Murray Reflects On Global Trends

David Murray discussed his aversion to the global political agenda of untested regulation at the launch of the AFMA’s annual report on financial markets in Sydney earlier this month. Marion Williams reports.

Speaking at the launch of the Australian Financial Markets Association (AFMA) annual report on financial markets in Sydney earlier this month, David Murray, chairman of the financial system inquiry, touched on some key conundrums his inquiry was weighing up as it sought to lay out a blueprint for the future to federal treasurer Joe Hockey next month. He said “what is in the best interests for Australians and the economy” was at the heart of the inquiry’s agenda, but added that each economy was different and its financial system would have to reflect that. He told the gathering that the global financial crisis had put the world on a path of low economic growth, requiring governments to think about productivity, something usually associated with deregulation.

Instead, the political response to the crisis was “to fix it at all costs”. “So, we’ve got Basel III, macroprudential policies and bail-ins,” said Murray. “All the new stuff is there. Most of it untested and most of it is due to the political agenda.” Murray said he was also considering the connection between the financial system and its ultimate backstop, the Commonwealth, as the quality of the backstop would determine the quality of the system. “We are trying to work out where to pitch the quality of the system,” he said. The emergence of Asia, and Australia being a user of the world’s savings, meant that Australia might have to have the highest quality financial system. “The cream always rises to the top,” he said. “We will be a financial centre if we are thought of as the highest quality.”

AFMA’s annual report

Low domestic interest rates and low volatility globally weighed on Australia’s debt market last financial year, causing overall Australian financial market volumes to fall by 6.6 per cent. Turnover in the physical and derivative debt market accounted for 62 per cent of the total market, hence the 10.6 per cent fall in debt activity far outweighed marginal increases in the currency and equities markets, according to AFMA’s 2014 Australian financial markets report. Volumes in the physical debt market in the 12 months to 30 June 2014 (FY14) slumped by 16.2 per cent to $11,466 billion, while debt derivative turnover dropped 9.5 per cent to $66,494 billion. The ratio of derivatives trading to physical trading rose to 5.8 times.

It has steadily increased from 4.1 times four years earlier. The second-largest asset class in Australia’s financial markets is currency, where physical volumes fell 2.4 per cent to $10,811 billion. This was offset by a 1.8 per cent rise in currency derivative turnover so that overall activity in the currency market edged up 0.7 per cent to $43,997 billion. As was the case with debt derivatives, equity derivatives, as a ratio of physical activity, continued to trend upwards to 3.1 times from 1.9 in FY10.

Equity market bucks trend

In contrast, trading of physical equities was up 3.2 per cent to $1,188 billion while equity derivative volumes fell 1.6 per cent to $2,039 billion, so that the ratio of derivatives to physical equity trading eased to 1.7 times from 1.8 times in FY13 and FY12. Overall, equity volumes increased 0.1 per cent to $3,227 billion. Financial markets fill multiple roles in the economy, including being a source of capital and investment and providing ways to manage risk. When launching the report, AFMA therefore called for regulatory and tax policy settings that would help the markets’ continued development so that they could support the economy as it responded to technological and demographic change and international events. Over-the-counter volumes accounted for 62.16 per cent of total activity in FY14 versus 62.19 per cent a year earlier. Overall, financial derivatives activity was down six per cent, driven by short-term derivatives, which AFMA said was to be expected because stable interest rate markets reduce risk management needs of business and government.

Government debt, equity issuance up

As for the debt and equity capital markets, turnover of government debt securities increased 6.8 per cent to $1,899 billion amid continued demand for safe asses and budget deficits leading to extra issuance. However, trading volumes of non-government debt slipped 0.7 per cent to $772 billion “as the potential of the corporate bond market remains to be fully realised”. AFMA also highlighted the contraction in the short-dated debt market as regulation forced banks to source more funding from sticky customer deposits and longer-term wholesale debt issuance. Conversely, “the persistent decline in equities turnover over recent years halted”. There were 107 IPOs in FY14, up from FY13’s total of 82, which raised $27.7 billion. A total $66 billion of capital was raised, a 42.3 per cent increase on FY13, as the big banks dominated secondary placements while use of dividend reinvestment plans continued to trend down.

Banking, Capital Markets,
David Murray, Marion Williams, AFMA, Financial Market, AFMA’s annual report
Marion Williams
Article Posted:
October 01, 2014

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