NZX announces new market participant structure

4 December 2003 – New Zealand Exchange Limited (NZX) wishes to announce that it has redefined the framework for regulating and monitoring the conduct of NZX market participants. Accordingly, NZX is releasing today a new market participant structure and draft NZX Participant Rules for public review and submission. The NZX Participant Rules will replace the NZX Business Rules, NZX Regulations and Code of Practice. The rules that apply to market participants have been renamed the "NZX Participant Rules", to better reflect who these rules will apply to and the expanded participant base.

“The structure of New Zealand’s capital markets has changed dramatically in the last 20 years and yet the Rules regulating the participants in that market have changed very little,” said Mark Weldon, NZX CEO. “We felt it was necessary to create a simpler, more flexible framework that will better reflect the evolving nature of our market.”

The proposed new structure has been developed after extensive review of the varied roles participants play in New Zealand’s capital markets. It better reflects the very different roles current participants play, as well as recognising the increasing involvement of several new participants, including banks. In formulating the proposed structure NZX has consulted extensively with its compliance working group, a group of industry professionals comprised of compliance managers and other representatives of market participants. NZX will continue to work with this group to review the capital framework (capital adequacy, under-writing, clients funds and accounting) of the NZX Participant Rules with a view to further amendments during 2004.

“One of the main objectives was to provide a more flexible framework that could deliver a more fair and equitable playing field for all participants,” said Weldon. “For example, we anticipate that the unbundling of the regulatory services will deliver cost savings by allowing participants to be regulated according to the relationship they have with NZX and their clients. The new structure moves away from “one size fits all” regulation toward regulation tailored to the role the participant plays in the market.”

There are four main changes to the structure which have been reflected in the proposed new NZX Participant Rules:

1. Introduction of NZX Associate Firms

a. Many broking firms in New Zealand do not enter trades directly into the marketplace. This means that the full set of compliance and inspection requirements which full NZX Firms (who do enter trades directly into the marketplace) are obliged to meet are not applicable to these organisations. The new structure recognises these types of differences and offers greater flexibility to allow organisations to be accredited for the type of service they provide.

b. To investors, the difference between an NZX Firm and an NZX Associate Firm will be minor, as NZX Associate Firms will be fully qualified to give advice and manage client funds. The key differentiator is their trading relationship with NZX, which is indirect.

2. Introduction of a new category called NZX Participant

a. This new category will enable entry to the market in ways that suits a participant’s organisation.

b. There are two types of NZX Participants – trading organisations, and settlement organisations.

c. A trading organisation will be accredited by NZX to undertake trading activity in a specific market or markets (e.g NZDX only or NZDX and NZSX). This category was developed with organisations such as banks in mind and broadens the channels for participating in on market trading activity. Broadening participation will be critical going forward to increase liquidity in NZX markets, and are seen as a valuable interface for improving market value in New Zealand.

d. A back office operator who is connected to NZX’s FASTER system, will be required to become accredited as an NZX Participant also. This includes companies such as fund managers, and any clearing and settlement organisations that may choose to connect to FASTER, having specialist clearing and settlement providers connected to the equity market is important for the success of NZFOX.

3. Change in the name of NZX Brokers to NZX Advisors

a. Globally and in New Zealand, brokers are expanding their role and are becoming much less focused on driving commissions and more focused on their overall client relationships and providing advice.

b. NZX recognises the invaluable role brokers play in giving New Zealand investors investment advice, as opposed to simply brokering trades.

c. In recognition of this, and to truly differentiate the value that accredited brokers and advisors play in delivering integrity to the market, NZX is re-naming the accreditation standards of individuals that advise and manage client funds in NZX Markets, from NZX Broker (and Associate Broker) to NZX Advisor and Associate Advisor.

4. Introduction of Direct Market Access (DMA)

a. Most exchanges around the world utilise straight through processing to increase efficiency and liquidity in their markets. DMA will allow independent software vendors access to the NZX FASTER trading system, which they can then offer to their clients. This opens access to additional participants in the market and is expected to help increase both efficiency and liquidity.

b. DMA will not only allow additional third party access in New Zealand, but will also allow brokers in other markets to trade directly into this market.

The proposed new NZX Participant Rules are out for public submission until 2 January 2004. All submissions should be made in writing to:

Elaine Campbell
General Counsel
New Zealand Exchange Limited
PO Box 2959
Wellington
or to elaine.campbell@nzx.com.

Once all submissions have been received they will be reviewed and feedback incorporated where appropriate. NZX aims to have the final draft to the minister for disallowance by January 2004 with expected implementation due 1 April 2004.

The proposed new NZX Participant Rules governing the new participant structure can be found on the NZX website at www.nzx.com/regulation.

NZX will be hosting a conference call on this matter within the next week.

For more information, please contact:
Bridgit Vivian
New Zealand Exchange Limited
04-496-2874
027-472-7599
bridgit.vivian@nzx.com