SEP2007
• Individual - The aim of education is to enable individuals
2003 FSAP Findings Non–Bank
Financial Institutions
The International Montary Fund, Financial Sector Assessment
Program was conducted in New Zealand at the end of 2003,
FINANCIAL MARKETS and weaknesses highlighted to New Zealand at that time
OPERATIONS ASSOCIATION
were:
Oversight of non-bank financial sector relies heavily on
the role of trustees, who are appointed by the institution
to represent the interests of creditors, and auditors who
are responsible for auditing the prospectuses of financial
institutions.
IN THIS ISSUE With a few exceptions, there is no formalised licensing or
supervis i on of non- bank fi nanc ial i nst ituti ons.
Chairperson’s Report
The FSAP team found that disclosure of non-bank financial
FSAP institutions may not be timely or comprehensive enough to
Finance Company Failures ensure adequate market oversight, and that there is no
Education Update official oversight of trustees. This report recommended a
review of the practices and resource needs for government
Changes agencies involved in this sector, with a view towards improving
public access to financial data”.
e209/Banking Industry Code of Practice/
(ORRF) Overnight reverse repo facility Financial
Products and Providers Almost four years later in 2007, we now have 9 failed finance
companies reportedly in excess of 1 billion dollars affecting
Competition many Mum and Dad investors. Some questions that come
Emissions Trading/Depository/AXE to mind are:
Tony Alexander • Why has it taken so long?
Chief Economist, Bank of New Zealand • Oversight for that public listed issuer?
• Conflict of interest?
Adam Cox • Brand differentiation?
New Zealand Guardian Trust, PIE & KiwiSaver
• Who will be next?
Greg Yanco • Is someone I know affected?
CEO AXE, Fact Sheet on Trans Tasman market
Over the last few years many in the market have questioned
November Conference Details why New Zealand should follow international standards such
& Registration as IMF, IOSCO and it’s relevance to New Zealand. There
is now ample evidence of why… Investor Protection!
Oversight extends beyond finance companies. There is
active promotion of a savings culture, which without doubt
is the right direction. However with the introduction of
KiwiSaver, it offers no guarantees for investors, that their
savings are safe, and we have the continued situation of
providers not being regulated as proposed regulatory
timetable expects legislation in FY09.
23 August 2007 Active Day for Government
The Securities Commission together with the Big 4 Accounting
F i r m s ( D e l oi t t e , E r n s t Y o u n g , K P MG a n d
NZ FMOA PricewaterhouseCoopers) recently wrote to the Minister of
Commerce, Lianne Dalziel urging the government to
reprioritise the issue of independent oversight, which was
placed on hold. These changes would bring New Zealand
Chairperson’s into line with International Best Practice.
The Minister of Commerce Press Release – “Government
Report consults with Finance Sector Regulator to determine best
way forward” the following points were put forward:
• Call Trustee Companies together to determine whether
existing terms of the trust deeds are adequate
• Priority to independent audit regulation and oversight
Welcome to this issue • Securities Commission to move ahead with public
of the FMOA information campaign to foster greater understanding
of risks and returns
newsletter, which we • Consider reprioritizing parts of the Review of Financial
Products and providers to enable particular concerns
have aligned with the to be addressed first.
registration for our Lianne Dalziel stated in her press release “Legislation inevitably
takes time and care to draft, pass through Parliament, then
conference in implement. The industry then requires transition time. All
this is on track”.
Wellington on the 9th
November at the new 17 September Cabinet Approves New Rules –
Effective Date 21 September.
venue Holiday Inn.
The Introduction of Legislation to Govern
Trustees
New Zealand financial This further strengthens New Zealand’s regulatory framework
sector has seen nine in the area of non-bank sector. Information is available on
the Securities Commission website.
finance companies fail,
with profound
Education Update
implications for some
In 2006 we stated that the objectives of this initiative were
New Zealanders. to:
• Garner support from the management levels of financial
institutions, so visions and strategies could be realised
for the industry.
• FMOA facilitation and buying power, with market
support.
• Employer - Engage with and support operational
professionals, through budgets and mentoring.
1 Web site: www.fmoa.org.nz
to continue their education and the object and reward
of learning is continued capacity for growth and
recognition of achievement.
What the Sub Committee is
Working Towards 2007
Phase I: Industry Background
The first step in the programme will be the development and
completion of tutorials, which provide a broad understanding
of the financial markets. These tutorials are to be taken from
existing Intuition content and where necessary modified to
reflect any New Zealand market practices.
Phas e II: New Zealand Legal Framework
A new tutorial which provides an overview of the New Zealand
regulatory environment, including statutory regulation, the
role of the co-regulators and self regulation which:
• introduce the principles behind New Zealand financial
and corporate legislation
• enhance understanding of the anti-money laundering
and anti-terrorist financing requirements
• enhance understanding of the roles of the Ministry of
Economic Development, Reserve Bank of New Zealand,
the Securities Commission and Banking Ombudsman
• explain standard market terminology
Phase III: Industry Skills
Several new tutorials will be developed to reflect local industry
skills. Initially these tutorials will be designed in collaboration
with FMOA selected sponsors to cover: Austraclear, Exchange
Settlement Accounts, CLS Bank in New Zealand and FASTER
(or its equivalent service). In addition Proficio and FMOA
intend to adapt or update the following existing Intuition
tutorials to meet any specific New Zealand requirements:
New Zealand Equity Market
Trade Processing - Equities
Trade Processing - Fixed Income
Trade Processing - Foreign Exchange
Trade Processing - Futures
Trade Processing - Options
Trade Processing - OTC Derivatives
Trad e Pr ocessin g - Risks & Risk Managem ent
Market Benefits
• Delivery of an operational education program tailored
for the New Zealand Market
• The introduction of a minimum standard will ensure
participants in the market are at the same minimum
level of competence.
• This will lead to better communications
• More effective and efficient operational processing
• Reduce the risk of operational error, unethical behavior
and breaches of legal processes
• Employers can be ensured that key competencies are
in place.
• Access to competency-based learning guides, checklists
and reference manuals which contain the essential
need-to-know information related to the skills
• On-going competency program focused on the
development of operations specific training to meet the
needs of the industry
Funding Support
• To date we have received $55,000.00 with a remaining
4 entities working through internal processes.
• FMOA Management Committee would like to thank
and acknowledge the support of the below organizations
for their contribution towards the education initiative.
BNZ, ANZ National Bank, ASB, Westpac, Kiwibank,
Computershare, National Nominees Limited
Chairperson of the Education Sub Committee is Guy Curtis
from ASB should you wish to be involved or have any questions
about this project.
Guy C urtis c an be c ont ac t e d on (09 ) 302-144.
continued on page 2
FINANCIAL MARKETS
OPERATIONS ASSOCIATION
PO Box 48057, Silverstream,
Upper Hutt, New Zealand
Email: info@fmoa.org.nz
continued from page 1
Changes
Many regulatory changes have taken place this year, and we would like to bring the
following to you and your client’s attention in case they have slipped under the radar:
Issuers – e209
Listed issuers now have the option to provide electronic annual reports to shareholders.
However the implementation of the legislation seems to have made it more complicated
than necessary.
Changes to section 209 of the Companies Act 1993 (Companies Act) became effective
18 June 2007, at the same time changes were also made to the Securities markets
Act 1988 and to Rule 10 of the NZX Listing Rules.
Every year a company will need to decide whether to:
1. Send an annual report to every shareholder; or
2. Not to send an annual report to every shareholder,
and if no 209 Notice has ever been sent, send a
209 Notice to every shareholder; or
3. If a 209 Notice has been sent previously to every
shareholder then:
• Send a 209 Notice to every shareholder who
did not respond: and
• Send a 209 Notice to every new shareholder;
and
• Send an annual report to each shareholder who
requested one the previous year
New Zealand Bankers Association - Code of
Practice
The banking industries code of practice is reviewed every
three years, and in June a new code was published.
We wish to draw your attention to the NEW internet
banking section. We suggest that you take a look and
check that you are fulfilling your obligations. Ensure that
you understand in what circumstances either the bank
or you will be responsible for losses. An electronic version
of the new code may be found on www.nzba.ord.nz
F i n an c i al P r o d u c t s an d P r o vi de r s
Decisions have been made on the below areas and
legislation expected in 2008
regist r ati o n of all financi al service pr ov i der s;
• improved supervision of corporate trustees;
• improved prudential supervision of non-bank deposit
takers;
• regulation of financial advisers;
• consumer dispute resolution and redress.
Decision’s still to be made on the below legislation
expected 2009 (unless reprioritised)
• improve supervision by corporate trustees of
collective investment schemes and debt issuers;
• simplify and improve security offerings disclosure;
• modernise insurer prudential and mark et;
• conduct regulation;
• consolidate regulation of mutuals' governance;
• regulate platforms and portfolio management
services.
See: www.med.govt.nz
Acceptable Security in the Overnight Reverse
Repo Market
The Reserve Bank released a statement on 17 July 2007
announcing that supra bonds are now eligible to be used
in its Overnight Reverse Repo Facility.
See: www.rbnz.govt.nz
Competition appears to be on
the rise…?
Emission Trading
New Zealand ratified the Kyoto Protocol in 2002. Under
the Kyoto Protocol, New Zealand will become liable for
its emissions come January 2008. We have a healthy
start to this market with two parties promoting capability
and expertise. We have NZX with TZ1 (name of NZX’s
regional emissions market) offering a new regionally significant market that is globally
competitive and New Zealand Carbon Exchange with CantorCO2e offering the New
Zealand market access to their existing global market. TradeMe has also indicated
they intend to provide a service for this market.
• Are the proposed Emissions trading markets viable?
• How will compliance be monitored?
• Are there adequate resources?
2
Depository - FASTER Settlement System Upgrade and Replacement
NZX announced its FASTER Settlement System replacement and upgrade by issuing
a paper which didn’t provide a lot of detail. As part of the proposed changes NZX
will be restructuring and rewriting the rules again.
In summary the proposal intends to provide functionality for:
• Cash equities and debt
• Equity and debt derivatives (options, futures, swaps)
• Index derivatives (options and futures)
• Commodities
• Commodity derivatives (options, futures, CFDs, EFPs)
Delivering:
• Compliance with G-30/ISSA and CPSS-IOSCO
Recommendations
• STP throughout the transaction chain and between
CSDs using ISO15022
• Highest levels of security
• Multilateral trade netting – BIS 3 model
• Fixed T+3 settlement period for on-exchange
transactions, with improved techniques for
reducing settlement failures, such as margining
and securities lending
• Settlement in Central Bank Funds
• NZX as central counterparty guaranteeing
performance and the introduction of more robust
risk management practices
• Participants will have to meet stringent financial
and operational criteria
It is obvious NZX needs the CSD for TZ1, but does the
Auckland Conference 2007 cost benefit weigh up for introduction to the broader
capital market.
Would you trust these people with your money?
A fellow gambler with Jeanette McCallum and
The proposal introduces an alternative depository.
Kylie Burns from National Nominees. Effectively replacing the Stock Exchange FASTER
Administration System known, as FASTER Settlement
System (FSS) but it would appear the intention is not
an outright replacement of FASTER or the introduction
of a separate Clearing House, but retaining the market
infrastructure as originally conceived with internal
improvements and connectivity improvements to achieve
interoperability.
NZX have indicated they intend to introduce a Central
Counterparty being NZX and replace Gateway II with
ISO15022 standard. For brokers this will be a significant
amount of work, resulting in reengineering both operational
processes for systems and operations.
For the Registries, NZX have indicated that they intend
to retain Gateway II (the FASTER messaging protocol)
as part of the new implementation, and in the future.
GTWII will continue to be the mechanism for transfers
and registration for both CSDs operating in the market.
There will be no degradation of existing service levels
for issuers.
Auckland Conference 2007 During the week of 6 August NZX consulted market
participants and advised:
This table was popular!!! Julie Allen from
Deutsche Bank, Stan Malcolm from Link Market • NZX were working with MED on a paper for cabinet
Services to name a few! approval, which would be going to them in 2
weeks, and approval was expected within 4 weeks.
We find it interesting that cabinet are approving
prior to a substantive market consultation without
detailed information being available to participants,
s o as t he y m ay as s es s t h e c hanges .
• MED indication was that the regulatory framework
could be processed by May
• NZX would issue a full paper describing the system,
business processes, flows and messages mid
September.
• The chosen vendor is Tata Consulting Group with
their eClearsettle Solution
Under the proposed model NZX will be:
• Public Listed Company,
• A Regulator,
• A Depository
• Custodial services
Auckland Conference 2007 • Lending services
Serious gamblers from ETOS and Westpac The proposed model places a significant number of eggs
in one basket. Without doubt the devil will be in the detail
and ensuring adequate resources are available.
Given the nature, size and scale of the NZ market it would appear logical to enable
consolidation to remove duplication and introduce cost efficiencies, whilst recognizing
competition is healthy and generally delivers better outcomes for the overall industry.
The clear benefit is from an oversight perspective as it enables visibility at a consolidated
level for risk management purposes.
continued on page 3
continued from page 4
Trans Tasman
Both NZX, AXE and Luquinet have put in AML applications to ASIC to become market
operators. The Submission process has now closed and all parties await decision.
The process has raised interesting issues for ASIC on matters of policy which they
have previous not been faced with in the Australian market.
Upcoming Conference – 9 November
We have an exceptional line up of speakers for our November conference, so I sincerely
hope you will be able to join us on the 9th November for the conference.
Barbara Baker
Chairperson
Auckland Conference 2007
The FMOA Committee bought together an interesting
collection of speakers for our conference held in May,
in Auckland. It started with Kelly Eckhold of RBNZ
speaking to delegates about Financial Stability through
the Eyes of the RBNZ. Adrian Orr from NZ Superannuation
Fund gave an insight into NZ Superannuation Fund, while
Ross Pennington updated conference delegates on NZ
Securities Market Regulations and Stuart Turner of NZX
discussed the ECN and Clearing and Settlement Project.
The conference finished with a shake of the dice and a
spin of the wheel, with a casino night run by Las Vegas
Functions. It was well received by over 70 gamblers
(oops – I mean conference delegates and Auckland
operations staff). It was great to see the casino night
well supported by ASB Bank, ASB Securities and ASB
Investments, Westpac, HSBC, ETOS, National Nominees
and Computershare to name a few.
The high rollers at the end of the night (the ones who
had the most money) were Duncan McMinn of ASB who
won a digital camera, sponsored by BNZ; Scott Hamilton
of ASB Securities and Frances Liefting of HSBC who
both won $75 Whitcoulls vouchers.
But you didn’t have to be a big winner, as there were
plenty of lucky prize draws, with some lucky punters
walking away with an iPod Shuffle donated by Kiwibank,
dinner vouchers donated by ANZ National and ETOS,
a lunch voucher donated by National Nominees, luxury
hotel vouchers and double movie passes and gift bags
full of goodies.
It was a fun way to end a great day.
But don’t despair if you missed out on this casino, as
we will be running a casino at our Wellington Conference
on 9 November. So Wellington delegates and operations
staff, get practising with your roulette, and “21” as there
will be a c hance to w in m or e gr eat priz es.
A big thank you must go to ANZ National, BNZ, ETOS,
Kiwibank, National Nominees and FMOA who donated
prizes for the casino.
For the Wellington contingent we had the conservatives
departing around 7.30-7.45pm, then we had the risk
takers who headed for the airport
at 8.15pm. Outcome no one missed the plane!
We have structured the Wellington Casino evening on
the November 9th to accommodate Aucklanders being
able to participate… and make the last plane home!
Maria Chandler
FMOA Administrator
Auckland Conference 2007 “Anchor or
Heart” - too many choices….
Auckland Conference 2007
The big winners: Duncan McMinn of ASB, Scott Hamilton
of ASB Securities and Frances Liefting of HSBC
Auckland Conference 2007
Stuart Turner from NZX, Rob Glen from NZ Guardian
Trust and Louise Lynch from ASB Investments take
time out from the tables for a glass of wine and a chat.
of easing monetary policy in the United States and because over the next few months
we are going to see some evidence of the New Zealand housing market slowing down.
This will occur as people roll onto fixed interest rates about 1% higher than what they
signed up to a couple of years ago.
But overall New Zealand is going to remain a high interest rate country for what could
be a great number of years simply because we face a reasonable outlook for growth
but a continuing shortage of key resources such as labour, machinery, roading,
electricity, and buildings.
Tony Alexander
Chief Economist, Bank of New
Zealand
There is a certain aspect of central bank monetary policy
a lot of people don't seem to pick up on. A central bank
raises interest rates when they want to slow down the
rate of economic growth, improve capacity availability
and therefore exert some downward pressure on the
rate of inflation. But what a lot of people don't understand
is that a central bank will only cut interest rates when
they want to interject more inflation into an economy.
That is, when they reach a decision that we need greater
jobs growth, an acceleration in the rate of growth in
wages, more congestion on the roads, greater uptake
of electricity use with upward pressure on electricity
prices, and greater uptake of office and factory space
with increasing rentals then they will start cutting interest
rates.
Put in those terms hopefully one can see that there is
going to be very limited scope for any easing of New
Zealand monetary policy for a long period of time. This
is because we have already had the slowdown in the
rate of growth in our economy sought by the Reserve
Bank when they started raising interest rates at the
beginning of 2004. This slowdown occurred between
the middle of 2004 and the first half of 2006. But since
then not only has the rate of growth in our economy
accelerated back towards about 3% again but we have
exited the period of slow growth without any decent
improvement in resource availability.
When raising interest rates a central bank wants to not
just slow economic growth for the sake of it but because
slowing growth will improve resource availability and
place downward pressure on cost increases. But this
hasn't happened. The rate of capacity utilisation measured
in the NZIER Quarterly Survey of Business Opinion
remained well above average at 91.6% in the June quarter
compared with a 10 year average of 90.4% and a peak
a couple of years ago at 92.7%. The improvement in
capacity availability using this reading is minimal.
More importantly the unemployment rate has remained
very low with recent numbers showing an increase in
employment in the first half of the year of 32,000 people,
the unemployment rate at 3.6%, and the participation
rate almost back at a record level.
Then there is the strong anecdotal evidence we continue
to receive from the property sector of a shortage of all
types of commercial accommodation. This includes
office space, factories, warehouses, and perhaps going
by the large surge in consent issuance farm buildings
as well.
And of course there is no evidence that the problems
of roading congestion in New Zealand are improving to
any substantial degree and pressure remains upon the
electricity supply as well.
The key point we have made since 2004 has been that
the Reserve Bank have operated monetary policy in such
a way that they have very limited ability to handle any
positive growth shocks to our economy. And unfortunately
for the Reserve Bank we are getting a big positive shock
in the form of a new boom in the terms of trade.
Our current expectation is that monetary policy will be
eased over 2008 but just as we have been warning since
early 2004 the clear risk is that the forecast timing for
this easing gets pushed out. The risk is that there is
no easing in New Zealand monetary policy until 2009
and that means floating interest rates remaining at high
levels for a very long period. Fixed interest rates are likely
to face some downward pressure before 2009 as a result
4
Practical PIE Taxation Investor Tax Calculation
by Adam Cox Total allocated Taxable Income .074704
Less Tax deductible fees 0
Introduction
Add back: Rebates 0
Although PIEs come in many flavours (excuse the pun), when most people talk about Investor Taxable Income .074704
'pies' they really mean portfolio tax rate entities. In this article I will focus the discussion
on two types of PIE: portfolio tax rate entities, and portfolio investor proxies (PIP's). Gross PIE tax @ Investor PIR (19.5%) .0145672
Other types of PIE include: provisional tax paying PIEs, Portfolio Listed Entities, and
Defined Benefit Plan PIEs - but these will not be described in this article. Less FTC7 .0000131
Less Domestic tax credits8 .000249 .00038
Allocation and Calculation – the new jargon Net PIE tax to pay ($) .0141872

PIE tax, although sounds complex, conceptually their workings are quite simple. PIE i
Table 3 Investor net PIE tax calculation example (for brief explanation please refer to
tax is described a tax pass-through regime in that taxable income and tax credits are endnote to this article)
passed up from unit pricing to registry and allocated to the investors in the fund. In this
way, each investor is allocated taxable income and tax credits in proportion to their However, in stating this, there is an on-going obligation to monitor whether an investor's
holding in the total units on issue for each allocation period (day, month, quarter)1. It's PIE tax liability is greater than the current PIE investor holding value, and this is not just
noteworthy to mention that non-taxable income is really retained at the fund level and for quarterly paying PIEs who have elected to zero rate partial redemptions. Whether
incorporated into gross unit price – so we don’t need this data pushed from unit pricing any net PIE tax liability resides to the manager has yet to confirmed by legislation. So
to registry. in effect, the fund's registry is forced to undertake routine monitoring, but on a pragmatic
basis the risk of a tax liability being greater than an investor's holding depends
Upon occurrence of a tax event, the investor's PIE tax is calculated; either an amount very much on the fund's investment style as well as how the PIE treats partial
of tax is payable or a tax rebate may be owing to the investor. PIE tax is described as redemptions. High levels of taxable income coordinated with a large drop in unit price
a 'final' tax so where the correct PIR2 is stated, the investor does not need to pay any can conceivably mean the unit holder could experience a capital loss on his/her
additional taxation in relation to the PIE. investment and still be allocated taxable income and still have PIE tax to pay! Where
a quarterly paying PIE has elected to zero rate partial redemptions, an investor's
Notice the words in italics. This is the new PIE Tax regime lingo. No longer is the word holding in the fund can be decreased throughout the quarter and yet investor PIE
attribution used, rather investors are allocated taxable income, along with any domestic tax may still be payable. 9
and foreign tax credits; subsequently the portfolio tax rate entity no longer pays tax.
When a PIE makes a distribution, no longer are imputation credits assessed, and RWT A point of interest relating to these examples (tables 1-2) is that tax credit and taxable
calculated (where applicable). Rather, a distribution is deemed excluded income, so income amounts can not only be very small, particularly when the allocation frequency
it’s not taxed in the recipient's hands. Remember each investor's PIE tax liability is is daily, but tax credit data can also be very sparse. For example, if tax credits are
driven from an allocation of taxable income and tax credits which is proportionate to recognised in the fund only realised10 (keyed in from a dividend statement), and so
that investor's holding in the fund for each allocation period. although dividends may be accrued in the fund (accrued after declaration date but
before payment date), tax credit data may only show-up in spasmodic bursts throughout
Let's put some numbers with these words. the calculation period.
Conceivably, an investor could be present in a fund and be allocated taxable income
Fund Data (including any accrued dividend income), but due to the timing of their exit from the
fund not be allocated any tax credits in respect to those accrued dividends.
TUOI Taxable Income DT credits3 FTC 4 PIE tax calculations can require registry to capture very small fractional amounts. For
1 1000 1.00 .0010 00 example, what is the average per unit value of foreign tax credits? One can start to
appreciate the need for up to 10 decimal places for taxable income and tax credit data
2 1001 1.01 0 00 elements.
3 1003 1.02 .0015 00
4 1002 1.01 0 .0012
5 1001 1.00 0 0 Tax Events – Coordinating Activities
6 1001 .99 0 0 Refunds of taxation paid to the investor as a tax rebate from the PIE will arise whenever
7 1002 1.00 0 0 excess domestic tax credits or a loss at the end of mandatory tax wash-up.11 Unless
the investor has fully redeemed from the fund these rebate monies can be re-invested
back into the fund, by buying units at the current price for each investor with their
Table 1 – Fund level data rebate monies, noting that any excess foreign tax credits at the end of the tax year are
lost. On the other hand where foreign tax credits and domestic tax credits are less
Taxable income, domestic tax credits and foreign tax credits can be allocated to each than gross investor PIE tax, the investor would have an amount of net PIE tax payable.
investor proportionate to the value of their holding in the fund on each allocation period. I
have assumed in this example that tax credit data are pushed-out of unit pricing This PIE tax could be paid from a deduction from a distribution and/or by redemption
at the same time a unit price is struck, so in effect the striking of an unit price is the of units from the PIE, including any class of a multi-class PIE. This fact too should be
means by which fund valuation, TUOI5, taxable income and tax credit data are particularly kept in mind for any would-be KiwiSaver PIEs where processing costs and
struck and pushed into the registry s ystem . efficiency needs to be married-up with expectations of annual growth rate of investor
FUM. 12
Investor Allocation Data It makes sense then to coordinate many of these activities and events so they align
to the same effective date, although this too can be burdensome from a processing
perspective. For example, if a fund makes a distribution, then thought should be given
Unit % Unit Taxable Domestic Foreign to product specific of deducting investor PIE and paying rebates at this time so that
Holding holding Income tax credits tax credits only the net figure is distributed to the client, or re-invested into the fund on their behalf.
1 10 0.01000 0.0100000 0.00001 0
Product policies have to be thought through carefully and sometimes what appears
2 10 0.00999 0.0100899 0 0 to a good idea from a marketing perspective, may have undesired consequences from
3 10 0.00997 0.0101694 0.0000149 0 a registry process and reconciliation perspective.
4 10 0.01099 0.0110999 0 0.0000131
5 11 0.01098 0.0109800 0 0
6 11 0.01098 0.0108702 0 0 Multi Class PIEs
7 11 0.01097 0.0109700 0 0 What has been assumed / describe thus far is really a single class PIE entity. In other
Total 0.074704 0.000249 0.0000131 words the stand-alone 'fund' is a single tax payer.

Table 2 Investor holding data with taxable income and tax credit allocations
On a practical note, a daily PIE does not always have to determine for each investor
their PIE tax payable on every allocation period, rather on the occurrence of a tax event,
these amounts can be tallied-up to determine PIE tax payable. Tax events include:
1 Partial redemptions, where a quarterly paying PIE elects to not zero-rate
partial redemptions.
2 Full redemptions.
3 Quarterly tax wash-up for quarterly paying PIEs
4 End of tax year – for all PIEs.6
On the other hand, a PIE can have multi-classes, so that instead of having a series of
funds each being a separate tax entity (separate IRD number), a PIE may also have
multiple funds or classes (with only one IRD number at the 'scheme' level). In this case
the PIE is termed a multi-class PIE.
Where any of the classes are multi-sector funds PIE set-up must carefully consider the
number of layers in the master fundii process set-up. Time required to process each
layer needs to be understood otherwise the retail level or 'class' valuation availability
could be pushed back quite late in the day. This has flow-on effect, which defers other
investor related processing activities. Moreover, the investment style and pricing
availability of the underlying securities needs also to be considered. For example, what
happens when 4 or 5 classes can be struck, but the fifth fund is waiting on pricing
data? Product related polices which resolve this type of issue need to be implemented

1 1-week allocation period is not available at the time of writing this article. In this way taxable income, and tax credits need to be allocated daily where a weekly unit price is struck.
2 (prescribed investor rate / portfolio investor rate) PIR must be confirmed by the investor at least once per tax year and can be taken at face value by the fund's administrator. There appears to be no onus to change an investor's 19.5% PIR to 33%
(30% 1 April 2008 and onwards) once their income exceeds the $38,000 pa income threshold.
3 For brevity's sake, I have amalgamated domestic tax credits. Unless the investor is zero rate (PIR of 0%), there is no need to distinguish each source of domestic tax credits.
4 Foreign tax credits
5 Total units on issue
6 Portfolio Tax Rate Entities have 1 April – 31 March tax year.
7 FTC have been deducted first from PIE tax payable as any excess will be lost at year end.
8 Domestic tax credits can be identified separately for zero rated investors
9 The investor has been allocated taxable income and has net PIE tax to pay after tax credits.
10 From a taxation perspective tax credits are recognised at the time of their receipt, but operationally in many funds they are essentially accrued along with dividend recognition.
11 Neither land Class Losses nor Formation Losses may result in a tax rebate to investors. Rather, they must be carried forward by the fund until they can be offset against taxable income.
12 Funds under management continued on page 5

4
continued from page 4
so that if a multi-class PIE is daily allocating, then all classes have daily prices struck Where a land class investment also has a formation loss, then formation loss must be
around the same time in each open day. utilised before the land class loss may be utilised from subsequent periods. Like
formation losses, land class losses don't serve to create a tax rebate to the investor,
One may ask why have a multi-class PIE, rather than separate and alone PIEs? From because they cannot be utilised to create a position of negative income for investors,
a KiwiSaver perspective, the KiwiSaver Act specifically states the KiwiSaver scheme which would allow a tax rebate to occur.
is to be a single tax entity, on the other hand where a scheme is converting into the
PIE regime it may have to carefully consider the current deed(s) set-up. In many cases,
the way the Deeds are set-up will determine whether a fund will be a multi-class PIE Portfolio Investor Proxies (PIPs)
or a series of stand-alone PIEs.
Portfolio Investor Proxies serve to complement the managed funds industry use of
Multi class PIEs as single tax entities allow investor tax credit sharing between classes nominee/ collective holdings like those found in various 'platform' providers. In essence
– this is a another benefit13 For example, an investor invests in one class, fully redeems PIPs are really an extension of single class PIE allocation and calculation functionality.
before the end of the tax year, but that very same investor (in the same tax year re- PIPs can be used at any time where a pooled holding is collectively held in another PIE
invest back into PIE) re-invests back into any class of the same PIE. In this instance, (portfolio tax rate entity). In this way, the PIP invests in the PIE as a zero-rated investor
that investor can utilise any excess foreign tax credit, which have arisen from the other (PIR is zero). In doing so, the onus of allocating taxable income and tax credits is
class because they relate to the same tax entity - the same PIE. pushed back to the PIP registry. PIPs like PIEs adjust investor interests to pay for net
PIE tax payable, or where distributions are paid from the PIE to the PIP then such
On the other hand, where negative income is allocated to one class to potentially give distributions again need to proportionately allocate to each investor by the PIP.
rise to a tax rebate at the end of the mandatory tax wash-up period, taxable income
from another class (the investor has invested in different classes of the same PIE) will Unlike single class PIEs; PIPs do not have to concern themselves about formation or
be netted-off against one another. This investor could be left with a net PIE tax payable land class losses. These losses serve to limit taxable income pushed to the investor
position where any class or classes could be redeemed to pay for this net PIE tax and so the PIE does not need to publish this data to PIPs nor should there be a need
liability. to allocate this data to investors including zero rated investors like PIPs.
Just to re-cap, where an investor has insufficient units to pay investor PIE tax, units Because PIPs are zero-rated investors in an underlying PIE, aligning the PIPs allocation
in another class (of the same PIE) can be redeemed to pay for this investor PIE tax and calculation frequencies with that of the underlying PIE makes sense. So where the
labiality. Moreover, where a net rebate is due where such rebate originates from one underlying PIE is daily allocating and quarterly paying, then the PIP must also adopt
class/fund, and the investor no longer has a holding in that fund, those rebate monies these allocation and calculation frequencies. This is because PIP emulates the underlying
may be re-invested in another class of the same PIE. PIE, albeit a collective nominee holding in the underlying PIE. So in sense, PIP registry
functionality leverages off PIE functionality, and in particular that related to the single
Registry must not only allocate income and tax credits, perform master fund processing class PIE.
with these new data elements (tax credits, income) but also amalgamate investor level
tax data and keep track of FTCs. The PIE regime puts more emphasis on the speed
and efficiency of registry systems than ever before.
Third Part Data Provisioning
From the huge list of fields once contemplated, I would suggest that only core data
Formation Losses fields are really needed to provide to external PIEs and PIPs. Where this field list seems
to simply re-iterate the IRD TOII14 B2B specifications in reality, not so many data fields
Much debate has transpired about formation losses over the last 4-5 months. Where are really required. Let's take a look at what I suggest are the core third party data
a loss is crystallised as of the time of going into the PIE tax regime, that loss is termed provisioning requirements are for inter-PIE and PIP investors.
a 'formation loss'. Whether one pushes the monitoring and allocation of formation loss
functionality to registry or performs these tasks in unit pricing, the premise in essence
is the same. Formation losses offset taxable income. However, only that portion of PIE Data (to be provided)
the formation loss in excess of the domestic tax credits grossed-up at 33%, termed
'protected income' can be utilised to offset taxable income available for allocation to
investors. In this way, formation losses can never be used to create a tax rebate from File Creation Date / Time The date and time the file is created may not be identical
a tax loss (negative income). to the effective date.
Where formation losses are greater than 5% of the fund value, a daily allocation of Fund Name Format to be specified. Should be identical to current
1/1095 of the formation loss can be allocated per day from the formation loss amount. practice.
In essence on any day or allocation period the formation loss amount, which may be
allocated, will be determined by protected income, and can consist of the allocation Fund ID Format to be specified. Should be identical to current
period's fraction and any formation loss carried forward (not utilised from a previous practice.
allocation period). TUOI Due to the need of PIPs to confirm to the PIE each
quarter that they are not breaching the maximum
For PIEs with allocation periods greater than one day, then the actual days in the month investor threshold, TUOI for the applicable effective
or quarter can be used for this fractional allocation. 1095 days was determined as it date has been included.
represents a three-year period (not considering leap years). In other words, formation
losses are set up to be amortised on a straight-line basis over a three-year period. Effective Date Effective date to which the unit price valuation and
hence PIE specific data relates to.
Where the formation loss is less than 5%, then this loss may be allocated to the
m aximum ext en t t ha t pr ot ec t e d i nc om e l e ve l s w i l l al l ow eac h day . Base price
Should be identical to current practice. 0, 2-4 decimal
Entry price places depending on fund.
Where a fund has a formation loss greater than 5%, and not yet utilised its loss fully
in the 1095 days, then any portion remaining may be treated in the same manner as Exit price
if the loss was less than 5%. In other words it can be fully utilised to the extent permitted
by ' pr otec ted' i nc om e afte r t h e 1095- d a y i nit i al am ortis at i on per i od. Taxable income Numeric to 10 decimal places. (Note that the quantum
of taxable income per unit will be driven from the fund's
Depending on the source on the fund's income, noting that portion of the fund's income investment strategy, and on a per unit incremental basis
from FDR and non-Australasian equity exempted share income, formation losses could could be quite small although may be regular due size
be conceivably be amortised at a very slow rate. In essence, they may result in zero due to accruals.
economic value to investors in the sense that they may never be utilised and they
cannot be used to generate a tax rebate. That is, formation losses cannot give rise to FTC
Numeric to 10 decimal places.15 (Note if per unit
a tax loss (negative income) and this why any formation loss amount available for RWT Credit incremental data is issued, these numbers could be
allocation is tested against 'protected' income. quite small and infrequent depending on investment
DWP Credit (and MA) style and where credits are recognised only at the time
One point of interest which arises particularly in $ funds (non-unitised funds) and other of receipt)
funds which make distributions is that formation losses serve to offset taxable income Imputation Credits
available for allocation to investors thereby decreasing the amount of PIE tax an investor
must pay, but they do not affect the amount of income which is distributed form the
fund. Therefore for the purposes of distributions and in particular $ fund distributions I would argue that data items listed below are not required for the reasons for this are
any income determined for tax purposes can be different to the income available for listed below.
distribution purposes where formation losses are being utilised.
Non-taxable income Non-taxable income is retained in the fund and serves
Formation losses for multi-class PIEs are not shared between classes. Rather, the to support Unit Price.
formation losses, is constrained at the class level and may serve only to shield taxable
income related to that particular class. Formation loss used Formation Loss serves to shield taxable income, and
is not required by a third party.
Land Class Losses used Land class losses are retained at the fund level and
Land Class Losses serve to shield taxable income for land class investors.
Land class used cannot be utilised by a third party.
As one can guess, it is never ending fun in the land of PIE! Just when one has tackled
all the aforementioned issues, land class investments make yet another twist. Where
a fund has 50% of more in land class investments, a loss in the land class investor can Moreover, investor specific data, such as fees, rebates should not be confused with
be offset only by land class income. So where a fund is a land class investor and part 'market' or 'fund' level data. Fee, charges and rebate data, really fall into investor-
of a multi-class PIE, any losses originating at the land class level cannot be utilised to centric statement and reporting requirements, whereas these data relate solely to PIE
offset taxable income from investment in other classes. fund identity, effective date identification, and the subsequent utilisation and tax data
for subsequent allocation investor PIE calculation requirements.
Rather, unit pricing may have no taxable income to push to registry for allocation to
investors until the land class investor makes a net taxable income. Moreover, in doing
so the investor, unlike negative taxable income situations (noting that formation losses
cannot make a negative income), will not be allocated a taxable loss and a subsequent
tax rebate will not arise.

13 Albeit a minor one given the reality of how small FTCs can be!
14 Taxation of Investment Income
15 Per unit data or cumulative date should be noted. Where cumulative data is noted, then the date from which the accumulation began needs to be noted.
continued on page 6

4
continued from page 5
Conclusion
PIE tax has gone a myriad number of toing and froing – debate after debate, but when
all is said and done, the premise behind PIEs is really quite simple. But like all things
conceptually simple, it’s in the detail that lays the difficulty lies in the detail.
PIE tax regime emphasises the need for unit pricing – registry integration as well as
processing efficiency to be carefully considered. Moreover, product features also must
be carefully considered. Marketing teams must interact with fund accounting and
registry to understand impacts such trail commission rebates, distribution timing and
the PIE tax regime elected into. Where processing efficiency is high, investor satisfaction
consequently must be enhanced, so it is in marketing's best interests to understand
and appreciate the PIE tax regime too.
PIE tax regime has seen what used to be disparate teams but how these teams
understand each other’s processing requirements, and integration issues.
About Adam Cox.
Adam, MSDIA, SA FIN has over 15 years Banking, Finance and credit industry experience.
Adam has played an active role in Investment Community in Australia. In particular
Adam specialises in hedge fund, trading system and funds management systems and
technology with many years quantitative, programming experience and product
development experience.
Adam is a member of the Australian Securitisation Forum, the Q-Group (invitation only
quantitative analyst association) and has also given lectures to students studying
towards their Master Degrees in Finance at the Australian Securities Institute in Sydney.
Adam currently consults to Asteron Life Limited and New Zealand Guardian Trust.
Adam can be contacted at acox@primeconsulting.co.nz, www.primeconsulting.co.nz.
i Trail commission rebates have the effect of increasing taxable income (if taxable income is passed from registry on
a net basis), whereas certain fees are tax deductible in the hands of the investor. In order to derive investor net taxable
income, tax-deductible fees and rebates need to be taken into account. Where net funds are required to be ascertained,
other fees and rebates must also be taken into account for payment or net distribution purposes.
ii PIE tax becomes little more tricky in master fund or fund of fund setup. Firstly, any multi-sector or balanced fund could
invest into two or more core funds. In this case unit prices must first be struck at the core fund level thereby pushing
unit pricing, taxable income and tax credit information up to the retail core level where the retail fund level price is
struck. Whenever a core fund is an external PIE, the PIE would invest in any one of these funds as a zero-rated
investor.
6
AXE FACT SHEET
What is an ECN (Electronic Communications Network)?
ECNs are high speed, low cost platforms that offer trade execution services, separating
the trading and listing functions of a traditional Exchange. They are already available
in most leading global markets. In the United States and Europe there are approximately
34 ECNs.
What is AXE?
AXE is a joint venture led by the New Zealand Exchange (NZX) in conjunction with a
number of Australia’s largest financial market participants. NZX owns 50%, and
Citigroup, CommSec, Goldman Sachs JBWere, Macquarie Securities and Merrill Lynch
each own 10% of AXE.
AXE has applied for an Australian Market Licence which will allow it to be a market
operator, offering trade execution and reporting services to its participants in respect
of securities listed on ASX. AXE participants are able to undertake crossings and
negotiate directly with other participants through AXE’s market. AXE anticipates that
the majority of its market will relate to crossings. (Crossings occur where the participant
acts for both the buyer and the seller). Crossings currently account for around 30%
of equity trading.
AXE operating rules are based on Best Execution Principles similar to those developed
in Europe over the last four years under the Markets in Financial Services Directive
(MiFID). Essentially, these require AXE participants to seek the best deal for their client
for each transaction, based upon a range of factors articulated by the participant.
AXE participants will settle transactions through their existing settlement system, by
entry of messages on both sides of the transaction. Participants transacting with other
participants will both bear the counterparty risk, since there will be no central counterparty.
Data vendors will consolidate AXE trading data with that received from ASX and make
available consolidated data in respect of ASX-listed securities.
Why is the current market structure limited?
Until now the ASX has had a dominant position in securities trading in Australia.
The entry of AXE will provide competition and deliver value to market participants by
reducing costs and offering a new approach in a sub-set of execution services.
Participants currently internalise their transactions to some extent and the trend towards
internalisation is continuing. Internalisation is execution (or ‘crossing’) of trades in-
house rather than on the Central Limit Order Book. The Current ASX crossing rules
restrict the circumstances in which internalisation (or crossings) may occur.
Existing ASX rules relating to crossings under “Special Size” ($1m) create onerous
obligations that cause delay and often discourage genuinely brokered deals. For
example, the current rules require an artificial market to be created for 10 seconds
before a crossing may be executed. In an era of automated trading these restrictions
also make it extremely difficult for automated order flow to interact with orders that are
held in a participant’s internal order book. This restricts the ability of participants to
pursue legitimate commercial strategies to deliver Best Execution to their clients.
AXE - Benefits for Equity Trading
What will AXE do for the Australian market?
AXE is premised upon the ability for participants to choose upon which market they
will execute and report their transactions. This type of competition results in reduced
prices, higher quality of service, increased innovation and increased liquidity. These
are benefits that will apply to investors at all levels, providing them with diverse investment
opportunities at a lower cost.
It is a commonplace in the world’s leading capital markets for exchanges to compete
for execution. For example, less than 75% of the transactions that occur in NYSE
listed stocks actually take place on the NYSE platform – the remainder take place on
competitor ECN platforms that offer different benefits. The development of AXE is an
opportunity for Australia to be at the forefront of ECN development in the region and
to provide these benefits to the Australian market.
• Lower market impact costs
• Price Competition • Access to larger pools
• T ec hni c a l I nnov at i o n of liquidity
• A better market structure • Decreased costs of delay
for crossings • Increased speed and lower
implementation shortfall
continued on page 7
continued from page 6
Cost Reduction
With commissions declining, while technology and regulatory costs are rising, it is
critical to the future health of national capital markets that competition emerges and
market participants have a choice of execution platforms.
Innovation and increased liquidity
The introduction of an ECN to Australia is likely to increase innovation and activity in
the financial services sector as new participants and new products enter the market
and to enhance liquidity. The trend in US and Europe is for institutions to develop and
offer new products following the introduction of ECNs, enabling better and cheaper
execution.
For example, hedge funds, which look for the best and cheapest access are attracted
to ECNs. Reduction of transaction costs will likely lead to an increase in this low margin,
high liquidity business in Australia, which currently lags Singapore and Hong Kong in
this area.
An ECN with lower transaction costs will also facilitate the development of internal
crossing networks in Australia, as have been developed by major brokers offshore.
Further, an ECN is likely to attract new participants into the Australian market who act
as alternatives to brokers, offering opportunities for fund managers’ trading desks to
match orders. Liquidnet has operated this model successfully in the US. AXE anticipates
t ha t ne w p ar t i c i pant s wi l l t hu s be at t r ac t e d to an Aust r al i a n EC N .
In summary, AXE will:
• Provide market participants with a new choice in execution and reporting services;
• Offer a new level of competition, value, innovation and technology;
• Position Australia as the region’s leading financial services centre;
• Deliver increased depth and liquidity to the capital market;
• Invigorate the market and encourage all players to invest in better technologies;
and
• Lead to a wider range of innovative products and services.
Best Execution
Best Execution means a broker taking all reasonable steps to deliver the best possible
outcome for their clients, taking into account a variety of factors including, but not
limited to, price. This is fundamental to investor protection and is implicit in the fiduciary
obligations a participant owes to its client. The international trend is increasingly moving
towards the concept of Best Execution. This concept is fundamental to the operation
of AXE’s market and Best Execution requirements form a core part of AXE’s rules.
ASX rules include no similar obligation.
Progressive regulators in the United States and Europe recognise that rules based on
Best Execution should acknowledge that execution quality can depend on factors other
than price, such as size, cost and speed of execution. For example, satisfying the
requirements of Best Execution for a particular transaction may require either instant
execution or access to ‘quiet liquidity’, depending upon the circumstances and the
client’s requirements. The concept of Best Execution provides the necessary flexibility
to enable a participant to execute a transaction in the way that best accommodates
the client’s requirements.
This approach is outcome-oriented rather than prescriptive, and provides flexibility
while ensuring that participants meet their fiduciary obligation to their clients in respect
of execution.
The concept of Best Execution assumes a particular importance where there is
competition for execution services – a number of markets through which a transaction
may be executed. In these circumstances, Best Execution obligations may replace
restrictions based on time and price depth on a single market, without compromising
investor protection. In fact, Best Execution enhances investor protection by providing
clients with information (through disclosure of a participant’s Best Execution policies)
enabling them to assess whether a participant has acted in their best interests. This
is particularly significant for retail investors who do not have access to the same level
of information as market professionals.
The AXE operating rules require each AXE participant to have and adhere to a Best
Execution Policy, which participants provide to their clients. AXE rules require such
policies to address at least the following factors:
• Client instructions
• Price
• Size of the order
• Cost (e.g. exchange fees)
• Speed
• Choice of execution and reporting venue.
For retail investors the most favourable result would typically be in terms of price and
cost.
AXE will both approve Best Execution policies and monitor participants’ compliance
with these obligations on a real-time basis.
Price Discovery
Participants will not be relying solely on ASX price information to assess how to achieve
Best Execution. Participants will review information from a range of sources, including
fundamental data, analyst research, trends, recent price and volume history etc. AXE
participants will also have access to bulletin boards displaying indications of interest
from other participants and AXE will provide its own electronic display board for these
purposes.
It is also important to put pre-trade ASX ‘quote’ information in context. This enables
the market to establish a view of demand and supply around a tight set of prices at
or around the spread, but not over the entire set of demand and supply. The market,
especially the retail market, forms its views on prices not only from available quotes
but also from last and recent trade information.
1
ASX’s first automated trading system introduced in 1987
Last trade information is a key part of broader market price discovery. It contains
valuable pre-trade information on quantity demanded and quantity supplied and forms
part of the overall supply and demand curve for a given security. AXE transactions
involve the same participants or two participants negotiating directly without reference
to the Central Limit Order Book. In this case, supply and demand information is only
relevant when it is matched and a transaction effected.
Consequently, ASX pricing information is only one part of a much broader process to
determine what represents fair value and Best Execution for a particular client.
Furthermore, to the extent that they use this data, AXE and AXE participants will not
be free riding on ASX price data since AXE participants have paid valuable consideration
for this. Using this ASX data as a reference point is entirely within the scope of the
licences provided by ASX to disseminate this information. Moreover, using price data
in this way for comparative purposes is no different to what currently happens for dual
listed securities.
Internalisation
Currently internalised transactions, or crossings, account for around 30% of all equity
trades in the Australian market. For institutional brokers the rate is around 40%.
Generally, clients prefer their orders to be crossed due to the reduced market impact
and low er c os ts ass oci at e d w it h delay and i m pl ement at i on shortf al l.
The AXE model will encourage and support internalisation of orders while requiring
participants to seek out Best Execution for their clients. For example, the AXE model
will facilitate crossing engines which have proved to be successful in other markets.
These enable participants to more efficiently match internal order flow to ensure
maximum internalisation of their trading, to the extent that this is consistent with Best
Execution obligations. Under the current system participants’ internal orders do not
generally interact efficiently with DMA order flow. This hinders liquidity and increases
costs and delays.
Fragmentation
Historically, most trading occurred on the floors of regional exchanges, as was the
case in Australia up until the establishment of ASX in 1987. Professional traders needed
to be part of these exchanges because this was the only means of gathering information
and identifying trading opportunities.
Under this structure, trading across different instruments essentially fragmented across
regional exchanges as local traders in a region became impatient and sought local
execution, rather than waiting to trade on a distant market. This incurred higher
transaction costs because their local brokers were exposed to the risk of price shifts
in other regional markets and sought to recoup the cost and risk of moving liquidity
across regional exchanges. This process also led to wider spreads, which reflected
the cost of processing information and acting upon it across vast distances.
Over time, new technologies reduced the cost of accessing and processing information
and gradually reduced the risks of trading across regions. Technology initially drove
exchange consolidation to reduce the costs and complexity of technology and centralise
information flows. This was largely the case with ASX in 1987 as it strove to lead the
world in its implementation of SEATS1 as a consolidated national order book.
Increased competition in execution services has been described in negative terms as
leading to “fragmentation” i.e. the dispersal of trading and therefore liquidity pools
across a number of execution venues, including the internalisation of each participant’s
order flow. This is a natural result of competition and modern electronic financial
markets. The tendency to perceive fragmented markets as increasing costs and
impeding efficient price discovery no longer holds true. This may have been the case
under old exchange-based models where access to information on a timely basis was
unreliable and the ability to trade required a physical presence.
That is, these concerns would be well founded if traders in various markets did not
know about and respond to market conditions in other markets or platforms, where
each platform would become an isolated pool of liquidity, in which price formation took
place independently of all other market platforms. Prices would not efficiently incorporate
all available information about fundamental asset values because information in one
platform would not affect trading in another platform. Transaction costs would be
higher because liquidity demands in one platform could not meet liquidity supplies in
other platforms. Traders would therefore need to satisfy all liquidity demands separately
within each platform. This would contribute to market inefficiency and increased
transaction costs.
However, developments in market structures and technology no longer mean inferior
price formation and high transaction costs. Traders can now obtain the benefits of
consolidation in fragmented markets when information flows freely between market
platforms and when traders can choose on which platform to trade. These factors
cause fragmented markets to converge into a unified market with diverse segments.
Traders know what is happening in each market segment and can act on that information
when prices or liquidity conditions diverge.
There are a range of services that effectively consolidate fragmented markets in this
way. Such services are provided by data aggregators, information vendors, providers
of order management and routing services and portfolio management services. Industry
reliance on these services across multiple markets and geographic regions provides
a central platform for a consolidated view of security pricing across these different
markets and regions without increasing the transaction costs and risks that predated
the advent of electronic trading systems. Importantly, new communications technology
gives traders an instantaneous presence in markets in which they could not otherwise
have participated. For example, the large range of current instantaneous market data
and order routing systems permit traders and even algorithmic trading systems to see
and act upon market opportunities from anywhere in the world.
Furthermore, research has demonstrated that internationalisation can lead to better
pricing arising from competition and a greater diversity of choice of where to execute
orders rather than having to send them all to the central market. AXE will encourage
information to flow more efficiently between participants’ order books, the ASX CLOB
and the Indications of Interest displayed by market data vendors. The liquidity available
in each market (or in each participant’s internal order book) will interact in the search
for Best Execution. Some research also indicates that when Best Execution takes
account of factors other than simply price, internalisation of orders can lead to better
executions.
Data vendors and other service providers will enable a consolidated view of the Australian
continued on page 6
6
continued from page 7
market for traders and investors. Consequently there will be no reduction in market transparency, while offering traders the
opportunity to trade simultaneously in any available pool of liquidity. This is expected to increase liquidity by better meeting
the needs of some trading segments, bringing to market trades that might not otherwise have occurred.
FMOA
Integrity of Australian Capital Markets
It is of fundamental importance to the commercial success of AXE, its shareholders and its customers that it operates a fair,
COMMITTEE
orderly and transparent market of high integrity. AXE will operate under an Australian Market Licence (AML) in full compliance
with all requirements imposed upon a market operator, as regulated by the Australian Securities and Investments Commission.

Significantly, the consolidation and dissemination of trading data from both AXE and ASX will ensure no reduction in
MEMBERS
transparency, i.e. quality and scope of information available to investors and traders.
Barbara Baker (Chairperson)
AXE will also be working with ASX to develop supervisory information-sharing procedures to ensure the quality of supervisory Computershare Limited
outcomes across both markets is not reduced.
Barbara.baker@computershare.co.nz
The Australian Market Licence (AML) Application Martyn Bain (Treasurer)
NZ Exchange Limited
AXE is currently awaiting the outcome of an AML application lodged with ASIC. AXE encourages interested parties to support
AXE’s application. martyn.bain@nzx.com

Maria Chandler (Administrator)

The Technology maria@fmoa.org.nz
AXE’s primary and secondary data centres will be located in Sydney. Participants can connect to AXE through either the
IRESS IOS or via the world standard FIX (Financial Information eXchange) Protocol. To ensure accurate surveillance, the Cathy Rush
SMARTS (Securities Markets Automated Research Trading and Surveillance) system will be configured to read AXE’s data Kiwibank Limited
and consolidated data from ASX and AXE. catherine.rush@kiwibank.co.nz

Financial Resources
Julie Allen Deutsche
Bank AG New
AXE has the backing of Australia’s leading market participants and NZX, and has sufficient financial resources to meet the Zealand Branch
financial requirements of its business operations. Julie.allen@db.com
Robert Douglas
ANZ National Bank Ltd
Overview of the AXE technology and data platform robert.douglas@anznational.co.nz
Mark Lawrence
ANZ Custodian Services
Particip ants
lawrencm@anz.com
Works tatio n/Terminal
(IRESS, Fidessa, etc) Phil Stace
Bank of New Zealand
Intrad ay
( )
phil_stace@bnz.co.nz
Static D ata/
Elizabeth Mak
Security L ist National Nominees Ltd
(IRESS API)
AXE ECN Trade Data
(FIX or API) (Vendor Format)
Ind ustry elizabeth_mak@bnz.co.nz
Corp. Actions
(IRESS API)
Lesley Mitchell
ETOS Limited
(TP API) (FIX)
Lesley.Mitchell@etos.co.nz
Rebecca Murphy
BOS
(Back Office) RBNZ
Rebecca.Murphy@rbnz.govt.nz

Scott Sinclair
Westpac International
Operations NZ
scott_sinclair@westpac.co.nz
Next Steps
Barbara Winther
Citigroup Securities Services
Timetable barbara.winther@citigroup.com
July/August 2007 ASIC Consultation Process

September 2007 Final business establishment

October 2007 AXE is open for business (subject to regulatory approvals)

Contact
Greg Yanco
Chief Executive Officer
AXE ECN Pty Limited ACN 121 659 658
Phone: (02) 9994 8913
Email: greg.yanco@axe-ecn.com

Disclaimer
This document is provided by AXE ECN Pty Limited (ACN 121 659 658) for informational purposes only. AXE ECN Pty Limited
does not warrant the accuracy, adequacy or completeness of such information and expressly disclaims liability for errors
and omissions therein. This document may include dated or inaccurate information, and information may be changed or
updated without notice.
FMOA
Fi n an ci al M a r k e t s
Operations
Association
8