Aligning the markets

Overview

Since the introduction of the NZ ETS, the regulation of the market for the trading of NZUs has generally been light touch. In July 2021, the MfE initiated a consultation process in relation to proposed reforms to implement further regulation of the market for trading NZUs. At the end of 2022, MfE released a discussion document on the “Market governance of the New Zealand Emissions Trading Scheme”. The consultation period closed on 27 February 2023 and a policy decision is expected later this year. Notably, the discussion document proposes to bring NZUs within the ambit of the existing financial markets regulatory framework that applies to the trading of shares and other more traditional financial products (with suitable modifications). This is MfE’s preferred option for regulating market conduct for the trading of NZUs.

In addition to proposing the extension of the financial markets regulatory framework to the NZU market, MfE considered options to reduce information asymmetry and the application of the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (the AML/ CFT Act) regime to the NZU market.

FMCA applies

The Financial Markets Conduct Act 2013 (the FMCA) will apply to the trading of NZUs, prohibiting insider trading and market manipulation of NZUs. NZU market operators will be required to hold a licence and comply with the onerous obligations that apply to operators of financial product markets under the FMCA. However, certain rules under the FMCA, such as information disclosure requirements (for example, the provision of a product disclosure statement), will not apply to the NZU market.

Reporting requirements

In order to reduce information asymmetry in the NZU market, MfE proposed to require parties to NZU trades to report on the following information for all NZU trades:

(a) the price of NZUs or total value of the transaction;

(b) whether the trade is with someone else or between the transactor’s own accounts; and

(c) the transactor’s primary reason for holding an account.

This proposal does not require parties to report on additional information in respect of NZU derivative transactions at this stage.

Rules for advisers

NZU financial advisers, brokers and custodians will be subject to the same regulatory regime (including the FMCA) that currently applies to financial advice providers, brokers and custodians who provide such services in respect of existing “financial products”. Implications include:

(a) licensing requirements may apply (for instance if providing an NZU financial advice service);

(b) oversight by the Financial Markets Authority (FMA) as to compliance with fair dealing rules and other statutory duties; and

(c) increased compliance costs, including fees and levies payable to the FMA.

AML regime already applies

MfE emphasised in the discussion document that the AML/CFT Act already applies to activities related to the NZU market – in particular, where persons handle or invest money on behalf of others or carry out other types of financial activities. The MfE noted that it does not consider it necessary at this time to extend the scope of the AML/CFT Act framework beyond the way it already applies to the NZU market.