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Legislative Assembly for the ACT: 2001 Week 6 Hansard (13 June) . . Page.. 1695 ..

MR KAINE (continuing):

I think any prudent investor would consider derivatives to be on the very risky end of the spectrum of investments. It was for that reason that we decided nearly 10 years ago that it was unwise to expose public money to risk levels that can be experienced when you get into the derivatives business. That is why the restriction is in the legislation now, and it has been there for 10 years.

If you were in private enterprise and you had lots of your own money that you wanted to play with then maybe you would get into the derivatives business because you can make a lot of money quickly or you can lose a lot of money quickly, but here we are talking about public money. Like Mr Quinlan, when it comes to investing public money I am very prudent, and that is why there has been a restriction on investing in this kind of investment for the last 10 years.

If we are going to remove that restriction and allow our investors, and they are not necessarily public servants, to play with our money and invest it in derivatives, we have to have a high level of confidence in their ability and in their integrity. So I will be interested to see the kinds of guidelines that the government intends to put in place to protect the public's money if they are going to go into the area of trading in derivatives. Unless those guidelines are pretty tightly written, it will be interesting to see what our money investors do with the taxpayers' money.

I thought it prudent to highlight the fact that we have not allowed very much trading in derivatives for the last 10 years for a very good reason. I wonder why it is now considered expedient to open up our investment markets to allow us to do so given the risks that are inherent in it. I have not heard any justification from the government yet as to why they want to do this. I will certainly be looking closely at their guidelines, and I am sure Mr Quinlan will also.

MS TUCKER (6.40): Yes, it is interesting how things come around, I agree. In 1993 the then Labor government put up amendments to the Audit Act to allow, amongst other things, the investment of government funds in derivatives. The Liberal Party and Michael Moore opposed the legislation. At the time they were concerned that derivatives were a highly speculative form of investment which could expose the government to increased risk. While this might be acceptable for a private investor, the government does have a responsibility to protect the assets of the community, particularly the superannuation assets of its employees. The public accounts committee inquired into the previous bill and recommended that there be a limit of 5 per cent of investments being placed in derivatives, but the government would not support this.

Putting some limits on the use of derivatives seems quite reasonable. I understand that derivatives can be a legitimate form of funds management where used as hedging against uncertainty in future returns on investments to take into account things like rises or falls in interest rates, share prices and exchange rates. They are, however, inherently risky as they could also be regarded as a form of gambling on whether particular events will happen in the future.

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