pbl 3 banking law

pbl 3 banking law - Problem Based Learning Exercise Three...

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“Problem Based Learning Exercise Three” Banking industry in Australia is very wide spread and the banking law is constantly changing. Due to the global financial crisis in 2008, Australian government has increased regulations and prepared more guidelines in order to regulate the new developments such as margin loans, derivatives, high frequency trading and algorithmic trading. This is being done in order to ensure that the market is “fair” and less risky for unsophisticated investors. Derivatives A derivative is a financial instrument that derives or gets it value from another stock or real good. It’s simply a contract between two parties to exchange value based on the action of real good 1 . Some examples are shares, fixed securities, currencies etc. Derivatives allow investors to speculate on shares that they don’t own and spread risk. So, if the original investor makes money on an investment, then the person purchasing the derivative also gains. Also if the original investor loses, then the losses are multiplied and affect a larger group of people. 2 Collateralised debt obligations are a classic example of products whose values were derived from sub-prime loans. During the GFC crisis these CDO’s caused huge amount of losses to people who bought them as the creditors defaulted on the loan payments. Under s 764 A (1) (c) of Corporations act, derivative is a financial product. Derivatives are hard to regulate because they are hard to fully comprehend. ASIC is trying to guide and protect customers by seeking improved disclosure statements from companies under s 706 CA of Corporations act and surveying and monitoring the markets. Therefore, even though derivatives market is highly unregulated, ASIC can still pursue promoters of a product for misleading or deceptive statements made in product disclosure statements under s12DA of 1 S. John, “What are Financial Derivatives?”, Wise Geek, 2011, http://www.wisegeek.com/what-are- financial-derivatives.htm , viewed 11 September, 2011. 2 ibid.
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the ASIC Act 3 : Henjo investments Pty Ltd v Collins Marrickville Pty Ltd. 4 Rationally, lots of investors do not read a detailed statement or go to a financial advisor before making decisions regarding investment. Also, Product disclosure statement provides only ‘point of sale’ protection and no ongoing protection regarding securities and derivatives 5 . Therefore, in order to provide greater transparency in the market and to protect the unsophisticated investors, the government/ ASIC still needs to place more rules to regulate the derivatives as product disclosure statement is not adequate. Margin loans Margin loans allow households or investors to borrow to invest directly in shares or managed funds. The shares and households are used as mortgage security in case of price drop of drop. This type of leveraging can be highly risky if the shares perform poorly. In Australia, margin lending grew rapidly between 2000 and 2007 and as the share values
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This note was uploaded on 11/09/2011 for the course BUS ECO 101 taught by Professor Nguyen during the Three '11 term at Monash.

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pbl 3 banking law - Problem Based Learning Exercise Three...

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