Working Group of Officials
National Competition Policy Review of the
Bills of Exchange Act 1909
July 2003
Ó Commonwealth of Australia 2003
ISBN 0 642 74196 4
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The Government is seeking comments from interested parties on the Report of the Working Group. The Comments should be forwarded to the following address by 30 September 2003:
Market Integrity Unit
Corporations and Financial Services Division
The Treasury
Langton Crescent
PARKES ACT 2600
Inquiries concerning this paper can be made to:
Andrew Craston
Telephone: (02) 6263 2962
Copies of this document are available on the Treasury web site: (http://www.treasury.gov.au)
Table of contents
Terms of reference vii
Abbreviations xi
Executive summary 1
Chapter 1 Background to the review 5
1.1 Analytical framework of competition policy reviews 5
1.2 Terms of reference 6
1.3 Legislation under review 7
1.4 Report structure 7
Chapter 2 The short-term money market 9
2.1 The regulatory environment 9
2.2 The market environment 10
2.3 Bank bills 12
2.4 Certificates of deposit 13
2.5 Retail market in bank bills and certificates of deposit………….. 13
2.6 Promissory notes 14
2.7 Treasury Notes…. 15
Chapter 3 The Bills of Exchange Act 17
3.2 Objectives of the Bills of Exchange Act 18
3.3 Continuing relevance of the objectives of the Bills of
Exchange Act……….………………………………………………22
Chapter 4 Participants’ views of the Bills of Exchange Act 25
4.1 Introduction 25
4.2 Conclusion 29
Chapter 5 The Bills of Exchange Act ¾ restrictions on
competition. 31
5.1 Introduction 31
5.2 The general nature of operating and compliance costs 31
5.3 Compliance costs as a restriction on competition 35
CHAPTER 6 The BILLS OF EXCHANGE ACT ¾ the scope for
improvement 41
6.1 Introduction 41
6.2 Amendment of the Bills of Exchange Act……………………... 41
6.3 Alternative means of achieving the Act’s objectives 43
6.4 Costs and benefits of alternative arrangements 45
6.5 Assessment 45
6.6 Inclusion of other short-term money market instruments in
the Bills of Exchange Act 46
Chapter 7 Impediments in the Bills of Exchange Act to dematerialisation ¾ legal issues 53
7.2 Nature of impediments to a bill of exchange or promissory
note in electronic form 53
7.3 Impact of impediments on the development of electronic techniques in relation to bills of exchange and promissory
notes 56
7.4 Adapting the attributes of negotiability to electronic
securities 60
Chapter 8 Other issues raised by the terms of reference and submissions to the Review 63
8.1 Introduction 63
8.2 Retaining bills of exchange and promissory notes in paper
form 64
8.3 Encumbrances over dematerialised securities under the Corporations Act 74
8.4 Impact of the definition of ‘debenture’ in the
Corporations Act 77
8.5 Saturday as a non-business day 78
8.6 Modernising the Bills of Exchange Act generally 81
Chapter 9 Options for reform 83
9.1 Introduction 83
9.2 Option 1 ¾ Electronic bills of exchange and promissory notes
to be created by statute; statutory support for transfer of title
to electronic bills of exchange and promissory notes 84
9.3 Option 2 ¾ Reliance on the clearing and settlement facility
and electronic transfer of title provisions of the Corporations
Act, as amended by the Financial Services Reform Act 87
9.4 Option 3 ¾ Reliance on the Electronic Transactions Act 90
9.5 Conclusion 91
Appendix One: Provisions in the Bills of Exchange Act relating to the documentary form of bills of exchange and promissory notes 95
Appendix Two: Dematerialisation in Australia: The Austraclear
System 99
Appendix Three: International experience 103
Appendix Four: List of Submissions 113
References 115
1. The Bills of Exchange Act is referred to an Inter-Departmental Working Group (the Working Group) for evaluation and report. The Working Group, which is comprised of officers from the Treasury, the Reserve Bank of Australia and the Attorney-General’s Department, is to focus on those parts of the legislation which restrict competition, or which impose costs or confer benefits on business. However, the Working Group may give consideration to a possible broadening of the scope of the Act to encompass financial rights and obligations, whether in the form of a physical instrument or otherwise, which are negotiable in nature, but which are not currently encompassed by the Act.
2. The Act encompasses three types of negotiable instruments, namely, bills of exchange, promissory notes and also cheques drawn before 1 July 1987. The legislation prescribes the form of the instruments, determines many of the rights and obligations of the parties to the instruments and establishes procedures for their drawing up and resale. The Act does not apply to other money market instruments, some of which have come to be regarded as negotiable instruments, such as certificates of deposit, floating rate notes and Commonwealth Government securities, including Treasury Notes and Treasury Bonds.
3. The Working Group is to report on the appropriate arrangements for regulation, if any, taking into account the following objectives:
a) legislation should be retained only if the benefits to the community as a whole outweigh the costs, and if the objectives of the legislation cannot be achieved more efficiently through other means, including non-legislative approaches. In developing any options, the Working Group will seek to ensure efficiency in the money market in relation to the trading of the instruments to which the Act applies.
b) compliance costs and the paper work burden on business should be reduced where feasible.
In assessing these matters, regard should be had, where relevant, to effects on economic development, investor rights, consumer interests, the competitiveness of business including small business, and efficient resource allocation, taking into account rapid technological developments in electronic commerce and trade.
4. In making assessments in relation to the matters in (3), the Working Group is to have regard to the analytical requirements for regulation assessment by the Commonwealth, including those set out in the Competition Principles Agreement. The report of the Working Group should:
a) clarify and review the objectives of the Bills of Exchange Act in the light of continuing technological developments in electronic trading, clearing and settlement of money market securities;
b) identify the nature and impact of impediments in the Bills of Exchange Act on the development of electronic techniques for the issue of, trading in and transfer of ownership of, negotiable instruments, including bills of exchange and promissory notes, and determine, in the light of technological advances permitting the transfer of money market instruments by electronic means in screen-based or book-entry depository systems, whether the Act should be extended to cover negotiable instruments other than bills of exchange and promissory notes; in addition, determine whether the Bills of Exchange Act should recognise mechanisms for the creation, recording and transfer by electronic means of payment obligations with equivalent characteristics to negotiable instruments;
c) identify whether, and to what extent, the Bills of Exchange Act restricts competition;
d) identify relevant alternatives to the Bills of Exchange Act (including non-legislative approaches) and determine a preferred option for regulation, if any, in light of objectives set out in (3);
e) determine the need to identify Saturdays as non-business days for the purposes of the Act;
f) analyse and, as far as reasonably practical, quantify the benefits, costs and overall effects of the Bills of Exchange Act and alternatives identified in (d);
g) identify the different groups likely to be affected by the Bills of Exchange Act and alternatives identified in (d);
h) list the individuals and groups consulted during the review and outline their views; and
i) examine mechanisms for increasing the overall efficiency, including minimising the compliance costs and paper burden on business (including small business) of the Bills of Exchange Act and, where it differs, the preferred option.
5. In undertaking the review, the Working Group is to advertise nationally, consult with key interest groups and affected parties, and publish a report.
6. Within 6 months of receiving the Working Group’s report, the Government intends to announce what action is to be taken, after obtaining advice from the Treasurer and where appropriate, after consideration by Cabinet.
ABA Australian Bankers’ Association
ACCC Australian Competition and Consumer Commission
AFMA Australian Financial Markets Association
ASCT Australian Society of Corporate Treasurers
ASIC Australian Securities and Investments Commission
ASX Australian Stock Exchange
ATOA Australian Treasury Operations Association
Bills of Exchange Act Bills of Exchange Act 1909
CD Certificate of deposit
CHESS Clearing House Electronic Subregister System
CIS Act Commonwealth Inscribed Stock Act 1911
CMO Central Money Markets Office (UK)
Corporations Act Corporations Act 2001
CP Commercial paper
CRESTCo Operator of UK settlement systems
Electronic Transactions Act Electronic Transactions Act 1999
FRN Forward Rate Note
FSR Act Financial Services Reform Act 2001
FTR Act Financial Transactions Reports Act 1988
ICC International Chamber of Commerce
LCA Law Council of Australia
MMI Money Market Instrument (UK)
NCC National Competition Council
NCP National Competition Policy
NCCUSL National Conference of Commissioners on Uniform State Laws (US)
NCD Negotiable certificate of deposit
OTC Over-the-Counter
RBA Reserve Bank of Australia
RITS Reserve Bank Information and Transfer System
SFE Sydney Futures Exchange
SIRCA Securities Industry Research Centre of Asia-Pacific
SME Small and medium sized enterprise
T-Note Treasury Note
UCC Uniform Commercial Code (US)
UETA Uniform Electronic Transactions Act (US)
UK United Kingdom
UNCITRAL United Nations Commission on International Trade Law
US United States
Interpretation
Generally speaking, references in this report to ‘bills of exchange’ should be read as including ‘promissory notes’.
The report uses terms such as ‘electronic bill’, ‘electronic note’, electronic negotiable security’, ‘dematerialised negotiable security’, dematerialised bill of exchange’ and ‘dematerialised promissory note’ interchangeably.
The term ‘dematerialised security’ has a special meaning under the rules of the Austraclear System.
The report also uses terms such as ‘unchallengeable title’, ‘better title’, ‘perfect title’, ‘guaranteed title’, ‘free from previous defects in title’ and ‘title free of defects’ interchangeably.
This report fulfils a commitment made by the Commonwealth to undertake a National Competition Policy (NCP) review of the Bills of Exchange Act 1909 (Bills of Exchange Act). The focus of the report is on those parts of the legislation which restrict competition and/or impose costs or confer benefits on business, including small business, and investors generally.
The overarching purpose of the Bills of Exchange Act is to codify by statute the common law relating to two types of negotiable instrument - bills of exchange and promissory notes. The Bills of Exchange Act confirms that bills of exchange and promissory notes are negotiable instruments. The particular advantage enjoyed by negotiable instruments over other financial instruments is that of negotiability. Negotiability provides a good faith purchaser of a bill of exchange or promissory note guaranteed title to the financial instrument. The Bills of Exchange Act applies to any person who becomes a party to a bill of exchange or promissory note.
The Bills of Exchange Act plays a significant role in Australia’s financial markets, with bills of exchange and promissory notes constituting an important segment of the short-term money market.
The terms of reference of the Review require the Working Group to clarify and review the objectives of the Bills of Exchange Act in the light of continuing technological developments in electronic trading, clearing and settlement of money market securities.
The objectives of the Bills of Exchange Act are to:
· provide uniformity of law in Australia in relation to bills of exchange and promissory notes;
· provide legal certainty by confirming the nature of bills of exchange and promissory notes as negotiable instruments; and
· promote efficiency in the marketplace which utilises bills of exchange and promissory notes through the concept of negotiability.
The Working Group notes that, generally speaking, participants in the Review regarded the Act as achieving its objectives of uniformity, certainty and efficiency. However, participants were almost unanimous in highlighting the substantial compliance costs imposed by the Act’s requirements for paper-based financial instruments.
The majority of participants in the Review called for the Act to be retained but modernised to provide for the dematerialisation of bills of exchange, promissory notes and other similar money market instruments, to enable these financial instruments to take advantage of modern developments in electronic commerce.
The Working Group’s analysis suggests that the Bills of Exchange Act restricts competition by imposing costs on business and other investors. The complex and prescriptive requirements of the Act relating to the paper form of bills of exchange and promissory notes impose significant costs on participants in relation to producing, trading and settling the instruments. This, in turn, makes bill and note finance less competitive with other sources of finance.
Nonetheless, the Working Group is of the view that the net benefits of the Bills of Exchange Act outweigh the costs of the restrictions to competition it imposes, because the objectives of the Act have allowed it to play an important role in the development of Australia’s financial markets through the provision of both legal and commercial certainty and a clear definition of operating parameters.
Pursuant to the terms of reference, the Working Group also examined the nature and impact of impediments to the proposed dematerialisation of bills of exchange and promissory notes arising out of the documentary nature of negotiable instruments.
In addition to issues raised by the terms of reference regarding competition policy matters and the dematerialisation of bills of exchange and promissory notes, the Working Group also considered other issues raised by participants in the Review, including the ramifications of retaining the paper form provisions of the Bills of Exchange Act.
Recommendations
The Working Group recommends that the Bills of Exchange Act be retained. However, the Working Group considers that the Bills of Exchange Act should be amended to facilitate the dematerialisation of bills of exchange and promissory notes.
The Working Group recommends that the Bills of Exchange Act should retain those provisions that facilitate the continued use of conventional bills of exchange and promissory notes by those investors or traders who need physical bills or notes because of legal requirements.
The Working Group recommends that in providing for the dematerialisation of bills of exchange and promissory notes, a legislative approach would be preferable to a non-legislative approach.
· The Working Group considers that a non-legislative approach could undermine the uniform legal framework established by the Bills of Exchange Act and the Act’s objectives of legal and commercial certainty. The Working Group is of the view that it is in the interests of the public, and the economy in general, to retain uniformity and certainty throughout Australia with respect to the law relating to bills of exchange and promissory notes.
The Working Group also sees scope for the inclusion of negotiable certificates of deposit under the Bills of Exchange Act, given their treatment as negotiable instruments by the market.
· However, the Working Group does not consider that other short-term money market instruments, such as semi-government securities, forward rate notes, perpetual notes or debt instrument issued by trustees should be included within the scope of the Bills of Exchange Act.
Options for reform
The Working Group has identified three options, derived in part from participants’ suggestions and in part though an examination of overseas experience, to assist in reducing the complexity and prescriptiveness of the requirements of the Bills of Exchange Act, so as to achieve the objectives of the legislation in a more cost-effective manner (and facilitate dematerialisation of those instruments that are covered by the Act).
The options are:
· Amend the Bills of Exchange Act to make statutory provision for negotiable instruments in electronic form with equivalent functionality to bills of exchange and promissory notes in paper form. The legislation would specify