CEG also referred to a speech by Guy Debelle, Assistant Governor of the Reserve Bank, in which he describes the creation of the Committed Liquidity Facility. CEG submitted that the creation of this facility demonstrates that the CGS market is constrained. CEG stated: Importantly, Assistant Governor Debelle was clearly expressing the view that the liquidity premium in the CGS market was, in November 2011, at historically very high levels (and seemingly well in excess of 15bp). The implementation of Basel III can be expected to ensure that this remains so in the foreseeable future. The Committed Liquidity Facility was in fact created for the very purpose of ensuring the CGS market continues to function well: Specifically, the creation of a committed liquidity facility (CLF) by the Reserve Bank is intended to prevent a situation in which the liquidity in the CGS market is impaired or in which the premia attached to CGS are increased beyond reasonable levels. The AER accepts this advice that the CGS market will continue to function well in the presence of Basel III requirements. Furthermore, Assistant Governor Debelle's comments suggest that, over the years prior to the onset of the GFC, the liquidity premium may have been unusually low. Advice from the RBA and Treasury in 2007 suggested the use of nominal CGS as a proxy for the risk free rate was appropriate. The AER does not consider it appropriate to attempt to determine an average, or 'normal', liquidity premium and only accept prevailing CGS when the observed premium is equal to the 'normal' premium. The AER has confidence those authorities understand the requirements in their jurisdiction and have put in place adequate measures to address potential concerns. The AER concludes that the current demand for CGS does not undermine its usefulness as a proxy for the risk free rate. CEG contention: There is a shortage of supply of CGS in Australia The AER does not accept that there is a shortage of supply of CGS in Australia. Consequently, the AER does not accept that there is a 'scarcity premium' included in CGS yields. As discussed in attachment 4.3.2 above, the Australian Government has a stated position recognising the need to ensure sufficient CGS are available to maintain liquidity in the market. CEG made the following statement:
CEG also referred to a speech by Guy Debelle, Assistant Governor of the Reserve Bank, in which he describes the creation of the Committed Liquidity Facility. CEG submitted that the creation of this facility demonstrates that the CGS market is constrained. CEG stated: Importantly, Assistant Governor Debelle was clearly expressing the view that the liquidity premium in the CGS market was, in November 2011, at historically very high levels (and seemingly well in excess of 15bp). The implementation of Basel III can be expected to ensure that this remains so in the foreseeable future. The Committed Liquidity Facility was in fact created for the very purpose of ensuring the CGS market continues to function well: Specifically, the creation of a committed liquidity facility (CLF) by the Reserve Bank is intended to prevent a situation in which the liquidity in the CGS market is impaired or in which the premia attached to CGS are increased beyond reasonable levels. The AER accepts this advice that the CGS market will continue to function well in the presence of Basel III requirements. Furthermore, Assistant Governor Debelle's comments suggest that, over the years prior to the onset of the GFC, the liquidity premium may have been unusually low. Advice from the RBA and Treasury in 2007 suggested the use of nominal CGS as a proxy for the risk free rate was appropriate. The AER does not consider it appropriate to attempt to determine an average, or 'normal', liquidity premium and only accept prevailing CGS when the observed premium is equal to the 'normal' premium. The AER has confidence those authorities understand the requirements in their jurisdiction and have put in place adequate measures to address potential concerns. The AER concludes that the current demand for CGS does not undermine its usefulness as a proxy for the risk free rate. CEG contention: There is a shortage of supply of CGS in Australia The AER does not accept that there is a shortage of supply of CGS in Australia. Consequently, the AER does not accept that there is a 'scarcity premium' included in CGS yields. As discussed in attachment 4.3.2 above, the Australian Government has a stated position recognising the need to ensure sufficient CGS are available to maintain liquidity in the market. CEG made the following statement:
Envestra%20draft%20decision%20-%20Part%203_1.docx