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chapt05.pdf - Chapter 5 Regulation of Financial Markets...

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. . . 107 Chapter 5 Regulation of Financial Markets Introduction 5.1 This chapter considers the regulation and development of Australian financial markets in the light of the Inquiry’s Terms of Reference that direct it to propose regulatory arrangements that: best promote the most efficient and cost effective service for users, consistent with financial market stability, prudence, integrity and fairness; and ensure that financial system providers are well placed to develop technology, services and markets and that the financial system regulatory regime is adaptable to such innovation. 5.2 The financial markets play a critical role in raising and allocating capital, providing avenues of investment, facilitating risk management, providing liquidity and facilitating international trade. Internationally competitive, efficient and liquid financial markets are therefore vital to Australia s economic well-being. 5.3 The chapter addresses 3 main issues: ¾± first, whether arrangements for regulating financial market integrity facilitate the development of internationally competitive and innovative markets; ¾± secondly, the development of efficient and liquid financial markets, in particular whether there are any impediments to the process of securitisation or secondary trading of financial instruments; and ¾± finally, the effectiveness of the financial markets in providing debt and equity capital to small and medium sized enterprises (SMEs).
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Financial System Inquiry 108 . . . 5.4 Other issues relating to the competitiveness of Australian financial markets and measures to promote Australia as a regional financial centre are considered in Chapter 9. 5.5 The financial markets considered in this chapter have been defined very broadly. They encompass markets for debt, equities and foreign exchange, which can be further divided into: ¾± primary markets where financial instruments such as bonds, shares and trust units are initially issued to raise capital; ¾± secondary markets where financial instruments are priced and traded; and ¾± derivatives markets involving futures or other contracts whose value is derived from a separate underlying asset, rate or index. 5.6 These markets may be classified as being conducted: ¾± on approved exchanges primarily the Australian Stock Exchange (ASX) and the Sydney Futures Exchange (SFE); ¾± in over the counter (OTC) markets conducted on a bilateral basis principally between wholesale market participants; or ¾± in retail markets between financial institutions and their customers. Market Integrity Regulation 5.7 Market integrity regulation refers to the legislative and self-regulatory arrangements which aim to ensure that markets are efficient, orderly and fair. Such regulation aims to improve the efficiency of financial markets in pricing, allocating capital, managing risk and avoiding fraud.
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