E-Credit Derivatives: Buying and Selling Credit Risk Over the Internet
University of Queensland Law School Working Paper
13 Pages Posted: 6 Jun 2001
Date Written: May 2001
This article provides an overview of the on-line platforms for trading credit derivatives. The article also discusses the key issue facing parties intending to establish similar platforms in Australia, that is whether or not the operation of such a platform constitutes the establishment or conduct of a futures market in Australia. Finally, the article comments on the new market licensing provisions proposed in the Financial Services Reform Bill 2001 (which is expected to be enacted in October 2001).
It is likely that the various credit derivatives presently transacted on-line would, if transacted in Australia, constitute "futures contracts" under the Australian Corporations Law. Accordingly, it will therefore be necessary for the operator of an on-line platform to ensure that the credit derivatives transacted via that platform are, in fact, being transacted on an "exempt futures market" (in order to avoid the civil and criminal sanctions imposed for breaches of the futures licensing provisions of the Corporations Law).
The Financial Services Reform Bill, introduces a new form of licence, the "Australian market licence". A party that operates a "financial market" in Australia must hold this licence. A financial market includes facilities through which offers to acquire or dispose of "financial products" are regularly made. It is likely that credit derivatives would fall within the definition of "financial products" set out in the Bill. However, it remains unclear whether or not an on-line platform for transacting credit derivatives constitutes a "facility". Notwithstanding this, the Australian Securities and Investments Commission is likely to consider a platform through which a substantial volume of business is transacted as constituting a facility for financial products and thus a regulated financial market.
Keywords: Credit derivatives, Internet
JEL Classification: G24, K22
Suggested Citation: Suggested Citation