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Sydney Futures Exchange LTD v. Australian Stock Exchange LTD

128 ALR 417
(1995) 56 FCR 236



(Judgment by: Lindgren J.)

Between: SYDNEY FUTURES EXCHANGE LTD -
And: AUSTRALIAN STOCK EXCHANGE LTD and ANOTHER

Court:
Federal Court of Australia

Judges:
Lockhart J

Gummow J

Lindgren J

Subject References:
Contract
Contracts
Corporations
Futures
Futures industry
Meaning of "commodity"
Option contracts
Securities
Whether a low exercise price option (LEPO) is a futures contract within s 72(1) of Law
Whether securities options are securities for purpose of s 92(1) of Law
Whether stock exchange precluded from trading in LEPOs
Whether underlying securities capable of delivery

Legislative References:
Corporations Law - s 9; ss 72(1); ss 92(1); s 1251

Case References:
Ainsworth v. Criminal Justice Commission - (1992) 175 CLR 564; 106 ALR 11
Archibald Howie Pty Ltd v. Commissioner of Stamp Duties (NSW) - (1948) 77 CLR 143
Borland's Trustee v. Steel Brothers & Co Ltd - [1901] 1 Ch 279
Buckle v. Josephs - (1983) 47 ALR 787
Carragreen Currencies Corp Pty Ltd v. Corporate Affairs Commission of New South Wales - (1986) 7 NSWLR 705
Cochrane v. Moore - (1890) 25 QBD 57
Cohns Industries Pty Ltd v. DCT (Cth) - (1979) 24 ALR 658
Colonial Bank v. Whinney - (1885) 30 Ch D 261
Colonial Bank v. Whinney - (1886) 11 App Cas 426
Commissioner for Corporate Affairs v. Shintoh Shohin Pty Ltd - (1987) Aust Sec Law Cases 76-134
Corin v. Patton - (1990) 169 CLR 540; 92 ALR 1
Cuisenaire v. Reed - [1963] VR 719
Dalton v. AML Finance Corp Ltd (CA)(NSW) - 16 April 1982, unreported
E Bailey & Co Ltd v. Balholm Securities Ltd - [1973] 2 Lloyd's Rep 404
Gamer's Motor Centre (Newcastle) Pty Ltd v. Natwest Wholesale Australia Pty Ltd - (1987) 163 CLR 236
Inland Revenue Commissioners v. Crossman - [1937] AC 26
Jenkins v. NZI Securities Australia Ltd - (1994) 124 ALR 605
Laybutt v. Amoco Australia Pty Ltd - (1974) 132 CLR 57; 4 ALR 482
Mackay v. Wilson - (1947) 47 SR (NSW) 315
Marfani & Co Ltd v. Midland Bank Ltd - [1968] 1 WLR 956
R v. Gray; Ex parte Marsh - (1985) 157 CLR 351
Re Rose; Rose v. Inland Revenue Commissioners - [1952] Ch 499
Ross, McConnel Kitchen & Co Pty Ltd v. Lorbergs (SC)(NSW) - 31 March 1983, unreported
SCF Finance Co Ltd v. Masri - [1986] 2 Lloyd's Rep 366
Shoreline Currencies (Aust) Pty Ltd v. Corporate Affairs Commission - (1986) 11 NSWLR 22
Simonius Vischer & Co v. Holt & Thompson - [1979] 2 NSWLR 322
Spiro v. Glencrown Properties Ltd - [1991] Ch 537
Sydney Futures Exchange Ltd v. Australian Stock Exchange Ltd - (1994) 126 ALR 209; 15 ACSR 206
University of New South Wales v. Moorehouse - (1975) 133 CLR 1; 6 ALR 193
United Scientific Holdings Ltd v. Burnley Borough Council - [1978] AC 904
Wilson, Smithett & Cope Ltd v. Terruzzi - [1975] 1 Lloyd's Rep 642
YZ Finance Co Pty Ltd v. Cummings - (1964) 109 CLR 395

Hearing date: 16, 20 December 1994
Judgment date: 3 March 1995

Sydney


Judgment by:
Lindgren J.

Nature of proceedings

This appeal is brought by the Sydney Futures Exchange Ltd (SFE) from the dismissal on 2 November 1994 by Sackville J ((1994) 126 ALR 209; 15 ACSR 206) of its application in which it sought the following relief:

1. A declaration that a contract, arrangement or understanding entered into in accordance with the contract specifications described in the document brought into existence by the respondent entitled "LEPOS'' would be a futures contract within the meaning of s 72 of the Corporations Law.

2. A declaration that, in the event the respondent conducts a market for the trading of Low Exercise Price Options (LEPOS), it will be conducting an unauthorised futures market.

3. An injunction pursuant to s 1324 of the Corporations Law restraining the respondent from establishing or conducting a market for the trading of LEPOS.

By its statement of claim in support of its application, SFE pleaded:

·
 that it was, but that the respondent (ASX) was not, approved as a "futures exchange'' under s 1126 of the Corporations Law (the Law);
·
 that ASX had announced that it proposed to establish and provide a market for the regular acquisition and disposal of Low Exercise Price Options (LEPOs);
·
 that a LEPO would be a "futures contract'' within the meaning of s 72(1)(a) of the Law and that such a market would be a "futures market'' within the meaning of s 9 of the Law but an "unauthorised futures market'' within the meaning of that section because it would be neither a "futures market of a futures exchange'' nor an "exempt futures market'';
·
 and that the establishing and provision by the ASX of its proposed market for the regular acquisition and disposal of LEPOs would be a contravention of s 1123 of the Law.

Section 1123 provides as follows:

A person must not establish or conduct, assist in establishing or conducting, or hold out that the person conducts, an unauthorised futures market.

Contravention attracts the penalties provided for in s 1311 of the Law. Simply put, SFE's case is that LEPOs are futures contracts, any market for the trading in which must be a futures market conducted by a futures exchange such as itself. By a cross-claim, ASX sought a declaration that a LEPO was a "security'' within the meaning of s 92(1) of the Law. Simply put, ASX's case is that LEPOs are "securities'' and therefore may lawfully be traded on a stock market of a "securities exchange'' such as itself.

The ASC intervened pursuant to s 1330 of the Law.

Sackville J dismissed SFE's application, made the declaration sought by ASX, and ordered SFE to pay ASX's costs.

What is a LEPO?

The trial judge gave a detailed account of the nature of LEPOs, the Australian Options Market (AOM) conducted by ASX, the means by which ASX proposes that LEPOs be traded on the AOM, the ASX's Business Rules applicable to LEPOs and to the trading of them, and the futures market conducted by SFE: (1994) 126 ALR 209 at 210-16; 15 ACSR 206 at 207-13. I do not find it necessary to repeat the account given by his Honour but it is desirable, in order to put in context what I say later, that certain matters be noted.

In its application SFE referred to LEPOs in terms of contracts, arrangements or understandings entered into in accordance with the contract specifications described in a document entitled "LEPOs'' brought into existence by ASX. In its cross-claim, ASX referred to LEPOs as being described in the ASX Business Rules as amended for the purpose of embracing LEPOs (not all of the amendments had been submitted to the Attorney-General pursuant to s 774 of the Law by the time of the filing of ASX's cross-claim on 12 October 1994). It was not suggested that there was any material difference between the things described in the two documents. It is convenient to describe LEPOs in the present tense but it must be understood that the market for them has not yet been established by ASX.

In its "LEPOs'' document, ASX introduces the reader to LEPOs as follows:

Option market investors now have a new investment alternative. LEPOs (Low Exercise Price Options) are a new style of leveraged security transaction. They are deep in-the-money call options with a European styled expiry and are designed to complement the existing range of options traded on the Australian Stock Exchange Derivatives (ASXD).

Later the brochure describes LEPOs in these terms:

LEPOs, or Low Exercise Price Options, are extremely deep in-the-money call options. They typically have an exercise price of between one and 10 cents, and have a European expiry, ie they can only be exercised on the last trading day.

Because they are deep in-the-money options, they have a delta of near one, ie their price moves closely in line with the underlying share.

LEPOs are deliverable contracts. Each contract normally covers 1000 shares of the underlying stock. If the taker elects to exercise at expiry, they will be taking delivery of those 1000 shares from the writer at the strike price.

Whereas options traded on the stock exchange in respect of shares (I will refer to these as "securities options'') may be put options or call options, LEPOs are call options only. The premium payable for the "writing'' (issuing or granting) of a LEPO is approximately equal to (actually slightly above) the market value of the underlying shares. All that remains to be paid upon exercise of the LEPO is a nominal amount of between 1 cent and 10 cents per underlying share. It follows that a movement in the value of the underlying shares will indicate a virtually identical movement, dollar for dollar, in the value of a LEPO in respect of those shares. Assume shares having a market value of $15 per share and a premium payable on a LEPO contract in respect of 1000 such shares of $16 per share. The LEPO had an initial market value of $16,000. If the market value of the underlying shares falls by $1 per share, the market value of the LEPO will fall also by $1 per share, that is, by $1000 from $16,000 to $15,000. This dollar for dollar correspondence between movements in the market value of the underlying shares and the market value of a LEPO in respect of them, is expressed by saying that LEPOs have a "delta'' of near one.

Because the amount of the premium payable upon the writing of a LEPO, the market value of the underlying shares, and (hence) the market value of the LEPO, are all initially approximately equal, and the "strike price'' (exercise price) of between 1 and 10 cents per share is a minuscule fraction of that amount, it can be confidently predicted that on the exercise date it will be in the interests of the holder to exercise the LEPO, and that the LEPO will, at all times throughout its life, have a value. The only situation in which this would not be so is one in which the market value of the underlying shares fell below the strike price of between 1 and 10 cents per share - a development extremely unlikely to occur. The foregoing is captured by the statement that a LEPO is always "deep in-the-money'' and is never "out of the money''.

There are similarities between the positions of the taker of a LEPO and the holder of the underlying shares. Both own something which has a market value of approximately the same amount. However the holder of a LEPO does not have the dividend or voting rights of a shareholder.

What are the advantages in taking a LEPO as against buying the underlying shares? The answer is to be found in the margining practices adopted by ASX using the "Theoretical Intermarket Margining System'' (TIMS). This allows the amount of the premium which the taker of a LEPO assumes liability to pay to be offset by a credit equal in amount to the current market value from time to time of the LEPO. Under TIMS the net amount actually payable by the "taker'' on the writing of a LEPO is much less than the amount of the premium. It is "the sum of the current `mark to market' plus risk margin'', a notion which calls for some elaboration.

LEPOs are written, taken and traded as between brokers only. Upon the writing of a LEPO, the premium is debited to the taker's account and credited to the writer's account. TIMS calculates the projected liquidation value of each position for which a taker is in credit at the current market price and for which a writer is in debit at the current market price. An initial risk margin is calculated for the position and paid by both taker and writer. If there is a downturn in the market value of the underlying shares and thus of a LEPO written in respect of them, the taker is required to "top up'' the margin. If there is an upturn in the market value of the underlying shares, and thus of a LEPO in respect of them, the holder of the LEPO will be in credit (the amount of that credit can be used to offset other debit premium margins or other risk margins).

The margining system and "marking to market'' signify a highly leveraged investment for a relatively small cash outlay. According to the relative volatility in the market for the underlying shares, substantial gains (and losses) can be made over a short period.

In the case of a conventional option, there are exercise prices available for each expiry month, for example, $9, $9.50, $10 and $10.50 down to the last Friday of March, June, September and December for a $10 share, whereas LEPOs have only the one nominal exercise price.

Both LEPOs and conventional securities options traded on a stock exchange are "standardised'', that is to say, all options in the same series are in respect of the same number of underlying shares, have the same exercise date and the same strike price: only the premium payable to the writer changes according to the date when the option is written.

Standardisation and novation (see later) make securities options "fungible'' or "interchangeable''. In this way market trading in securities options is made possible. It also enables "closing out''. By this process a person in a bought or sold position takes up an offsetting sold or bought position and is enabled by the ASX's Business Rules to discharge his or her obligations. For example, the writer of a call option in relation to 1000 shares of a company exercisable by a particular date ( on a particular date in the case of a LEPO) may discharge that obligation by purchasing (becoming the taker of) a call option in the same series. The latter will confer a right to call for the same number of shares at the same exercise price by the same date ( on the same date in the case of a LEPO). The ASX Business Rules allow for discharge by this means of the person's obligations as writer. The sold position of the person as writer and the bought position of the same person as taker are set off against each other. The person ceases to be a party to either option, leaving the original taker and the new writer with rights and obligations.

Securities options must be registered with Options Clearing House Pty Ltd (OCH) a wholly owned subsidiary of ASX. So must LEPOs. The accounting for dealings on the AOM takes place through the accounts of "clearing members'' at OCH. "Clearing members'' are member organisations of ASX which have been approved as "clearing members'' under ASX's Business Rules.

Under the ASX Business Rules governing the AOM, OCH becomes a party to all options registered with it. The option contract is "novated'' in that it is replaced by a new contract or two new contracts under which OCH becomes the taker to each writer and the writer to each taker. The taker exercises the option by giving an exercise notice to OCH which "allocates'' it to clearing members which are writers of options in the same series. The clearing member which gives the exercise notice must pay the exercise price to OCH or procure its client to do so. A clearing member to which OCH allocates an exercise notice must "deliver'' the underlying securities or procure its client to do so. Any obligations owed by a clearing member by reason of the writing or taking of options are owed by it to OCH. OCH's rights against clearing members and the concomitant obligations owed to it by clearing members are "secured'' by provisions of the ASX Business Rules relating to the liquidity of clearing members and to deposits and "margins'' to be paid and maintained by them.

The novation referred to above, and in particular the liability undertaken by OCH, enhances the efficiency of performance of the OAM, and, together with the standardisation of options, makes for their fungibility or interchangeability.

Securities are eligible for approval as "underlying securities'' in respect of LEPOs only if they satisfy certain criteria: ASX Business Rules 7.1.9 (d). These include a requirement that "the securities are FAST eligible securities or CHESS approved as securities''.

"CHESS'' is an acronym for "Clearing House Electronic Subregister System''. CHESS provides an electronic subregister for uncertificated holdings of each class of CHESS approved securities. CHESS approved securities are transferred electronically and without either share certificates or share transfers.

"FAST'' is an acronym for a "Flexible Accelerated Security Transfer System'' operated by ASX. In the case of FAST also, only uncertificated shares are traded, although in this case an instrument of transfer is used as between brokers.

ASX Business Rule 7.1.17 deals with the exercise of securities options traded on the AOM and with "delivery'' of the underlying securities upon exercise of the options. Subparagraph (3)(d), introduced in relation to LEPOs, provides as follows:

(d)
 Notwithstanding any other provision in these Rules or in the SCH Business Rules, the obligation of a Clearing Member to deliver Underlying Securities upon the exercise of a LEPO shall not be settled by the delivery of a share certificate.

Although the Business Rules refer freely to "delivery'' of the shares which underlie securities options, in the case of a LEPO, by reason of both the uncertificated nature of shares the subject of the CHESS and FAST systems and Business Rule 7.1.17(3)(d) quoted above, this does not involve delivery of a share certificate.

It is convenient to note some of the differences between LEPOs and ordinary options traded on the stock exchange. Some of these have already been noted.

The differences can be shown in a table as follows:

  LEPO Ordinary Exchange Traded Option
1. A LEPO may be a call option only. A conventional option may be either a call option or a put option.
2. Upon the writing of the LEPO there is an unqualified liability of the taker to pay to the writer a premium which is approximately equal to the market value of the underlying shares. There is such a legal liability of the taker to the writer but the premium is normally a relatively small amount, a small fraction of the value of the underlying shares.
3. Although the taker undertakes an unqualified liability to pay the premium, actual payment of the premium is deferred by the process of marking the LEPO to market during its currency, a process which in general terms, involves the setting off in accordance with TIMS of the market value of the LEPO from time to time against the liability of the holder to pay the premium. Not only does the taker undertake an unqualified liability to pay the premium, but actual payment must be made "up front" and not deferred.
4. A LEPO is exercisable on one date (a "European style" of option). An ordinary exchange traded option is exercisable at any time throughout a period up to a specified end date (an "American style" of option).
5. The amount payable upon exercise of a LEPO is nominal (between 1 and 10 cents per underlying share) with the result that a LEPO will always be "deep in-the-money" and, very likely indeed to be exercised on its exercise date. The amount payable upon exercise of an ordinary exchange traded option is substantial and so it may, from time to time during its currency, be "in the money" or "out of the money", and therefore may or may not be exercised.
6. A LEPO has only one exercise price. Any ordinary exchange traded option has a series of exercise prices according to whether it is exercised by the last Friday of March, June, September or December.

Relevant general provisions of the Corporations Law

Chapter 7 (ss 760-1119) of the Law is headed "Securities'' and Ch 8 (ss 1120-1273) is headed "The futures industry''. Many of the individual provisions in these two chapters are structured identically or almost identically. As well, some Parts within the respective Chapters bear identical or similar headings, suggesting that they deal with the same subject matter in the areas of the Securities Industry and the Futures Industry respectively. For example, Pt 7.2 and Pt 7.2A are headed "Securities exchange'' and "The securities clearing house'' respectively, whereas Pt 8.2 is headed "Futures exchanges, clearing houses and futures associations''; Pt 7.3 is headed "Participants in the securities industry'' whereas Pt 8.3 is headed "Participants in the futures industry''; Pt 7.4 is headed "Conduct of securities business'' whereas Pt 8.4 is headed "Conduct of futures business''.

The terms of s 1123 on which SFE founded for its application for an injunction were quoted earlier. Section 1123 was directed against any "unauthorised futures market''. Section 767 provides identically in respect of "unauthorised stock market''.

Section 9 defines "unauthorised futures market'' to mean "a futures market that is neither a futures market of a futures exchange nor an exempt futures market'', and the same section defines "unauthorised stock market'' in, mutatis mutandis, identical terms.

The section defines "futures market'' to mean "a market, exchange or other place at which, or a facility by means of which, futures contracts are regularly acquired or disposed of''. The definition of "stock market'' is structured differently but it is sufficient for present purposes to consider it as having the same effect but for the substitution of the word "securities'' for the words "futures contracts''.

Section 9 further defines "futures exchange'' to mean, relevantly, a body corporate holding an approval by the minister as a futures exchange (it was not in issue that SFE held such an approval). Similarly, the section defines "securities exchange'' to mean, relevantly, a stock exchange such as ASX.

It is SFE's case that LEPOs are futures contracts and that they are not securities.

The key expressions "securities'' and "futures contract'' are defined in s 92(1) and 72(1) respectively as follows:

92(1) Subject to this section, "securities'' means:

(a)
 debentures, stocks or bonds issued or proposed to be issued by a government; or
(b)
 shares in, or debentures of, a body; or
(c)
 prescribed interests; or
(d)
 units of such shares or of prescribed interests; or
(e)
 an option contract within the meaning of Chapter 7;
 but does not include a futures contract or an excluded security. [Emphasis supplied.]

72(1) A futures contract is:

(a)
 a Chapter 8 agreement that is, or has at any time been, an eligible commodity agreement or adjustment agreement;
(b)
 a futures option; or
(c)
 an eligible exchange-traded option;
 other than: ... [Emphasis supplied.]

The words "but does not include a futures contract'' in s 92(1) make it clear that the notions of "securities'' and "futures contract'' are mutually exclusive. But those words do not necessarily suggest that in their absence, the content of the notion of a "futures contract'' or even some of that content would fall within the notion of "securities''. In other words, the concluding words commencing "but does not include'' do not necessarily indicate that the area covered by the definition of "futures contract'' has been carved out of that otherwise covered by the definition of "securities''. (A similar observation is applicable, mutatis mutandis, to s 93(7) and s 97 of the Law.) Exclusionary words are sometimes used for more abundant precaution and to put beyond doubt that two things are indeed mutually exclusive. The purpose and effect of the exclusionary words in this case must be determined by looking further afield (see later).

The expression "option contract'' for the purposes of Ch 7 is defined as follows:

"option contract'', in Chapter 7, means:

(a)
 a contract under which a party acquires from another party an option or right, exercisable at or before a specified time, to buy from, or to sell to, that other party a number of specified securities, or of a specified class of securities, being securities of a kind referred to in paragraph 92(1)(a), (b), (c) or (d), at a price specified in, or to be determined in accordance with, the contract; or
(b)
 a contract entered into on a stock market of a securities exchange or on an exempt stock market, being a contract under which a party to the contract acquires from another party to the contract an option or right, exercisable at or before a specified time:
(i)
 to buy from, or to sell to, that other party an amount of a specified foreign currency, or a quantity of a specified commodity , at a price specified in, or to be determined in accordance with, the contract; or
(ii)
 to be paid by that other party an amount of money to be determined by reference to the amount by which a specified number is greater or less than the number of a specified index, being the Australian Stock Exchanges All Ordinaries Price Index or a prescribed index, as at the time when the option or right is exercised; ...

SFE submitted that a LEPO is "a Chapter 8 agreement that is, or has at any time been an eligible commodity agreement'' referred to in para (a) of the definition of "futures contract'' in s 72(1) noted above. It is convenient to defer consideration of the definitions of the terms involved in that notion (see p 19 et seq).

ASX'S first submission: a LEPO is within the definition of "securities''

ASX's first submission is that a LEPO plainly falls within the definition of "securities'' in s 92(1) because it plainly falls within para (a) of the definition of "option contract'' in s 9 noted above. Indeed ASX submitted that even before one comes to that definition, s 92(1)(e) itself clearly suggests that "an option contract'' is intended to be dealt with by Ch 7 headed "Securities'' rather than by Ch 8 headed "The futures industry''.

A LEPO, being a form of securities option, falls within the express terms of para (a) of the definition of "option contract''. Paragraph (a) refers to securities options regardless of where they are made. Paragraph (b)(i) refers to options to buy or to sell, relevantly, a quantity of a specified commodity provided it is entered into on a stock market of a securities exchange. Two observations may be made at this stage. First, as will be seen later, in order for a LEPO to be, as SFE contends that it is, a "Chapter 8 agreement that is, or has at any time been, an eligible commodity agreement'' within para (a) of s 72(1), the underlying shares the subject of the LEPO must be a "commodity''. But if they are a commodity, a LEPO would fall within para (b)(i) of the definition of "option contract'' also, provided only (as the definition seems to accept as a lawful possibility) it was entered into on the stock market of a securities exchange such as ASX. Accordingly, LEPOs would then be "securities'' by reason of para (b)(i) as well as by reason of para (a) of that definition.

Secondly, the different descriptions of the underlying subject matters of the options referred to in paras (a) and (b) of the definition of "option contract'' at least suggest that "a number of specified securities'' referred to in para (a) is something different from "a quantity of a specified commodity'' referred to in para (b)(i).

Further, as ASX submitted, to the extent that options are intended to be within the definition of "futures contract'', it seems reasonable to assume that they are covered by paras (b) and (c) of s 72(1) which deal expressly with "options'', rather than caught by para (a) of that subsection which seems to be directed to things other than options.

All these are powerful indications that all securities options, including LEPOs, are intended to be "securities'' as defined. Yet it must be recalled that the definitions of s 9 have effect only "unless the contrary intention appears'' (the opening words of s 9). Against the possibility that the intention may yet appear that the words in s 92(1) "but does not include a futures contract'' are indeed intended to have the effect that the definition of "option contract'' is to encompass only those option contracts which remain after a "carving out'' by the definition of "futures contract'' from the area otherwise covered by the definition of "securities'', I find it necessary to consider the question whether a LEPO is a futures contract.

ASX'S second submission: a LEPO is not within the definition of "futures contract''

Definitions of "Chapter 8 agreement'', "eligible commodity agreement'' " commodity agreement '' and "commodity''

As noted above, SFE relied only upon that part of para (a) of the definition of "futures contract'' in s 72(1) which refers to "a Chapter 8 agreement that is, or has at any time been, an eligible commodity agreement'' for the proposition that a LEPO is a futures contract.

It is convenient and sufficient for present purposes to say that s 9 defines a "Chapter 8 agreement'' as, inter alia, a "relevant agreement'' and "a proposed relevant agreement'', and "relevant agreement'' as any agreement, arrangement or understanding even if not having legal or equitable force and even if not based on legal or equitable rights. The section defines "eligible commodity agreement'' as follows:

"eligible commodity agreement'' means a commodity agreement (in this definition called the "relevant agreement''), where, at the time when the relevant agreement:

(a)
 unless paragraph (b) applies - is entered into; or
(b)
 if the relevant agreement is not a commodity agreement at the time when it is entered into - becomes a commodity agreement;
 it appears likely, having regard to all relevant circumstances (other than the respective intentions of the person in the sold position, and the person in the bought position, under the relevant agreement), including, without limiting the generality of the foregoing:
(c)
 the provisions of any agreement;
(d)
 the rules and practices of any market; and
(e)
 the manner in which the respective Chapter 8 obligations of persons in sold positions, and persons in bought positions, under agreements of the same kind as the first-mentioned agreement are generally discharged;
 that:
(f)
 the Chapter 8 obligation of the person in the sold position under the relevant agreement to make delivery in accordance with the relevant agreement will be discharged otherwise than by the person so making delivery;
(g)
 the Chapter 8 obligation of the person in the bought position under the relevant agreement to accept delivery in accordance with the relevant agreement will be discharged otherwise than by the person so accepting delivery; or
(h)
 the person in the sold position, or bought position, under the relevant agreement will assume an offsetting bought position, or offsetting sold position, as the case may be, under an agreement of the same kind as the relevant agreement; ...

[Emphasis supplied.]

The word "eligible'' in the definition signifies that at the time when a relevant agreement can first properly be described as a commodity agreement'', it appears likely, having regard to a wide range of circumstances (not including the subjective intentions of the parties), that the obligation to make or accept delivery of the commodity will be discharged otherwise than by performance. It was common ground that if a LEPO was a "commodity agreement'', it was an "eligible'' one.

The expressions "commodity'' and "commodity agreement'' are defined in s 9 as follows:

"commodity'', except in Part 4.4, means:

(a)
 any thing that is capable of delivery pursuant to an agreement for its delivery; or
(b)
 without limiting the generality of paragraphs (a), an instrument creating or evidencing a thing in action;

"commodity agreement'' means a standardised agreement the effect of which is that:

(a)
 a person is under a Chapter 8 obligation to make delivery; or
(b)
 a person is under a Chapter 8 obligation to accept delivery;
 
 at a particular future time of a particular quantity of a particular commodity for a particular price or for a price to be calculated in a particular manner, whether or not:
(c)
 the subject matter of the agreement is in existence;
(d)
 the agreement has any other effect; or
(e)
 the agreement is capable of being varied or discharged before that future time; ...

Section 9 defines "Chapter 8 obligation'' to have the meaning given by s 55 which defines a "Chapter 8 obligation'' or a "Chapter 8 right'' as "an obligation or right, as the case may be, whether or not enforceable at law or in equity''.

Is a LEPO "a commodity agreement''?

In order for this question to be answered "yes'':

(i)
 The shares underlying a LEPO must be within the definition of "commodity'', that is, they must be either things capable of delivery pursuant to an agreement for their delivery or "instruments creating or evidencing a thing in action''; and
(ii)
 
(a)
 The taker must be under an obligation to accept delivery; or
(b)
 The writer must be under an obligation to make delivery; and
(iii)
 The delivery obliged to be made or accepted must be "for'' a particular price or a price to be calculated in a particular manner.

In my view, for the reasons appearing below, a LEPO does not satisfy any of these conditions.

(i)
  "The shares underlying a LEPO must be within the definition of `commodity', that is, they must be either things capable of delivery pursuant to an agreement for their delivery or `instruments creating or evidencing a thing in action'.''

It is not necessary to discuss in detail the legal nature of a share: see Borland's Trustee v Steel Brothers & Co Ltd [1901] 1 Ch 279 at 288 (Farwell J); Archibald Howie Pty Ltd v Commissioner of Stamp Duties (NSW) (1948) 77 CLR 143 at 156 (Williams J); Robert Pennington, "Can Shares in Companies be Defined?'' (1989) 10 The Company Lawyer 140; H A J Ford and R P Austin, Ford's Principles of Corporations Law (6th ed, 1992) para [315]. A share is a chose in action and is incapable of physical delivery. But the possibility must be allowed at this stage of the inquiry that the "thing'' referred to in the definition of "commodity'' is a non-physical thing and that the "delivery'' referred to in the definition is not a physical delivery ("delivery'' in a non-physical sense is used in relation to securities in the ASX Business Rules).

It should be noted at the outset that the legislature intended "capacity for delivery'', without definition or elaboration, to be a delimiting aspect of the "thing'' referred to in para (a) of the definition of "commodity''. Clearly, the draftsperson contemplated that "delivery'' had a sufficiently ordinary and familiar meaning that further definition or elaboration was unnecessary. Four reasons combine, unless a contrary intention appears, to cause me to construe "delivery'' to refer to physical delivery. First, no dictionary meaning of "delivery'' which I have found accommodates the transfer of a chose in action, and this accords with my sense of the ordinary meaning of the word in general parlance. I note the following dictionary definitions, neither of which embraces choses in action:

The Macquarie Dictionary (second revised edition):

1. a thing that is of use or advantage. 2. an article of trade or commerce. 3. Obs. a quantity of goods.

The New Shorter Oxford English Dictionary (1993):

II4 A thing of use or value; spec. a thing that is an object of trade, esp. a raw material or agricultural crop ... b. fig . A thing one deals in or makes use of ... 5 A quantity of wares; ...

Secondly, a transfer of physical possession of goods is important in law for various purposes and this is commonly referred to as "delivery'': cf Pollock and Wright, Possession in the Common Law (1888) at 43-7; 57-60; and the Sale of Goods Acts which define "delivery'' as the "voluntary transfer of possession from one person to another''.

Thirdly, the definition of "commodity agreement'', by referring to obligations to make and to accept delivery, invokes concepts which are basic to the law relating to the sale of goods: see for example, Sale of Goods Act 1923 (NSW) Pt 4 ss 30-40.

Fourthly, since para (b) of the definition of "commodity'' refers to "an instrument creating or evidencing a thing in action'' it is clear that a "thing in action'' itself is not within para (b). Paragraph (b)'s reference to an instrument is a reference to a thing capable of physical delivery. That the draftsperson should have taken care not to refer to a "thing in action'' itself but to refer only to a physical thing creating or evidencing it, suggests that "commodity'' is intended to refer to a physical thing, and in particular, not to a thing in action such as a share. The natural meaning of the definition of "commodity'' taken as a whole is that things in possession which are capable of delivery pursuant to an agreement for delivery are within para (a), things in action are within neither paragraph, and instruments creating or evidencing a thing in action, although they may well be within para (a), are, for more abundant precaution, referred to expressly in para (b).

A share is not a thing capable of delivery. A share certificate is literally "a thing capable of delivery pursuant to an agreement for delivery'' but, as noted earlier, it cannot be said, in terms of the definition of "commodity agreement'', that the effect of a LEPO is that a person undertakes to make or to accept delivery of a share certificate.

For the foregoing reasons, unless a contrary intention appears, I construe "delivery'' in para (a) of the definition of "commodity'' and in paras (a) and (b) of the definition of "commodity agreement'' as referring to a voluntary transfer of physical possession, and the definition of "commodity'' as referring to a chose in possession and not chose in action such as a share.

SFE submitted that there were, contrary to the above, indications in the Law that a share is a "commodity'' for the Law's purposes. In particular, SFE relied on s 1251(a) which, relevantly, is as follows:

1251. For the purposes of this Division, a futures contract concerns a body corporate if, and only if:

(a)
 the futures contract is a commodity agreement and a commodity to which it relates is securities of the body; ...

Section 1251 is the first section in Div 1, headed "Insider dealing'', within Pt 8.7 headed "Offences''. Division 1 deals with insider dealing in futures contracts. It is the counterpart to Div 2A, also headed "Insider trading'', in Pt 7.11 headed "Conduct in relation to securities''. SFE submitted that it would be surprising that the legislature should intend the word "securities'' in s 1251(a) not to embrace the most common class of security, being the class in respect of which insider trading is most commonly engaged, namely shares. So it would. In any event, that the expression "securities of the body'' in s 1251(a) includes shares in the body is put beyond doubt by s 92(2). In my view, in s 1251 an intention appears contrary to the Law's general intention that the definition of "commodity'' in s 9 should apply wherever the word "commodity'' appears.

Be this as it may, s 1251 is so far removed from the provisions central to this case in terms of both its location in the Law and its historical antecedents, that it has no significance as an indication of the intended respective spheres of operation of securities and futures exchanges. Similar observations apply to SFE's reliance on ss 235(1)(d), 262(3)(c) and 846(3)(d)(ii) of the Law as showing that the Law's notion of "delivery'' is one which accommodates delivery of shares. It is to the historical background to the Law's definitions that I now turn.

Historical background to the definitions

Chapters 7 and 8 of the Law relevantly reflect provisions of the Securities Industry Code and the Futures Industry Code, both of 1986. Consequently, the historical background of these Codes is the historical background of Pts 7 and 8 of the Law respectively.

In so far as the following account refers to the times when SFE introduced trading in various classes of contracts, it is based upon Remo Giuffre, "Regulation of the Commodity Futures Market in Australia'' (1982) 5 UNSWLJ 170; and Michael Hains, Options: Should They be Treated as Futures Contracts? (a Banking Law Association Special Report, Legal Books, 1992).l

(i) The first legislative control of stock exchanges in Australia is found in the Securities Industry Act 1970 (NSW) (Act No 35 of 1970). Similar Acts followed in the other jurisdictions but it suffices to refer to the Act of New South Wales because, as will be seen, it was in that State alone that predecessor legislation to the Futures Industry Code was passed.

Section 6 of the Act of 1970 prohibited the establishment or maintenance of a stock market that was not the stock market of a "stock exchange''. "Stock market'' was defined by reference to the sale, purchase or exchange of "securities'' which, was defined in s 4 as follows:

"securities'' means debentures, funds, stocks, shares or bonds of any government or of any local government authority or of any body corporate or unincorporate and includes any right or option in respect thereof and any interest as defined in section seventy-six of the Companies Act, 1961;

"Stock exchange'' was defined to mean The Sydney Stock Exchange Ltd and any other body corporate approved by the minister. Accordingly, from the legislative beginning, securities options were "securities''.

(ii) The Act of 1970 was repealed by the Securities Industry Act 1975 (NSW) (Act No 3, 1976). Section 27 contained a prohibition similar to that in s 6 of the 1970 Act. Again "stock market'' was defined by reference to "securities'' and "securities'' was again defined to include securities options.

(iii) It is clear that throughout the 1970s, securities options were treated as "securities'' themselves and therefore the subject of securities industry legislation. It is against that background that the first attempt to regulate the futures industry in 1979 must be considered.

SFE had been incorporated as a company limited by guarantee in 1960 as Sydney Greasy Wool Futures Exchange Ltd. From 1960 to 1975 futures contracts in respect of wool were the only contracts traded. The first regulation of a futures exchange occurred in the Futures Markets Act 1979 (NSW) (No 176 of 1979). By the time when the bill for that Act was introduced in the Legislative Assembly on 21 November 1979 SFE was providing markets for futures contracts for the following which it had introduced in the years shown: wool (1960), live cattle (1975), gold (1978), fresh frozen boneless beef (1979), and 90 day bank accepted bills of exchange (1979). The last had been introduced on 17 October 1979, just prior to introduction of the bill. All these futures contracts were simply contracts for forward delivery of a physical thing. Moreover, in all cases except the 90 day bank accepted bill of exchange, the physical thing was sold in quantities measured by weight or volume.

Cases decided on futures contracts in the 1970s and early 1980s all concerned straightforward contracts for forward delivery of a physical thing for a price fixed at the time when the contract was made, and contemporaneous judicial descriptions of "futures contracts'' reflected that understanding of what a futures contract was. In E Bailey & Co Ltd v Balholm Securities Ltd [1973] 2 Lloyd's Rep 404 (Kerr J) (cocoa and sugar), Kerr J said (at 405):

"Futures'' are contracts for the sale or purchase of commodities for future delivery on a date and at a price fixed at the date of the contract.

In Wilson, Smithett & Cope Ltd v Terruzzi [1975] 1 Lloyd's Rep 642 (Kerr J) (metals), the same judge said (at 652) that futures were contracts for the sale of goods notwithstanding the fact that delivery and acceptance might rarely occur by reason of their fungibility and the common practice on the futures market of "closing out''. In Simonius Vischer & Co v Holt & Thompson [1979] 2 NSWLR 322 (CA(NSW)) (wool), Samuels JA said of the Sydney Greasy Wool Futures Exchange Ltd (at 340):

Its purpose was to provide a market for trading in wool futures, and thus to enable traders to enter into contracts for the sale or purchase of wool for forward delivery or acceptance at a price fixed when the engagement was made. By this means a trader may engage himself to deliver a quantity of wool at a future date, but at the price current in the market when the contract is made, and thus higher or lower than the price ruling when the contract comes to maturity and performance is required. Or a trader may engage himself to accept a quantity of wool at a future date with the same possibility of variation in price when acceptance becomes due.

The Exchange is not a commodities market in the ordinary sense, although the price of futures moves relatively closely with the price of wool. But actual physical deliveries are rare, as on all wool futures markets. However, the contracts entered into on the Exchange are contracts for the sale and delivery or purchase and acceptance of wool; ...

In Dalton v AML Finance Corp Ltd (CA)(NSW) , 16 April 1982, unreported)(specified weight of live cattle), Reynolds JA described what was being negotiated by the brokers in that case in the following terms (at 1-2):

Contracts for the sale and purchase of a specified weight of live cattle for forward delivery or acceptance at a price fixed when the engagement was made. By this means a trader may engage himself to deliver the cattle to the required weight in a future month but at a price then determined and thus higher or lower than the price ruling when the contract comes to maturity and performance is required.

In Ross, McConnel Kitchen & Co Pty Ltd v Lorbergs (SC)(NSW) , Miles J, 31 March 1983, unreported), (gold) it was said that a "gold future'' (at 1):

... involved in the first instance the purchase of a certain quantity of gold at the current market price, but the time for payment and delivery of the gold is postponed to a certain date in the future.

The two remaining cases to be noted both concerned facts which occurred after other forms of futures contract had begun to be traded. In SCF Finance Co Ltd v Masri [1986] 2 Lloyd's Rep 366 (CA), for the first time, in addition to a physical commodity quantifiable by weight or volume, a financial instrument is referred to. Slade J said (at 369) in that case that:

A futures contract is a legally binding commitment to deliver at a future date, or take delivery of, a given quantity of a commodity, or a financial instrument, at an agreed price. [Emphasis supplied.]

Finally, in Commissioner for Corporate Affairs v Shintoh Shohin Pty Ltd (1987) Aust Sec Law Cases 76-134 (SC(Vic), Nathan J) it was said (at 85,310) that "A futures contract, as commonly understood, is an agreement to buy a given quantity of a basic commodity at a fixed price at a future time'' and that "In essence, a market has developed in trading in the contracts themselves, rather than the commodities involved, and it is only in a very few and limited number of circumstances that the actual goods change hands''.

The overwhelming impression is that the general understanding of a "futures contract'', at least in Australia and England, which was entertained at the time of the passing of the Futures Markets Act 1979 (NSW), as ascertained from the nature of the futures contracts in fact traded on the Sydney Futures Exchange and from reported cases arising out of futures trading in the 1970s was that a futures contract was a contract for the sale of a physical thing for future delivery and acceptance, perhaps necessarily in quantities measured by weight or volume. The only qualification to this was the appearance, just prior to the passing of the New South Wales Act of 1979, of trading in 90 day bank accepted bills of exchange.

By late 1979 in New South Wales futures in foreign currencies were in the offing. However, delivery of foreign currency was prohibited by the Commonwealth's Banking (Foreign Exchange) Regulations. This problem might be circumvented if seller and buyer agreed that they would make an adjustment in Australian currency according to the respective exchange rates on and as at the agreed date for the supply of the foreign currency. However, such an "adjustment contract'' had the appearance of an agreement by way of gaming or wagering which would be made null and void by s 16 of the Gaming and Betting Act 1912 (NSW).

The Futures Markets Act 1979 had two objectives: to overcome the obstacle posed for adjustment contracts by the Gaming and Betting Act 1912, and to provide a measure of regulation of any futures exchange approved of by the minister. Section 7 provided that a futures contract made at a futures market maintained by an approved futures exchange was not a contract by way of gaming or wagering. The Act enabled a body corporate to apply for and be granted approval by the minister as a "futures exchange'' if its business rules satisfied certain criteria. Amendment of the rules of an approved futures exchange was subject to ministerial approval.

The Act provided for enforcement by the court of an approved exchange's business rules upon application by a person aggrieved or by the Corporate Affairs Commission constituted under the Securities Industry Act 1975. These provisions were modelled on those of the Securities Industry Act 1975. Only SFE ever applied for and obtained the minister's approval. The Act did not prohibit the maintenance of a futures market by unapproved bodies, but s 7 and the measure of investor protection which the Act afforded did not apply in those cases.

The Act defined "futures contract'' to mean a "commodity futures contract'' or a "currency futures contract''. The latter was a contract the effect of which was that the parties undertook to make an adjustment between them at a specified future time in Australian currency, according to whether a specified amount of foreign currency was worth more or less, in Australian currency, at that time than it was worth in Australian currency at the time of the making of the contract. The other species of futures contract, the "commodity futures contract'', was defined to mean,

... a contract the effect of which is that one party agrees to deliver to the other party at a specified future time a specified quantity of a specified commodity at a specified price payable at that time; [Emphasis supplied.]

This definition was appropriate to express the then current common notion of a futures contract referred to earlier. The words emphasised by me ill fitted the bank accepted 90 day bill of exchange, trading in which had been introduced only a month before the first reading of the bill.

Options over securities (or, for that matter, over anything else) were not traded on SFE's market: the definition contemplated only unqualified forward contracts for delivery and payment.

The Act contained no definition of "commodity'' or of "delivery''. In my opinion, the considerations to which I have already referred require a construction of these terms as referring to the physical. But there is more. In his second reading speech in the Legislative Council on the bill for the Act, the Hon D P Landa, Minister for Planning and Environment, described a "commodity futures contract'' as "an agreement for the purchase or sale of a specified commodity by way of forward delivery'' and said (Hansard, Vol 152, NSW Legislative Council, 29 November 1979, at 4200):

It is an important feature of futures markets that trading is in terms of contracts to deliver or to take delivery, rather than on the immediate transfer of the physical commodity . [Emphasis supplied.]

(iv) Chronologically, the next development was the passing of the Securities Industry Act 1980 (Cth) (Act No 66 of 1980). This Act operated directly in the Australian Capital Territory and, by various State Securities Industry (Application of Laws) Acts, became the "Securities Industry Codes'' of the respective States. The bill was introduced in the House of Representatives on 2 April 1980, and the Securities Industry Codes commenced on 1 July 1981. Section 37(1) was the successor prohibition to those in s 6 of the 1970 Act and s 27 of the 1975 Act, both of New South Wales. Again the definition of "stock market'' hinged on that of "securities'', the latter being defined, in s 4, to mean:

(a)
 debentures, stocks or bonds issued or proposed to be issued by a government;
(b)
 debentures, stocks, shares, bonds or notes issued or proposed to be issued by a body corporate or unincorporate;
(c)
  any right or option in respect of any such debentures, stocks shares, bonds or notes ; or
(d)
 a prescribed interest,
 but does not include:
(e)
 bills of exchange;
(f)
 promissory notes; or
(g)
 certificates of deposit issued by a bank.

[Emphasis supplied.]

Paragraph (c) was the successor to the "securities options'' parts of the definitions of "securities'' in the New South Wales Acts of 1970 and 1975 previously noted.

(v) Between the commencement of the Futures Markets Act 1979 on 14 December 1979 and that of the Futures Markets (Amendment) Act 1982 (NSW) (next to be noted) on 15 December 1982, SFE commenced providing markets for trading in new classes of futures contracts. These were US dollars (1980), Japanese yen (1980), pounds sterling (1980), silver (1981), fat lambs (1981), and export bullocks (1982). Clearly, the markets for the three foreign currency futures were established in 1980 pursuant to the Futures Markets Act 1979.

(vi) On the second reading of the Futures Markets (Amendment) Bill, the Attorney-General described the bill's purpose as being fourfold: first, to widen the definition of "commodities futures contract'' by including contracts which were to be "completed by payment of a cash sum as an alternative to delivery of the underlying commodity''; secondly, to add a definition of "commodity'' to ensure that interest rate futures which were already being traded on SFE were subject to the Act; thirdly, to include a definition of a "share index futures contract''; and fourthly, to provide a regulation-making power to enable new types of futures contracts to be brought within the ambit of the Act: Hansard, Vol 173, NSW Legislative Assembly, 1 December 1982, pp 3667-8.

In describing the detailed provisions of the bill, the Attorney-General said that the definition of "commodities futures contract'' was being amended and he gave the following explanation (ibid at 3669):

The effect of the amendment is to expand the definition so as to eliminate the requirement of delivery of the underlying commodity. This will enable the exchange, upon the rules of that body being suitably amended, to introduce new procedures for settling commodities futures contracts by payment of a cash sum rather than delivery of the underlying commodity. It is envisaged that this sum will be determined by reference to the price applying in a physical market designated by the rules of the exchange. The cash settlement does not replace delivery in all commodity futures contracts but is an alternative form of settlement where the rules so provide. The cash settlement procedure is being introduced on some overseas futures markets. [Emphasis supplied.]

The Attorney-General clearly accepted that the existing definition of "commodity futures contract'' required that there be delivery of a physical thing as distinct from performance by the making of a financial adjustment between the parties - something allowed for already only in the definition of "currency futures contract''.

It will be recalled that the 90 day bank accepted bills of exchange had been introduced on 17 October 1979, just prior to the introduction of the Futures Markets Bill into the Legislative Assembly on 22 November 1979. According to the Attorney-General, doubts had been expressed as to whether such bills of exchange constituted a "commodity'' and therefore as to whether futures contracts in respect of them were "commodity futures contracts'' as defined in the Act. There was good cause for doubt: as noted earlier, the expression "a specified quantity of a specified commodity'' suggests a thing quantifiable by weight or volume rather than individual things quantified by number. The Attorney-General explained the proposed amendment which expressly included bills of exchange in these terms (ibid, p 3669):

Finally, cl 1(a) puts it beyond doubt that the interest rate future, which is based upon delivery of the bill of exchange , is within the definition of commodity futures exchange [sic "commodity futures contract"] as used in the Act. The view has been expressed that the common usage of the word commodity may not include a bill of exchange. Though there is some doubt as to the correctness of such view, it is important that there be commercial certainty about the enforceability of all contracts traded on the futures exchange. This clause also provides that the term commodity will include those matters prescribed by regulation. [Emphasis supplied.]

In the Legislative Council, the Hon D P Landa, Minister for Energy and Water Resources, said this in relation to the bill (Hansard, Vol 173, NSW Legislative Council, 2 December 1982, pp 3770-1):

Originally, the futures market was a rather specialised one of interest mainly to wool producers and users. In recent years, however, the futures market has developed into a large and diverse forum in which persons engaged in commerce as well as primary production, may seek profits or a redistribution of the economic risks and uncertainties they may face. An indication of the width of the market can be seen from the types of contracts that have been traded on the exchange. They include not only the more traditional commodity items such as the wool contract, cattle contract and fat lamb contract, and the metal contracts such as the gold contract and silver contract, but also financial futures including the United States dollar contract, and the bank accepted bills of exchange contract.

(vii) The Futures Markets (Amendment) Act 1982 (NSW) (Act No 128 of 1982) commenced on 15 December 1982. It inserted in s 2 of the Futures Markets Act 1979 a definition of "commodity''. "Commodity'' was now defined to include (a) a bill of exchange; and (b) anything prescribed by the regulations as a commodity.

The original Act's definitions of "futures contract'', "commodity futures contract'' and "currency futures contract'' were omitted. "Futures contract'' was now defined to mean a contract described in Sch 1 and provision was made for additions and omissions to be made to and from that schedule by regulation. Schedule 1 defined "futures contracts'' to mean a "commodity futures contract'', a "currency futures contract'' and a new species, a "share index futures contract''. The last, like a currency futures contract, was an "adjustment contract''. The definition of "commodity futures contract'' in Sch 1 embraced the alternative of "settlement by adjustment'' as follows:

Commodity futures contract.

A commodity futures contract is a contract the effect of which is that:

(a)
 one party agrees to deliver to the other party at a specified future time a specified commodity, or a specified quantity of a specified commodity, at a specified price payable at that time; or
(b)
 the parties will make an adjustment between them at a specified future time in Australian currency according to whether a specified quantity of a specified commodity is worth more, or worth less, in Australian currency at that time than it was worth in Australian currency at the time of the making of the contract, the difference being determined in accordance with the business rules of the futures market at which the contract is made. [Emphasis supplied.]

The words emphasised by me in para (a) were now inserted, no doubt in order that the definition might accommodate the bill of exchange which, as noted above, was now expressly included in the definition of "commodity''.

It is clear, in my view, that in enacting both the Futures Markets Act 1979 and the Futures Markets (Amendment) Act 1982, the New South Wales legislature proceeded on the assumption that a commodity was a thing capable of physical delivery pursuant to a contract for its delivery at a future time, and was perhaps necessarily quantifiable by weight or volume. The entertaining of this concept, and the concept of a futures contract as a contract for the sale and purchase of such a commodity with delivery and payment to occur on a future date, explain the necessity for the express inclusions of currency futures contracts and share index futures contracts which necessarily were adjustment contracts, commodities futures contracts which were to be completed by adjustment rather than by delivery, and, at least as a precautionary measure, contracts for the future delivery of bills of exchange.

(viii) Pursuant to the amending Act of 1982, on 16 February 1983 SFE introduced trading in futures contracts over the Australian All Ordinaries Share Index.

(ix) By regulations made under the Futures Markets Act 1979 in 1984 and 1985 Sch 1 was amended. There was added a definition of "Commonwealth Government Treasury Bond futures contract''; there was substituted for the definition of "currency futures contract'' a definition of "foreign currency futures contract''; and there was added a definition of "share index options contract''. The Commonwealth Government Treasury Bond Futures Contract and the foreign currency futures contract were adjustment contracts. The "share index options contract'' was not a contract to make an adjustment but gave an option or right exercisable at or before a specified future time to be paid a sum of money determined by reference to the extent to which a particular share index figure was, at the time of exercise of the option or right, greater or less than a figure specified in the contract. This was the first mention of any kind of option as being the subject of the Futures Markets Act. Previously, all futures contracts within the Act required performance by delivery or adjustment. As well, regulation prescribed, "a unit of foreign currency'' as a commodity''.

(x) On 18 June 1985 SFE introduced trading in options over the All Ordinaries Share Price Index futures contracts. This preceded the making of the relevant regulation referred to above which occurred on 13 September 1985. Trading in options over other futures contracts followed. But unless these options themselves fell within the definitions of "commodity futures contract'', "currency futures contract'' or "share index futures contract'', they were not "futures contracts'' as defined in the Act.

(xi) The Companies and Securities Legislation (Miscellaneous Amendments) Act 1985 (Cth) (Act No 192 of 1985) amended the definition of "securities'' in the Securities Industry Code. Paragraph 647 of the explanatory memorandum which accompanied the bill for the Act was as follows:

647. An amendment is proposed to the definition of "securities'' to bring commodity and index options traded on the Sydney Stock Exchange (SSE) within the ambit of the [Securities Industry Act] ... The SSE is now a member of the International Options Market which trades gold, silver and currency options. The SSE also proposes to introduce options on the Australian Stock Exchanges' indices. Bringing gold, silver, currency and index options within the ambit of the SIA will ensure that provisions such as fidelity fund protection, licensing and various offence provisions will apply.

The proposal was to enlarge the scope of operation of the securities industry legislation by extending the definition of "securities'' to encompass commodity and index options which were in fact already being traded on the Sydney Stock Exchange. This had nothing to do with securities options which were already within the definition and had long been traded on securities exchanges in Australia.

In fact the amending Act, by s 165(1)(p) and (w), omitted existing para (c) of the definition of "securities'' in the Securities Industry Code, and substituted the words "an option contract to which this Act applies''. Meaning was given to this expression by a new subs (8A) of s 4 of the Code which was as follows:

(8A) A reference in this Act to an option contract to which this Act applies is a reference to:

(a)
 a contract under which a party to the contract acquires from another party to the contract an option or right, exercisable at or before a specified time, to purchase from, or to sell to, that other party a specified number of specified securities, or of securities included in a specified class of securities, at a price specified in, or to be determined in accordance with, the contract; or
(b)
 a contract entered into on a stock market of a securities exchange or on an exempt stock market, being a contract under which a party to the contract acquires from another party to the contract an option or right, exercisable at or before a specified time:
(i)
 to purchase from, or to sell to, that other party a specified amount of a specified foreign currency, or a specified quantity of a specified commodity, at a price specified in, or to be determined in accordance with, the contract; or
(ii)
 to be paid by that other party an amount of money to be determined by reference to the amount by which a specified number is greater or less than the number of a specified index, being the Australian Stock Exchanges All Ordinaries Price Index or a prescribed index, as at the time when the option or right is exercised.

Clearly, para (a) was intended to continue the coverage of "securities options'' which had been the subject of the repealed para (c) of the definition of "securities''. Just as clearly, para (b) was intended to achieve the extension referred to in the explanatory memorandum. By reference to the explanatory memorandum, it is plain that the expression "a specified quantity of a specified commodity'' in para (b)(i) was intended to cover, at least immediately, gold and silver. The explanatory memorandum makes it plain that the word "commodity'' in para (b) was not intended to catch securities in general or shares in particular.

Further, it should be noted that para (a) refers to "a specified number of specified securities or of securities included in a specified class of securities'' and that para (b)(i) refers to "a specified amount of a specified foreign currency and to "a specified quantity of a specified commodity''. The distinction between the word "number'' and the plural form of "securities'' in para (a) and the word "quantity'' and the singular form "commodity'' in para (b) again suggests the further reason why a share is not a "commodity'' referred to earlier, namely, that unlike gold and silver, shares are not quantifiable by weight or volume.

The definition of "option contract'' which was introduced as s 4(8A) by Act No 192 of 1985 is, in substance, the same as that now found in s 9 of the Law. Accordingly, the matters to which I have just referred are relevant to the position under the Law.

(xii) The Futures Industry Act 1986 (Cth) (Act No 72 of 1986) commenced on 1 July 1986. It was part of a package of three Acts. The other one of present relevance is the Companies and Securities Legislation Amendment (Futures Industry) Act 1986 (Cth) (Act No 74 of 1986). The legislation applied directly in the Australian Capital Territory and was made to apply in the States by Application of Laws Acts.

Unlike the Futures Markets Act 1979 (NSW), the Futures Industry Code was to prohibit unapproved persons from establishing, maintaining or providing futures markets. It was therefore to be expected that the line of demarcation between the subject matter of the existing Securities Industry Code and the subject matter of the proposed Futures Industry Code would receive attention. Paragraph 10 of the explanatory memorandum which accompanied the bills was as follows:

10. In order to provide an appropriate framework for the various "products'' traded on futures and securities exchanges, it is proposed that the following regime will apply:

(a)
 The Futures Industry Bill will:
(i)
 apply to futures contracts, options over futures contracts, and to commodity options traded on a futures exchange (it should be noted that, at this stage, the Futures Industry Bill will not apply to deliverable commodity options not traded on a futures exchange);
(ii)
 adopt appropriate SIA provisions (eg prohibition on insider trading) to cover futures contracts where the underlying instrument is a security.
(b)
 There will be no regulation of physical commodity sales or of the sale of commodity options not traded on a stock or futures exchange.
(c)
 The SIA [Securities Industry Act] will apply to:
(i)
 securities and commodity options traded on a stock exchange (but not options over futures):
(ii)
 the marketing of discretionary accounts or of a right to participate in a commodity pool.
 Note: A dealing in a futures contract will not be a dealing in securities for the purposes of the SIA (see cl 12 of the Companies and Securities Legislation Amendment (Futures Industry) Bill 1986).
(d)
 The CA will apply to the offering of a right to participate in a commodity pool.

Although this passage is less than clear, at least it does not suggest that securities options, which had been included in the definition of "securities'' in the New South Wales securities industry legislation of 1970 and 1975 and in the Securities Industry Code in 1980, and were currently referred to in s 4(8A)(a) of the definition of "option contract'' in the Securities Industry Code, and thereby in the definition of "securities'' in that Code, were suddenly to cease to be subject to the Securities Industry Code and to become subject to the new Futures Industry Code.

The only relevant amendment which Act No 74 of 1986 made to the Securities Industry Code was the insertion in the list of "non-inclusions'' in the definition of "securities'', of:

(ea)
 a futures contract within the meaning of the Futures Industry Act 1986 or of the provisions of a law of a participating State or participating Territory that correspond with that Act;

The new Futures Industry Code contained relevant definitions in terms substantially identical to those now found in the Law noted earlier. The definition of "commodity'' was now exhaustive, not inclusive. That which had previously been allowed to be covered by the general notion of a "commodity'' was spelled out. I have suggested that the New South Wales futures legislation revealed an understanding that the essential feature of a commodity for the purposes of that legislation was a physical thing for the sale and delivery of which in "quantities'', perhaps necessarily measurable by weight or volume, there was a market. The first of the two limbs of the definition of "commodity'' introduced by the Futures Industry Code, "any thing that is capable of delivery pursuant to an agreement for its delivery'', reflect that general notion. Although the reference to a "thing'' can accommodate that which it is possible to "count'' as distinct from "measure'' or "weigh'', the definition of "commodity agreement'' reverted to the language of "a particular quantity of a particular commodity''.

The express extension which had been made in the New South Wales Act in 1982 to include "a bill of exchange'' was not repeated in those terms, but the second limb of the definition of "commodity'' was, in generalised form, clearly derived from and encompassed it. It was as follows:

(b)
 without limiting the generality of paragraph (a), an instrument creating or evidencing a thing in action.

As the Futures Markets Act 1979 (NSW) had done, this put it beyond question that such an instrument as a bill of exchange was to be a commodity, in case the words "a particular quantity of a particular commodity'' in the definition of "commodity agreement'' might be held to exclude it.

Conclusion as to whether the shares underlying a LEPO are within the definition of "commodity''

In my opinion, the legislative history recounted above confirms rather than detracts from the propositions stated earlier that the definition of "commodity'' in the Law refers to something physical and that "delivery'' in the definitions of "commodities'' and "commodity agreement'' refers to a voluntary transfer of physical possession. For this, the first of three reasons, it should be accepted that a LEPO does not fall within the definition of a "commodity agreement''. In my opinion, for the reasons given, a LEPO is a securities option with certain special characteristics and falls within para (a) of the definition of "option contract'' and therefore within the definition of "securities''.

(ii)
 
(a)
 The taker must be under an obligation to accept delivery; or
(b)
  the writer must be under an obligation to make delivery.

The following discussion must assume, contrary to what I have concluded above, that upon exercise of a LEPO there arises an obligation to make and to accept "delivery'' of a "commodity'' namely the shares which underlie the LEPO. It is common ground that LEPOs are "standardised agreements''. In order to satisfy the definition of "commodity agreement'' it is necessary that the effect of a LEPO be that a person is under an obligation either to make delivery or to accept delivery at a particular future time.

The relevant time at which the position is to be tested is during the period prior to exercise of the option: after exercise, the contract ceases to be a LEPO (a form of option) at all.

(a) Is the taker of a LEPO under an obligation to accept delivery? In my opinion the answer is "No''. SFE drew attention to s 55's provision that a Ch 8 obligation is an obligation "whether or not enforceable at law or in equity''. But I accept ASX's submission that even an obligation not enforceable at law or in equity, such as a moral obligation, is something which must "bind'' or "burden'' one party in favour of another. In the case of a LEPO nothing burdens the taker in favour of the writer. The taker is under no obligation to exercise the option. The commercial considerations which may compel a taker, in his or her own interests, to exercise a LEPO are, in my view, beside the point. The word "obligation'' is not apt to refer to "compulsion to act out of self interest''.

(b) Is the writer of a LEPO under an obligation to make delivery? Down to the exercise date, the taker is under an obligation implied by law not to put it out of the taker's power to perform on the exercise date. That is not an obligation to make delivery.

But does the writer have a "prospective'', "proposed'' or "contingent'' obligation to make delivery which satisfies the language of para (a) of the definition of "commodity agreement''? In my opinion, for two reasons the answer is again "No''. First, the historical background referred to earlier shows that the source of the present definitions of "commodity'' and "commodity agreement'' and "commodity'' was the original "forward contract'' under which there was, from the outset, an obligation, unqualified except by general law principles, to deliver at a particular future time, and in my view the definitions are still intended to reflect that notion. An option is foreign to it.

The fact that in the case of synallagmatic contracts the obligation of a party to perform or to perform further may be conditioned on performance or further performance by the other does not signify that they and option contracts are of the same order. The point is that the grantee of an option may perform or not perform the act of exercise at his or her choice without committing a breach of contract.

Reference must be made to Carragreen Currencies Corp Pty Ltd v Corporate Affairs Commission of New South Wales (1986) 7 NSWLR 705. In that case Hodgson J had to consider whether an option to purchase foreign currency fell within the definition of a "futures contract'' in s 4(1) of the Futures Industry (NSW) Code. His Honour held that it did. In particular, he held that it had the effect that the grantors of the option were under an obligation to make delivery, and that this conclusion was not prevented by the fact that the obligation was "conditional on'' the exercise of the option and payment in full of the price. In particular, his Honour relied upon s 5(2)(a)(i) of the Code to the effect that except so far as a contrary intention appeared, a reference in the Code to an "agreement'' included a reference to "a proposed agreement''; cf "Chapter 8 agreement'' in s 72(1)(a) of the Law and para (b) of the definition of that expression in s 9 of the Law. With respect, in the light of the historical background to which I have referred at length above, I disagree.

The second reason why I think that the writer of a LEPO is not under an obligation to deliver arises from ASX's Business Rules. These were discussed at 460-1 above. It will be recalled that under those Business Rules it is OCH which assumes liability to satisfy the obligations of a writer of a call option, such as a LEPO, if it is exercised. The taker gives an exercise notice to OCH. OCH is entitled to allocate the exercise notice to a writer or writers of call options in the same series. Writers have obligations to OCH and OCH has obligations to takers. Moreover, a writer is entitled to be discharged from its obligations as a writer by purchasing a bought position in the same series of options, resulting in a set-off.

The Business Rules to which I have referred are subrr 7.1.3(3) and 7.3.12(a) which are as follows:

7.1.3(3) Subject to the provisions of the Rules of Options Clearing House the Taker of an Option has the right, beginning at the time such Option is registered and expiring in accordance with the Articles of Association and Rules of the Exchange and the Rules of Options Clearing House, in the case of a Call Option to purchase from the Writer ( or from such substituted person as the Exchange may from time to time appoint to perform the Option ), and in the case of a Put Option to require the Writer to purchase from him at the Exercise Price the Standard Quantity of the Underlying Securities represented by such option, all in accordance with the Articles of Association and Rules of the Exchange and the Rules of Options Clearing House. The Writer of an Option has the obligation upon the allocation to him of an Exercise Notice in respect of such Option , in the case of a Call Option to sell and deliver the Standard Quantity of the Underlying Securities represented by such Option to such person as the Exchange may from time to time appoint against payment of the Exercise Price , and in the case of a Put Option to purchase the Standard Quantity of the Underlying Securities represented by such Option from such person, all in accordance with the Articles of Association and Rules of the Exchange and the Rules of Options Clearing House. [Emphasis supplied.]

7.3.12 Set off

(a) If a Clearing Member is registered as both Writer and Taker in respect of the same number of Options in an Option Series and such Clearing Member requests in the manner determined by Options Clearing House a set off in respect thereof:

(i)
 he shall thereupon be deemed to have ceased to be a party to such Options;
(ii)
 the registration thereof by Options Clearing House shall thereupon be deemed to have ceased; and
(iii)
 the other Clearing Members in whose names such Options are registered shall thereupon be deemed to have contracted with each other (subject to these Rules) and in pursuance of Rule 7.3.1 shall accept by way of novation such other party as Options Clearing House may appoint ...

It follows from r 7.1.3(3) that the writer of a LEPO will be under a Ch 8 obligation to OCH to make delivery to such persons as may be appointed, if and when OCH allocates an exercise notice to the writer. Prior to that time , a LEPO cannot be described (by reference to the first limb of s 72(1)(a) and the definitions of "Chapter 8 agreement'', "eligible commodity agreement'' and "commodity agreement'' in s 9) as a proposed agreement that is, or has at any time been , a standardised agreement the effect of which is that a person is under a Ch 8 obligation to make delivery at a particular future time .

Further, it follows from r 7.3.12(a) that the writer has a right to be discharged. It is true that the definition of "commodity agreement'' contains the words "whether or not: (a) ... (b) ... (c) the agreement is capable of being ... discharged before that future time'', but these words are not, in my view, apt to refer to a writer's unilateral right to be discharged under r 7.3.12(a).

In summary, the "Chapter 8 obligation to make delivery'' referred to in para (a) of the definition of "commodity agreement'' does not, in my opinion, describe the obligation initially undertaken by the writer of a LEPO to OCH under Business Rule 7.1.3(3) subject, as it is, to the writer's right to be discharged under Business Rule 7.3.12(a).

In my opinion, for this second reason also, a LEPO is not a "commodity agreement'' as defined.

(iii) The delivery obliged to be made or accepted must be "for'' a particular price or a price to be calculated in a particular manner .

Let it be assumed, contrary to the fact that LEPOs relate to uncertificated shares, that the effect of a LEPO is that the writer is under a Ch 8 obligation to make delivery of a share certificate. Although a share certificate is not an instrument evidencing or creating a thing in action within para (b) of the definition of "commodity'', it is literally a thing capable of delivery pursuant to an agreement for delivery within para (a) of that definition. None the less, a LEPO would not be a "commodity agreement'' by reason of the supposed obligation to effect delivery of a share certificate for two reasons. In the first place it is again a misuse of language to conceive of an obligation to deliver a share certificate as an obligation to deliver "a particular quantity'' of a thing. In the second place, the delivery of the share certificate would not be "for'' the price in question: rather, it is transfer of title to the shares that is "for'' the price in question.

In my opinion, for this third reason a LEPO is not a "commodity agreement'' as defined in s 9 of the Law.

Conclusion on SFE's application

In my opinion, for the foregoing reasons a LEPO is not a "commodity agreement'', is therefore not an "eligible commodity agreement'', and is therefore not a "futures contract''. Accordingly, it would not be a contravention of the prohibition in s 1123 of the Law against a person's establishing or conducting an "unauthorised futures market'' for ASX to establish and conduct a market for the trading of LEPOs, and the trial judge correctly ordered that SFE's application be dismissed with costs. Accordingly, SFE's appeal should also be dismissed with costs.

ASX'S cross-claim

The trial judge also made a declaration as sought by ASX in its cross-claim. His Honour noted that the declaration sought was one to future events but that SFE had not submitted that it should not be made. The declaration was as follows:

... that a financial instrument to be known as and designated by the respondent as a Low Exercise Price Option, being an instrument to be regulated in accordance with the Business Rules of the respondent, in the form of the document referred to as DJW5 in the affidavit of David John White sworn 10 October 1994, is a security within the meaning of s 92(1) of the Corporations Law.

On the hearing of the appeal SFE submitted that declaratory relief should not have been granted.

A declaration should not be made for the purpose of answering hypothetical questions or giving advice on a proposed course of action: University of New South Wales v Moorehouse (1975) 133 CLR 1 at 10; 6 ALR 193 (Gibbs J); Ainsworth v Criminal Justice Commission (1992) 175 CLR 564 at 581-2; 106 ALR 11 (Mason CJ, Dawson Toohey and Gaudron JJ). It will be recalled that ASX has not yet established the market in question.

For three particular reasons, the declaration is inappropriate in this case. First, its terms involve the difficulty of distinguishing between those Business Rules which do and those which do not regulate LEPOs. Yet if the declaration refers to the entirety of the Business Rules, it is of utility only for as long as they remain unchanged in any respect - a situation which ASX itself would scarcely welcome. Secondly, although some of the amendments to the ASX Business Rules intended to regulate LEPOs have been allowed by the Attorney-General pursuant to s 774 of the Law, others have not yet reached that stage. Thirdly, ASX was not able to point to any problem which might be likely to arise for it, if, SFE being refused relief on its application, ASX was refused the declaration sought in its cross-claim.

In my view, the declaration is inappropriate.

As I noted above, before the trial judge SFE did not oppose the makinq of the declaration. On the appeal, it made only brief submissions as to why the declaration should not stand and they were made only in response to the raising of the issue by the court. There should be no special order as to the costs of the cross-claim or of SFE's appeal in so far as it related to the cross-claim.

Case Judgement
Table of contents
  Judgment by Lockhart J
  Judgment by Gummow J
  Judgment by Lindgren J.
  Order


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