How serious is our debt, Mr Medcraft....should we be panicking?
ASIC’s Greg Medcraft lobbies US for debt relief
9 June 2015
Australian Securities and Investments Commission chairman Greg Medcraft is pressing American regulators to help make it easier and cheaper for Australian companies to sell financial securities to individual investors in the United States.
Mr Medcraft is lobbying the US Securities and Exchange Commission to sign a mutual recognition arrangement for the Australian and US retail debt markets. He is due to visit Washington this month to push for a deal.
Australia needs to convince the SEC of the merits of cutting red tape and enhancing capital flows between the countries.
A person in Washington familiar with the discussions between ASIC and the SEC said Mr Medcraft had been "knocking at the door of the SEC saying 'please do this'".
Mr Medcraft told The Australian Financial Review mutual recognition of retail debt markets between Australia and the US would be "win-win".
"For borrowers, it gives them access to funds, and for investors it gives them diversity in their portfolio," Mr Medcraft said. "And it strengthens further the ties between Australia and the US."
The push is part of a broader reform initiative Mr Medcraft is championing to improve the transparency and accessibility of Australia's opaque over-the-counter wholesale bond market, which has no mandated public price reporting and imposes minimum investment sizes of $500,000.
Under the proposal to overcome jurisdiction-specific disclosure and filing requirements for retail debt markets, Australian and US companies could use their domestic prospectuses to offer debt securities.
The arrangement would avoid costly and time consuming duplicated compliance for firms looking to sell bonds in both markets.
If the retail debt market idea is adopted, the arrangement would mirror similar deals between Australia and New Zealand and the US and Canada.
As well as reducing the cost of access to offshore debt markets, the mooted arrangement would give sub-investment grade companies greater access to American investors with greater credit appetite for junk bonds.
Red tape
ASIC also argues that Australian firms would win more brand recognition through issuance into the deep US market.
The local corporate regulator believes the red tape reduction for US companies selling their debt securities would provide opportunities for investor diversification into sectors not available in Australia.
Investors would gain exposure to a greater range of issuers and maturities.
Mr Medcraft, who specialised in debt markets as the former head of securitisation at Societe Generale in North America, has told US stakeholders that Australia's high quality regulatory environment meant they should be able to trust the Australian prospectus process. His role as chairman of the International Organisation of Securities Commissions gives Mr Medcraft extra clout and credibility in foreign regulatory circles.
The source in Washington said Mr Medcraft has told US counterparts that striking a deal with the US was overlooked in the 2004 US-Australia free trade agreement.
Currently, Australian businesses selling bonds in the US need to file a US-law compliant registration statement with the SEC and then, subject to the approval of that statement by the SEC, use a US-law compliant prospectus to offer debt securities. They are also subject to ongoing filing obligations such as annual reports.
King & Wood Mallesons partner David Friedlander said Australian companies outside the ASX100 were deterred from selling bonds in the US due to high transaction costs when coupled with increased legal liability.
"Australian corporates would be delighted if they could go to the US and rely on local disclosure requirements," Mr Friedlander said.
"It would make mid market corporates less reliant on bank funding."
The existing Australia-New Zealand arrangement allows companies to use the same offer documents, with minimal additional obligations.
The US and Canada multi-jurisdictional disclosure system arrangement, adopted in 1991, allows eligible cross-border debt and equity securities offerings to be governed by the disclosure requirements of the issuer's home country.
Publicly-listed Canadian companies rely on domestic documentation, combined with a simple US "wrapper".
"Because of the size of the market in the US, the vast majority of companies who use these rules are Canadian," said Baker & McKenzie partner Kevin Rooney, a corporate and securities lawyer in Toronto.
Separately, Mr Medcraft is understood to be considering ways to improve the pricing transparency of Australia's $1 trillion OTC bond market.
In contrast to listed equities transactions, investors in the wholesale bond markets are not required to report any prices or volumes publicly.
This works to the advantage of bank dealers who act as market-makers and can see real-time buy and sell flows while undermining the information available to end investors. It means that retail buyers of bonds often accept prices that are much more expensive than wholesale levels.
In the US the SEC introduced the Trade Reporting and Compliance Engine (TRACE) in 2002, which requires all bond transactions to be published through TRACE.