest in the local exchange, which is designed for the institutional market. But they do considerable business - say 90-100% of the total - in futures contracts on offshore exchanges on behalf of wealthy Kiwi speculators. Currently all futures contracts are supervised by the NZFOE even though most don't involve the local or Australian exchanges.

So what will take its regulatory place when the NZFOE moves to Australia? In some way regulation is less essential in futures than in stockbroking because, unlike financial and investment advisors or sharebrokers, futures dealers have to be authorised by the Securities Commission. The commission also acts as the background enforcer to the NZFOE.

As Unlimited went to press, the Securities Commission was announcing a new policy framework for those involved in arranging forward contracts for clients. Authorised dealers are to have ongoing supervision by an independent compliance reporter. The move has already been trialled by at least one local futures broker. Longer term, the commission wants the industry to replace the NZFOE with another self-regulatory organisation, as happens in the UK.

The New Zealand Stock Exchange is reported to be considering filling the role. It makes sense for the industry to not have to fund an entirely new organisation and there's synergy between the two markets, with many local speculators trading in equity-based futures and options offshore. While the stock exchange denies it is involved at this stage, it didn't rule out such a move in future.

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