Annual Report

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CHIEF EXECUTIVE'S REPORT

Each year we focus on important questions about the operation of our securities markets and identify key areas where our work can lead to improvements. This gives a wider strategic sense to our efforts than simply developing a work programme based on the outputs of the Commission.

The key areas in determining our priorities and settling our work programme in the year to June 2001 have been:

	improved quality of offer documents,
	improved quality of investment advice,
	improved market behaviour with particular reference to the secondary market for securities,
	improved funds management practices,
	removal of unnecessary compliance costs,
	increased effectiveness of Commission powers,
	provision of services to the Takeovers Panel.

In addressing these key areas we have aimed:

	to undertake surveillance and enforcement work where we have explicit statutory powers, in particular on:
	-	the quality of offering documents,
	-	practices of investment advisers,
	-	insider trading,
	to ensure securities market business is not impeded where we have immediate corrective powers and are able to provide an efficient and timely service. This relates particularly to exemptions and authorisations, also to appeals against decisions of the Registrar of Companies,
	to ensure the policies for using our powers remain sound by reviewing them regularly,
	to work for new or improved law where this is clearly in the public interest,
	to keep abreast of developments in global standard setting and contribute to this process,
	to promote New Zealand as a cooperative and well regulated country in which domestic and overseas investors and regulators can have confidence.

NEW ZEALAND SECURITIES MARKETS

This section briefly describes the securities markets in which the Commission performs its work. We have used the latest statistics available in each market sector. We used statistics from the Reserve Bank of New Zealand (RBNZ), the New Zealand Stock Exchange (NZSE), the New Zealand Futures and Options Exchange (NZFOE), and the WestpacTrust Household Savings Indicators compiled jointly by Morningstar and the New Zealand Institute for Economic Research.

The main types of financial assets held by households in New Zealand are assets invested with financial institutions including deposits with the registered banks, superannuation schemes, unit trusts and group investment funds, life insurance products and assets directly invested on the New Zealand stock market. As at 31 March 2001, the total of these investments was $92.2 billion compared with $91.9 billion 12 months earlier.

Figure 1 shows the distribution of household financial investments as at 31 March 2001 compared with a year earlier.

FIGURE 1. NEW ZEALANDERS' MAIN FINANCIAL INVESTMENTS

DEBT SECURITIES

There were 16 registered banks as at 30 June 2001, of which six were incorporated in New Zealand. All registered banks are subject to the prudential supervision of the RBNZ. They are also subject to the advertising provisions of the Securities Act 1978 and Securities Regulations 1983. The majority are subject to and abide by the rulings of the Banking Ombudsman.

The New Zealand household sector's aggregate investment in debt securities issued by both bank and non-bank financial institutions (M3) increased by 4.3 percent to $43.6 billion in the year to 31 March 2001.

A number of non-bank institutions undertake business as continuous issuers of debt securities under Securities Commission exemptions. These include finance companies, building societies, stock and station agents, friendly societies and credit unions.

SUPERANNUATION SCHEMES

The aggregate value of managed superannuation funds amounted to $16.6 billion as at 31 March 2001, some 60 percent of which was held in employer-sponsored schemes. Managed superannuation funds decreased in value by 4.6 percent from a year earlier. On aggregate, 58 percent of superannuation funds assets is managed by life insurance offices, 18 percent is managed by registered banks and 24 percent by other funds managers.

UNIT TRUSTS AND GROUP INVESTMENT FUNDS

The value of net assets managed through New Zealand retail unit trusts and group investment funds reached $12 billion as at 31 March 2001, indicating a 4.7 percent growth from the previous year. Life insurance offices were managing 39 percent and other funds managers were managing 20 percent of the assets of unit trusts and group investment funds. The remaining 41 percent was invested through registered banks.

LIFE INSURANCE

The value of life insurance products with an investment component was $9.2 billion as at 31 March 2001, down by almost eight percent from a year earlier. The bulk of these life insurance products was in whole of life policies and endowment policies valued at $7 billion. The remaining $2.2 billion was in unitised insurance products including insurance bonds.

EQUITY SECURITIES

Ownership of New Zealand listed equities continues to be dominated by offshore organisations. Institutional investors remain the most prominent owners of New Zealand listed equities. The value of equities listed on the NZSE and held directly by individuals was estimated to be $10.8 billion as at 31 March 2001, a seven percent decline from the previous year. The market capitalisation of New Zealand shares listed on the NZSE as at 30 June 2001 amounted to $43.9 billion compared with $49.7 billion at the end of June 2000. This 12 percent decline was in line with the downward trend of equity markets worldwide. Figure 2 shows, however, that the declining trend came to a halt towards the end of 2000.

FIGURE 2. NZSE MARKET CAPITALISATION

The restructuring of Fletcher Challenge group affected the composition of the top ten listed companies, impacting negatively on the total capitalisation of the ten largest companies during the first quarter of 2001.

The NZSE opened its New Capital Market (NCM) for investment in new growth companies in March 2000. The number of listings on the NCM increased from three at the end of June 2000 to ten at the end of June 2001, with one other company having graduated to the main board of the NZSE in August 2000. The capitalisation of the NCM grew from $3.5 million at 30 June 2000 to $42.5 million at 30 June 2001.

The total value of share turnover on the NZSE in the 12 months to June 2001 was $30.3 billion, compared to $26.4 billion in the 12 months to June 2000.These figures include both on-market and off-market transactions in listed securities.

The NZSE is established under the Sharebrokers Amendment Act 1981. It regulates the conduct of its members and makes its own rules, subject to approval by the Governor-General. It makes its own Listing Rules generally in consultation with the listed companies. The NCM Listing Rules were amended in October 2000 and the NZSE Listing Rules were amended in March 2001.The NZSE's Market Surveillance Panel regulates listed companies in accordance with the Listing Rules.

The NZSE and the Australian Stock Exchange held discussions on a possible merger of the two stock exchanges to form a single exchange active in the two jurisdictions. The parties were unable to agree on a suitable model for a merged exchange and discussions concluded in February 2001.

The New Zealand Stock Exchange Restructuring Bill was introduced into Parliament on 14 March 2001. Its purpose is to enable the NZSE, by approval of its members, to cease to be a statutory body and to demutualise into a for-profit, shareholder owned company registered under the Companies Act 1993. It is expected to list on its own market if the demutualisation proceeds.

FUTURES AND OPTIONS CONTRACTS

A total of 1,097,770 futures and options contracts was transacted on the NZFOE from July 2000 to June 2001. This compared with 789,009 futures and options contracts transacted from July 1999 to June 2000. Futures contracts account for some 91.5 percent of total volumes. The futures market is still dominated by the 90-Day Bank Bill futures contract, although its relative proportion has declined to 93.5 percent of all futures contracts with an increase in demand for 3-Year and 10-Year Stock futures contracts. There was also a strong growth in the volume of options contracts, with the volume of contracted 90-Day Bank Bill options tripling and that of share options almost doubling.

The NZFOE is a limited liability company. All shares are held by SFE Corporation Limited. SFE Clearing is responsible for clearing, settling and guaranteeing contracts entered into on the NZFOE. The Business Conduct Committee is responsible under the Rules of the NZFOE for surveillance, investigation and enforcement matters. The NZFOE conducts night trading to enable overseas and New Zealand investors to trade during the hours when the major overseas futures exchanges are operating.

The futures market is very largely wholesale and attracts relatively little retail investment.

TECHNOLOGY TRENDS

The use of electronic technology to manage financial transactions continues to grow. It is standard practice in the securities markets to trade, clear and settle transactions and transfer title electronically, for example all transactions for securities listed on the NZSE and all transactions for futures on the NZFOE. This significantly reduces time lags and, in the case of the NZSE, enables scripless trading. The securities of New Zealand incorporated companies listed on the Australian Stock Exchange and held on the Australian register are also transferred electronically on the CHESS system of electronic transfer.

Any system for the transfer of securities by electronic means must be approved by the Governor-General on the advice of the Minister given in accordance with a recommendation from the Commission. The Commission decided to recommend the approval of an extension of FASTER, the electronic securities transfer system of the NZSE, to cover the transfer of securities traded on the NZSE's market for unlisted securities.

Many New Zealand issuers offer investors the opportunity to receive investment statements and prospectuses via the internet or e-mail. A number of brokers offer their services, including trading facilities, on the internet. Online banking is developing rapidly. The use of the internet for company registration and filing of documents with the Companies Office is proving popular.