Legislative Assembly for the ACT: 2001 Week 6 Hansard (15 June) . . Page.. 1960 ..
MR KAINE (continuing):
chosen to tell us what those specific limited and circumscribed circumstances are where derivatives are used elsewhere.
I am not certain that we really need, or that it is desirable for us, to get into the group derivatives trading business. I said that not many people in this place would understand what it is really about. I guess that Mr Quinlan is probably the only person in this building at the moment who could tell you what forwards are, what futures are, what options are, what warrants are, what swaps are, what share ratios are and what other composites are. Those, the Chief Minister tells us, are transactions that are labelled, all taken together, as derivatives. Does anybody in this place even understand what they are? I would suggest Mr Quinlan could tell us, but I doubt that there is anybody else in this room at the moment who could tell us what they are.
The reason why trading in derivatives has been prohibited for the last 10 years is that, when you are trading in these things, you are trading at the very high risk end of investments. It is generally considered that this is inappropriate for public money because of the high risk involved.
I think it was Woody Allen who said that stockbrokers are people who take your money and trade in it until they have lost the lot. We hire people to trade in investments for us. If you let them get into derivatives they are pretty much like stockbrokers: they can lose the lot. If you let them trade in derivatives, they will lose it much more quickly because of the high risk.
The warning needs to be sounded. We have prohibited trading with public money in financial derivatives for 10 years, and for good reason. When the Chief Minister tells me that we now need to get into the trading of financial derivatives to assist in balancing risk and return objectives and that the members of the Finance and Investment Advisory Board have identified this as being "critical to improving the territory's investment processes", I am very dubious. I do not know how it will improve or why it is critical to improving the territory's investment processes that we get into very risky areas of investment in derivatives such as forwards, futures, options, warrants, swaps, share ratios and other composites, which none of us even begin to understand. Yet we are told that we have got to get into this very risky trading.
The other problem is that we are asked to trust the government. "Trust us," they say. "We will do all this in accordance with guidelines that have yet to be written." We do not even know yet what constraints the government intend to impose on our investors in this very risky area of investment. I say this because I think the warning needs to be sounded.
The investment market out there has its ups and downs at the best of times but, if you get into the field of derivatives, your ups and downs can be much greater and much more rapid. I am concerned about it, and I agree with Mr Quinlan that to argue that this will enhance our trading is certainly going too far. It is a high-risk area, and I support Mr Quinlan's amendment. I, too, would like to have seen in this bill a statement of the restrictions we are going to impose on our traders rather than wait until some future time when the government comes back and tells us what those restrictions are going to be.