Bulletin Board Introduced for Wholesale Loan Securities

Wholesale Loan Market
Reasons for Introduction
Method of Use

The Australian Stock Exchange (ASX) has created a bulletin board for the wholesale loan securities market. The ASX has done this through a series of amendments to the ASX Business Rules. This creates greater opportunity for (i) Australian borrowers borrowing offshore to also borrow domestically, and (ii) Australian lenders lending funds offshore to also lend funds to domestic companies.

Wholesale Loan Market

The ASX's wholesale loan market is a market for debt instruments issued by companies listed on the ASX with a value (when traded) of at least A$500,000.

The ASX has amended the ASX Business Rules to introduce a bulletin board facility for the wholesale loan market. A bulletin board is an electronic mechanism displaying information that indicates interest in the purchase or sale of securities, or bids or offers for securities, or otherwise facilitates contact between potential trades. The bulletin board facility differs from the traditional stock market because it does not itself provide the means for execution or settlement of transactions.

While orders for wholesale loans in this market are placed on the ASX's Stock Exchange Automated Trading System (SEATS), SEATS does not match the orders as it does for shares and other ASX traded securities. A broker who wishes to execute a trade with another broker in relation to wholesale loans must contact the other broker and execute the trade. Once the trade has been executed, the trade is reported to SEATS.

Another important difference between ASX's wholesale loan market and ASX's other markets is that trades in the market are not covered by the national guarantee fund. This means that settlement risk resides with the market participants.

Reasons for Introduction

The reasons for ASX's introduction of the bulletin board for wholesale loan securities include:

• to take advantage of certain withholding tax exemptions;
  
  
• to attract certain offshore fund managers;
  
  
• to attract borrowers to the domestic market; and
  
  
• to compete with the 'kangaroo market' (defined below).

Recently introduced amendments exempt from interest any withholding tax paid by a company on a debenture where:

• the company was an Australian resident when the debenture was issued;
  
  
• the company was an Australian resident when the interest was paid; and
  
  
• the debenture was issued 'publicly', including as a result of negotiations being initiated publicly in electronic form that was used by financial markets for dealing in debentures (the ASX's wholesale loan market will satisfy this public invitation requirement).

Many offshore fund managers wish to lend money to Australian companies, but their mandates or constituent documents prevent them from doing so unless the debt instrument is quoted on a stock market. The bulletin board is intended to satisfy these constraints so that by buying the debt instrument, the fund manager is buying a quoted (or quotable) debt instrument.

The ASX noted that many Australian companies were issuing debt in the more developed foreign debt markets. One aim of the bulletin board was to encourage domestic companies to issue debt domestically.

The depth of the domestic lending market has been demonstrated by the issue of 'kangaroo bonds'. Kangaroo bonds are domestic bonds issued by foreign entities. While the 'kangaroo market' has not been very active, there have been a number of issues showing that the domestic market is willing to lend to quality borrowers. The ASX's wholesale loan market aims to bring domestic borrowers and domestic lenders together.

Method of Use

The ASX established the bulletin board as a secondary market only, to allow investors holding debentures to trade them. To use the market, holders of appropriate issued debt simply request a broker place details of the debt and the trade on SEATS.

The market was not established as a primary market through which new debt could be raised. However, the bulletin board can be used by debt issuers as a selling point (ie, the increased liquidity in the debt market should add depth to the primary market). Also, when the bulletin board has sufficient depth of its own, it may be that borrowers may proceed to issue debentures by placing details on the bulletin board.

For further information on these topics please contact John Atanaskovic, Danny Simmons or James Dickson at Atanaskovic Hartnell by telephone (+612 9777 7000) or by fax (+612 9777 8777) or by email (jla@ah.com.au, dds@ah.com.au and jed@ah.com.au). The Atanaskovic Hartnell website can be accessed at www.ah.com.au.

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