A rule-making process in Australia could soon see a new generation of stock exchanges begin trading as derivatives rather than stocks.
Key points:Australia’s new rules for derivatives trading will require an investor to demonstrate that he or she has the resources to manage the risks involvedIn this scenario, an investor could buy a stock on a derivatives exchange and use the proceeds to buy shares on another exchangeA new rule-writing process could see the Australian Stock Exchange (ASX) become the first stock market in the world to trade derivatives tradingThe government is expected to introduce the rules for the derivatives trading market by the end of next year, which could mean that the Australian stock market could soon become the world’s first.
In order to get approval, an investment needs to be at least $10,000 in an exchange and be able to show that it has the financial capacity to manage those risks.
But that may not be possible for everyone.
Investors would have to show the same level of ability to manage their own risk as a bank’s, for example.
The government will be looking to a wider range of stakeholders, including companies and pension funds, to help it finalise the rules.
The regulator has been working on a rule for trading in derivatives since the end 2014, but there is still some work to do to make sure the changes are as effective as possible.
The rules will require investors to show they have the financial capability to manage any risks associated with the trading process, which would be something that is very difficult to prove in the current regulatory environment.
But the ASX has already established an infrastructure to provide financial management tools to its customers.
It is a process where the ASI uses information about the trading environment to develop an index that allows it to forecast the price of an asset.
In other words, a simple price calculation can provide the information needed to determine what an investor can afford to buy and sell in an asset’s future.
While the ASIC is working to develop a rule that will allow the ASY to buy or sell shares on an exchange in a certain timeframe, the regulator is yet to finalise a rule to allow investors to buy, or sell, shares on a derivative exchange.
The ASX is also working on rules for buying or selling shares on other trading platforms, but those are likely to be much more difficult to implement.
The regulations have been delayed several times, but the government said last year it was going to finalised the rules before the end 2018.
The ASQ will also be considering changes to the way it regulates derivative trading, with a focus on ensuring it provides the right level of supervision.