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Annual Report 30 June 1998
   
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J Farrell - Chief Executive |
Chief Executive's ReportIntroduction In promoting our purpose of fostering capital investment in New Zealand we have pursued two broad aims:
both in the offer of securities and in the management of investors' funds. We aim to achieve these principally by promoting regular, orderly and authoritative communication of information by issuers and promoters of securities. Standing behind us and giving us the authority to achieve these two aims are the Securities Act 1978 and its amendments. We use this authority to review:
and to take action where this is appropriate. We exempt people from the obligation to comply with securities law. We comment on securities law and practice. We engage in public communication projects. A description of our activities during the past year is set out in this report. New Zealand Securities Markets The following is a description of the securities markets in which the Commission performs its work. We have used the latest statistics available to us in each market sector. In addition to the Securities Commission's own data bases, statistics were obtained from the Reserve Bank of New Zealand, FPG Research, the New Zealand Bankers Association, KPMG, Standard & Poor's, the OECD, Bankers Trust New Zealand, International Data Corporation, the New Zealand Stock Exchange and the New Zealand Futures & Options Exchange. Equity Securities The market capitalisation of shares listed on the New Zealand Stock Exchange as at 31 March 1998 was $51,404 million compared with $51,677 million as at 31 March 1997, a marginal decrease. Figure 1 shows that market capitalisation peaked in July 1997 at $57,737 million.
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MARKET CAPITALISATION 1 April 1997 - 31 March 1998 |
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Market capitalisation fell significantly in October 1997. This followed sharp falls in Asian sharemarkets, in particular Hong Kong, Korea, Indonesia and Thailand.
The total value of share turnover in the year to March 1998 was $16,786 million, a 14.6% rise when compared with the equivalent figure of $14,642 million for the previous year. Figure 2 shows the value of monthly share turnover during the year. It also provides a breakdown of turnover between on-market and off-market trading.
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| 1 April 1997 - 31 March 1998 |  |
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____ Off Market ____ On Market ____ Total Monthly Turnover |
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There were 207 companies (124 New Zealand companies, 83 overseas companies) with their ordinary shares listed on the New Zealand Stock Exchange as at 31 March 1998, compared with 185 companies (120 New Zealand companies, 65 overseas companies) a year earlier. Despite 4 additional New Zealand companies being listed on the New Zealand Stock Exchange last year, a decline in the relative number of New Zealand companies listed on the New Zealand Stock Exchange is a trend apparent since 1995.
Listed issuers raised $3,260 million in the 1997 calendar year. Of this figure $1,103 million was raised in ordinary shares ($730 million last year), $566 million in unit trusts ($110 million last year), $30 million in redeemable preference shares (nil last year) and $1,212 million in equity warrants (nil last year). Listed issuers raised $349 million in listed debt securities (of which $308 million was in convertible notes) in 1997. The ownership of New Zealand listed equities is dominated by offshore organisations with approximately 61% overseas ownership as at 31 March 1998, compared with a figure of 23% as at 31 March 1991. Institutional investors are the most prominent owners of New Zealand listed equities. Private ownership was approximately 19% as at 31 March 1998, compared with a figure of 40% as at 31 March 1991. A significant proportion of the changes noted above occurred during the period March 1991 to March 1993. The New Zealand Stock Exchange is established by 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 in consultation with the listed companies. It has established a Market Surveillance Panel to regulate listed companies in accordance with the Listing Rules. Debt Securities There were 20 registered banks as at 31 March 1998. All registered banks are subject to the prudential supervision of the Reserve Bank. They are also subject to the advertising provisions of the Securities Act and Regulations. They abided by the rulings of the Banking Ombudsman. Nine of the registered banks were also members of the New Zealand Bankers Association, an organisation established to promote the mutual interests of the banks and their customers. The number of non-bank institutions undertaking business as continuous issuers of debt securities under Commission exemptions was:
The New Zealand household sector's aggregate investment in debt securities issued by both bank and non-bank financial (M3) institutions was $44,584 million as at 31 March 1998, compared with $42,671 million a year earlier. Approximately 90% of the household sector's debt investments were placed with registered banks as at 31 March 1998. The prospectus and trustee provisions of the Securities Act do not apply to the Crown, local authorities, the Reserve Bank of New Zealand, the Housing Corporation of New Zealand and registered banks. However, following an amendment to the Securities Act 1978, as of 1 October 1997 these organisations are required to produce an investment statement for all non-call securities. Life Insurance There were around 30 life insurance companies marketing life insurance products with an investment component as at 31 March 1998. Their headquarters companies are variously based in New Zealand, Australia, the United Kingdom, the United States and Sweden. The value of life insurance products issued as at 31 March 1998 was $11,836 million, compared with $10,950 million a year earlier. These figures exclude term life products which have no investment component. As at 31 March 1998, $8,600 million was invested in non-unitised insurance contracts (for example, whole of life policies, endowment policies) and $3,236 million in unitised insurance contracts, largely insurance bonds. The Commission no longer has a function of authorising life insurance companies. Life insurance companies must now comply with the investment statement and prospectus provisions of the Securities Act as amended by the Securities Amendment Act 1996. Superannuation The total value of managed superannuation funds was $14,583 million as at 31 March 1998 ($12,611 million a year earlier). Of this figure $5,214 million was invested in retail superannuation schemes as at 31 March 1998, while the figure for wholesale superannuation schemes, including employer-sponsored schemes, was $8,969 million. Superannuation schemes are now subject to the provisions of the Securities Act and Regulations and the Financial Reporting Act. Unit Trusts and Group Investment Funds The value of New Zealanders' net assets under management in unlisted unit trusts and group investment funds was $8,163 million as at 31 March 1998, compared with $6,271 million as at 31 March 1997. This represents a 30% increase during the year. Life insurance companies managed $2,198 million as at 31 March 1998, compared with $1,413 million a year earlier. Registered banks or their affiliates managed $1,121 million as at 31 March 1998, compared with $1,377 million a year earlier. A further $3,475 million was under management with other New Zealand funds managers as at 31 March 1998, compared with $2,294 million a year earlier. The total amount of money invested by New Zealanders with Australian retail unit trust and group investment funds managers was $1,368 million as at 31 March 1998, compared with $1,187 million a year earlier. Some 69% of funds invested by New Zealanders in New Zealand and Australian unit trusts and group investment funds was invested in New Zealand as at 31 March 1998. Of this figure, investments are relatively evenly split between cash and term deposits (25%), loans (21%), shares (19%) and property (13%). By contrast net assets held overseas are predominately in the form of shares (79%). As at 1 October 1997, the offer of interests in unit trusts to the public became subject to the provisions of the Securities Act and Regulations about the disclosure of information. Futures Contracts A total of 1,326,563 futures and options contracts was transacted on the New Zealand Futures & Options Exchange in the year to 31 March 1998, compared with 815,420 contracts traded in the previous year. This represents a rise of 63%. The volumes are dominated by 90 Day Bank Bill Futures, which accounted for approximately 90% of the total volumes for the year to 31 March 1998. All shares in New Zealand Futures & Options Exchange Limited are held by the Sydney Futures Exchange. Sydney Futures Exchange Clearing House Limited is responsible for clearing, settling and guaranteeing contracts on the New Zealand Futures & Options Exchange. The Business Conduct Committee is responsible under the Rules of the Exchange for surveillance and investigation matters. The New Zealand Futures & Options Exchange conducts night trading to enable overseas and New Zealand investors to trade during the hours when the major futures exchanges around the world are operating. There were 74 persons as at 31 March 1998 authorised by the Securities Commission as futures dealers. Of this total, 40 persons hold New Zealand Futures & Options Exchange permits to deal in exchange traded contracts, of which 34 are public brokers (10 New Zealand domiciled and 23 Australian domiciled), 5 are introducing brokers and 1 is a principal trader. Of the remaining 34 authorised futures dealers, 17 substantial fund managers are authorised to deal in futures contracts in relation to the funds they manage and 17 are authorised to deal in electricity price futures contracts. These people are not permit holders of the New Zealand Futures & Options Exchange and are not subject to the authority of the Exchange's Business Conduct Committee. Innovative Developments There are a number of innovative securities market developments in New Zealand. This follows trends apparent in the developed markets of the United States and Europe for some time. Securitisation and over-the-counter derivative markets have shown significant growth from relatively low bases by international standards. Although figures on activity levels in these markets are not readily ascertainable, the value of rated outstanding securitisations in New Zealand has been estimated at $3,900 million last year, compared with A$28,600 million for Australia. Mortgage-backed securitisations represent the bulk of securitisation activity, although the securitisation of hire-purchase agreements is increasing. The United States has the world's largest securitisation market, with new securitisations alone in the order of US$706,200 million last year. Securitisation is described as "the process by which (relatively) homogeneous pools of assets are repackaged (typically off-balance sheet) and resold as securities to third-party investors" (OECD). Rising activity levels have also been observed during the year in the over-the-counter markets for futures contracts, including foreign exchange and electricity contracts. The over-the-counter activity in unlisted equities has also risen, due to technological developments. International Securities Markets With the increasing internationalisation of the securities markets, the Commission places considerable importance on co-operation with securities regulators in overseas jurisdictions. The Commission is a member of the International Organisation of Securities Commissions (IOSCO), which comprises 151 regulatory and self-regulatory agencies including representatives of all major securities jurisdictions. The principal programmes of work of IOSCO continue to relate to multi-national disclosure of information, including harmonisation of international accounting and audit standards, regulation of secondary securities markets including an examination of the implications of the use of Internet and other electronic networks, regulation of market intermediaries, cross-border enforcement and exchange of information, investment management, objectives and principles of securities regulation and the supervision of financial conglomerates. These programmes are directly relevant to our work in New Zealand and give an important insight into international best practice and the regulatory policies on which it is based. The Commission is one of 82 subscribers to IOSCO's Resolution on Basic IOSCO Principles of High Regulatory Standards and Mutual Co-operation and Assistance. This resolution records our commitment to principles of high regulatory standards and mutual co-operation and assistance. It commits us to examine our respective laws, regulations and procedures and to report to IOSCO on this self-evaluation. It empowers IOSCO to monitor the ability of IOSCO members to obtain information from other jurisdictions, in particular those who are thought to be under-regulated or unco-operative. The Commission is also one of some 64 subscribers to IOSCO's 1986 Rio Declaration which calls on signatories to provide assistance on a reciprocal basis in the gathering of information related to market oversight and protection of investors against fraudulent securities transactions. The Commission confers with a number of these signatories and other regulators in the course of market inquiries. IOSCO has recently released a draft consultative statement of objectives and principles for securities regulation. We made a number of comments on a preliminary draft and many of these were accepted. The present draft is available for public comment internationally and we have sent copies to representative institutions in New Zealand. IOSCO has also prepared a consultative draft of guidelines for the disclosure of non-financial information in cross border public offerings and initial listings by foreign issuers. This has been referred to member jurisdictions for comment and we are distributing copies for comment within New Zealand. The Commission is party to Memorandums of Understanding on information sharing and related matters with the Australian Securities Commission, the United States Commodity Futures Trading Commission, the Hong Kong Securities and Futures Commission and the Chinese Taipei Securities Commission. By co-operating with securities regulators in other jurisdictions, the Commission is better able to facilitate the flow of securities across jurisdictional boundaries, by the use of its exemption powers and for this purpose to minimise transaction costs for issuers of securities and their clients. The Commission has approved a number of exemptions for overseas issuers. It has approved an exemption applying to all issuers listed on designated exchanges and incorporated in specified jurisdictions for the offer of overseas listed securities to the public in New Zealand. In the new financial year we propose to consider additional work on exemptions covering the offer in New Zealand of interests in collective investment schemes based in overseas jurisdictions. Competition Policy and Securities Markets Regulation In April 1997 the Commission, at the request of the Asia Pacific Regional Committee (APRC) of IOSCO, agreed to lead a regional study on competition policy and securities market regulation, with particular reference to optimum procedures for analysis of the costs and benefits of regulatory programmes and proposals. At its meeting in November 1997 APRC decided to establish a Working Group to continue the development of this project. The New Zealand Securities Commission was appointed Convenor. The other members are the Malaysian Securities Commission and the Hong Kong Securities and Futures Commission. In February 1998, the Commission presented a progress report on the project to the APRC. The APRC approved the Working Group's project document and authorised an applicable case study on the regulation of investment advisers. The Working Group is seeking funding from the Asian Development Bank. Technology Trends New Zealanders are increasingly turning to the use of ATMs, EFTPOS, telephones and personal computers to manage their personal and business affairs. This has seen a dramatic fall in manual transactions and payments. ATMs provide instant access to cash, while the cheque, as a form of non-cash payment, has increasingly been replaced by EFTPOS, direct debits and telephone transfers. In 1993, 54% of all non-cash payments, whether for consumption or investment purposes, were made by cheque in New Zealand. By 1997 this figure had fallen to 27%. Given this marked change, New Zealand is now a relatively low user of cheques when compared with other developed countries. In 1996, 75% of the United States' non-cash payments were conducted by cheque. These technology trends are evident in New Zealand securities markets more generally. It has become standard practice in many securities markets to clear transactions by electronic means. For example, all clearing transactions of the New Zealand Futures & Options Exchange are sent to Sydney via electronic means. In 1992, the introduction of the FASTER system of electronic registration significantly reduced time lags in the settlement of share transactions. In May 1998, the FASTER system was extended to facilitate scripless trading. Other efficiency gains are anticipated. In July 1997, the CHESS system of electronic transfer operated by the Australian Stock Exchange was extended to apply to the securities of New Zealand incorporated companies listed on the Australian Stock Exchange and held on the Australian register. These developments followed actions by the Commission under the Securities Transfer Act 1991. An emerging development is the use of electronic means for the offering of securities. From 1 October 1997, New Zealand issuers have been free to deliver their prospectuses and investment statements to prospective investors by electronic means. We observe that some New Zealand issuers already make use of this facility. In addition, there is increasing use of electronic means for the communication of information about offshore investment schemes. Some of these schemes appear to be fraudulent and we have issued public warnings from time to time. Secondary market trading by electronic means is developing generally in New Zealand. A number of brokers offer their services over the Internet. Data on the use of these services is currently not readily available. Recent figures suggest that of the total financial sector pages online banks have 38% compared with 4% for insurance companies. Section 5(5) of the Securities Act empowers us to exempt persons and classes of persons from compliance with a number of provisions of the Securities Act and Regulations. We use this exemption power to address rigidities in the law which may from time to time affect more traditional investment products. We use this exemption power to facilitate the development of new investment products, enabling them to be offered to the public in a timely and cost-effective manner. We also use this exemption power to enable various offshore public issuers to promote investments in New Zealand in accordance with offshore offering documents which comply with the laws of the home jurisdiction. We believe this adds to the diversity of investments available in New Zealand and makes the investment market more competitive. We aim to avoid conferring a competitive advantage on particular investment institutions through the exemption process. We wish to ensure that there is a reasonable equivalence of regulatory burden applying to different entities offering similar financial services to the community. We aim to respect the reasonable needs of both the investment institution seeking the exemption and its investors present and prospective. All exemptions will be soundly based within the general policies of the Securities Act and Regulations. We ask applicants to let us have an estimate of the likely costs and benefits, both to the applicant and to prospective investors, of both approving and declining to approve the exemption application. We wish to be able to estimate the value to the community of the Commission's exemption power. We have been particularly busy with exemptions this year. There were two principal reasons for this. First, we undertook a general review of all exemption notices issued since Part II of the Securities Act came into force in 1983. This provided us with an opportunity to revoke exemption notices that were no longer required. Other exemption notices were redrafted to reflect the detail of the new Act which came into force on 1 October 1997. We were also able review the policy of many exemption notices which we decided should remain in force. However, it remains necessary for us to review the basic policy of some notices to enable us to complete our general review as planned. Secondly, there were some entities, in particular, superannuation scheme managers and trustees, which had not previously been subject to the provisions of the Securities Act and Regulations. There were unique transitional issues for the superannuation industry and longer term compliance questions for employer-sponsored superannuation schemes. We approved a general exemption of three months for all superannuation schemes in order to allow the industry time to work through issues with us and the Registrar of Companies. We prefer to issue class exemptions rather than individual person exemptions where we can. We prefer to consult widely when time allows, particularly where an exemption application involves significant policy questions. We recognise that this may have the effect of committing an applicant company to the expenditure of time and resources for the public benefit. We are grateful to the many companies and industry organisations which have given us considerable help during the year on individual projects. We considered 159 exemptions, including 59 exemptions in the course of our general review, and we issued 111 exemption notices during the year. This compares with 85 exemptions considered in 1996/1997 and 68 notices issued. There are 121 exemption notices now in force, 333 as at 30th June 1997. Among the most important of our exemption notices are those which apply to the offer of securities in New Zealand by overseas companies, particularly Australia. AMP, for example, was able to issue its shares in New Zealand without the need for a New Zealand prospectus as the equivalent Australian offer document complied with Australian law. Australian unit trust managers were able to offer interests in their trusts in New Zealand without a New Zealand prospectus or a New Zealand trustee so long as the manager complied with Australian law and the terms and conditions of the New Zealand exemption notice. At present some $1,368 million of New Zealand investors' funds are under administration by Australian unit trust managers raised in New Zealand with the benefit of Commission exemptions. As at 30 June 1998, there were 31 applications before the Commission. We believe this is an important aspect of our work. We are unable to maintain the present level of work in the new year without additional funding. We are conferring with the Minister of Commerce on this matter. In the new year we hope to be able to take action on certain longer term projects on which there has been limited progress in the past year, including those for the benefit of small business enterprises, wholesale market participants and the managers of overseas collective investment schemes. |
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