George Stigler founded what might be called the ‘special interest’ school of regulation. This is in contrast to the ‘public interest’ school associated with Arthur Cecil Pigou. Stigler’s argument is that regulation benefits the incumbant at the expense of new entrants. There are four mechanisms whereby this can occur: direct subsidies, barriers to entry, control over substitutes, and the ability to price fix.
Peter Martin points us to a magnificent example where ASIC is controlling a substitute and probably enforcing a barrier to entry.
Centrebet has taken nearly $1 million in bets on the outcome of Reserve Bank board meetings in the past two years without complaint from ASIC. The markets have received wide publicity and have been listed on its website along with markets on elections and sporting events.
Yet in a letter to Centrebet dated March 26 ASIC’s senior manager, market participants and stockbrokers Jonathan Coultas says “it has come to the attention of ASIC that you may be carrying on a financial services business without holding a financial services licence”…
“In particular we believe the financial bets you offer over the ASX 200 share index and RBA interest rate changes may be ‘derivates’*, as defined in the Corporations Act,” the letter continues.
“Carrying on a financial services business without an Australian financial services licence is an offence punishable by a fine not exceeding $22,000 or imprisonment for 2 years or both”.
“ASIC may also decide to take other actions in relation to your conduct. For example… ASIC can seek court orders shutting down your business.”
I doubt that ASIC is so stupid to seek a court order to shut down a betting agency – that way their casual arrogance would be on display for all to see. Given that they have had case after case thrown out of the courts – at taxpayer expense – you would think that they would be more humble and far less gung ho.
Centebet’s licence from the NT government allows them to offer bets on financial markets. The problem for Centrebet is in the wording of the Corporations Act.
For the purposes of this Chapter, subject to subsections (2), (3) and (4), a derivative is an arrangement in relation to which the following conditions are satisfied:
…
including, for example, one or more of the following:
(i) an asset;
(ii) a rate (including an interest rate or exchange rate);
(iii) an index;
(iv) a commodity.
So betting on the value of the ASX 200 probably is a ‘derivative’ under the act, betting on the outcome of RBA meetings is debatable. But the Corporations Act is a federal statute and over-rides State based laws. It is possible to change this stuation by regulation, and if the government wants to promote competition it should do so by exempting betting agencies from the definition of derivatives.
* I think this is a typo, it should be derivatives.
Sorry but it makes no sense that they be exempt if they are offering a more or less identical product to that offered on exchanges which are regulated.
Or does the ASX spinoff a organization called the Australian Betting exchange (ABX) where by it offers its derivatives as bets but no longer requires a licence?
Either both should be regulated or none I can’t see how anything else makes any sense at all.
Steve Edney
8 Apr 10 at 3:06 pm
ALthough as I note one of the commenters on Peter Martin’s site said, it does perhaps mean that the ASX needs a gambling licence.
Steve Edney
8 Apr 10 at 3:08 pm
If Centrebet have any nads, they’ll frame a market on whether or not ASIC charge them.
Infidel Tiger
8 Apr 10 at 3:13 pm
Steve – I’d have to have a look at a Centrebet contract on the ASX 200 to see if they are different or not. But the outcome of the RBA meeting does not compete with any other instrument that I’m aware of.
Infidel – they’ll just stop trading those instuments.
Sinclair Davidson
8 Apr 10 at 3:17 pm
Centrebet already have.
Other non-listed agencies are still framing financial markets, such as Sportsbet.
Infidel Tiger
8 Apr 10 at 3:23 pm
I would think trading on the value of interest rates or the value of the ASX 200 would clearly be a derivative under 761D.
It would be interesting if Centrebet could rephrase the bet as not turning on a particular interest rate value or amount but rather on a statement by the RBA i.e. a bet on whether the RBA will announce a tightening or relaxation of monetary policy or no change.
Even though the economic effect would be the same, it would take it out of the plain language of 761D. It would then be up to ASIC to introduce regs under 761D(2) that that bet is a derivative.
This too would clearly be a derivative market if introduced in Australia:
http://www.nytimes.com/2010/04/08/business/media/08futures.html?hp
Tillman
8 Apr 10 at 3:49 pm
I would think the 30 day IB futures, would be a pretty close proxy essentially bets on the RBA rate.
http://www.sfe.com.au/content/aboutsfe/brochures/013_cashrate.pdf
Steve Edney
8 Apr 10 at 4:55 pm
Yes but the issue is that under s761D any arrangement whose value depends on the “value or amount” of something else is a derivative and thus a financial product and thus you need an AFSL to deal in it.
So the way you could get around it is not base the value of the arrangement on the value or amount of something else (i.e. the interest rate) but rather on the nature of the RBA’s statement i.e. the value depends on the words the RBA uses, not the value it sets.
Tillman
8 Apr 10 at 5:02 pm
I was responding to Sincs.
But on your issue.
Doesn’t say sport betting depend on the “amount” of points some team scores and is therefore a derivative?
Steve Edney
8 Apr 10 at 5:10 pm
Arguably, yes, but the defense would be that that provision is clearly not intended to cover sports betting.
Here’s the language in full:
A derivative is an arrangement in relation to which the following conditions are satisfied:
(a) under the arrangement, a party to the arrangement must, or may be required to, provide at some future time consideration of a particular kind or kinds to someone; and
(b) that future time is not less than [one day]; and
(c) the amount of the consideration, or the value of the arrangement, is ultimately determined, derived from or varies by reference to (wholly or in part) the value or amount of something else (of any nature whatsoever and whether or not deliverable), including, for example, one or more of the following:
(i) an asset;
(ii) a rate (including an interest rate or exchange rate);
(iii) an index;
(iv) a commodity.
Tillman
8 Apr 10 at 5:19 pm
ASIC has too much time on its hands.
ken n
8 Apr 10 at 5:22 pm
Having had to audit several FSLs before I have little doubt that the contracts that Centrebet are offering would be caught under the Act. A broker expressed that view to me some time ago and I looked at it then.
A few precedents from the UK might be interesting as this sort of contract was offered by the agencies over there while I was working there and there was a lot of discussion once they were offering spread bets on the future value of the FTSE – they were claiming they were bets, not share or index transactions and therefore exempt from the duties on those sorts of transactions.
The situation there now seems to be that this is construed as betting and therefore income tax free, but it is regulated by the FSA as a derivative product, so Centrebet could be stuffed. Getting an FSL is not a trivial thing and the due diligence on the customers and your staff is difficult.
My guess is that they will agree to stop selling the products once their lawyers look into it properly and pay a fine for their breach of the Act.
Someone overseas will then set up and sell the products with less safeguards for the punters here.
End result – less regulation but the regulators have a win.
Andrew Reynolds
8 Apr 10 at 5:44 pm