Joffe v R; Stromer v R [2012] NSWCCA 277 | Case summary

Court of Criminal Appeal (NSW)|2012-09-10|Before: Bathurst CJ, Allsop P, Barrett JA, Hall J

Judgment 1BATHURST CJ: The applicants were charged on indictment with a number of offences of insider trading in contravention of s 1043A(1)(d) of the Corporations Act 2001 (Cth) ("the Act") in the case of Mr Joffe and in contravention of s 1043A(1)(c) of the Act in the case of Mr Stromer. I have had the privilege of reading the judgments of Allsop P and Barrett JA in draft form. The judgment of Allsop P sets out Counts 3, 4 and 5 of the indictment, which are sufficient for an analysis of the issues raised in this appeal. 2The charges concerned the entry into contracts falling within the definition of derivatives in s 761D(1) of the Act. It was common ground for the purpose of this application for leave to appeal that, subject to the operation s 761D(3)(b), the contracts in question were derivatives and that an acquisition of such derivatives within the meaning of s 761E(3) of the Act had taken place. 3The applicants moved to have the relevant counts in the indictment quashed on the basis that the contracts that were entered into were not Division 3 Financial Products within the meaning of s 1042A of the Act and thus could not be the subject of charges of contravention of s 1043A. They contended that this was for two reasons. First, the contracts in question were contracts for the future provision of services and thus fell within the exemption to the definition of derivative contained in s 761D(3)(b) of the Act. Second, they contended that even if the contracts fell within the definition of derivatives the definition contained in s 1042A required that the contracts be financial products and that they were not as they were credit facilities excluded by the operation of s 765A(1) of the Act. 4The primary judge concluded that s 765A had no application in the consideration of whether a derivative was a Division 3 Financial Product for the purpose of the definition in s 1042A. Further he concluded that the contracts were not contracts for the future provision of services so as to attract the exemption to the definition of derivatives in s 761D(3)(b). He also concluded that even if the general exemptions in s 765A applied the contracts were not credit facilities. 5The applicants sought leave to appeal under s 5F of the Criminal Appeal Act 1912. At the outset of the hearing of the application the Court indicated that it would grant leave to appeal. The issue was one of general importance in the operation of the market regulation provisions in Ch 7 of the Act and in particular the insider trading provisions in Division 3 of Pt 7.10.

The first issue - The application of the exemptions in s 765A of the Act to the definition of Division 3 Financial Products 6The answer to this question depends, in my opinion, on a textual analysis of the provisions of Ch 7 of the Act: Alcan (NT) Alumina Pty Limited v Commissioner of Territory Revenue [2009] HCA 41; (2009) 239 CLR 27 at [47]. Recently, in dealing with the complex provisions concerning share buybacks in the Income Tax Assessment Act 1936, the High Court made the following remarks (citations omitted): "This Court has stated on many occasions that the task of statutory construction must begin with a consideration of the [statutory] text. So must the task of statutory construction end. The statutory text must be considered in its context. That context includes legislative history and extrinsic material. Understanding context has utility if, and insofar as, it assists in fixing the meaning of the statutory text. Legislative history and extrinsic materials cannot displace the meaning of the statutory text. Nor is their examination an end in itself." (Federal Commissioner of Taxation v Consolidated Media Holdings Ltd [2012] HCA 55 at [39]). 7Section 761A of the Act states that "in this Chapter [Ch 7] financial products has the meaning given by Division 3". It is to be noted that the words "in this Chapter" indicates that the definition operates throughout the Chapter, including Division 3 of Pt 7.10. 8Division 2 of Pt 7.1 of Ch 7 contains a general definition of financial products, in s 763A, whilst s 764A identifies specific things that are financial products. Section 763A so far as relevant provides as follows: "763A(1) For the purposes of this Chapter, a financial product is a facility through which, or through the acquisition of which, a person does one or more of the following: (a) makes a financial investment (see section 763B); (b) manages financial risk (see section 763C); (c) makes non-cash payments (see section 763D). This has effect subject to section 763E." Section s 764A so far as relevant is in the following terms: "764A(1) Subject to Subdivision D, the following are financial products for the purposes of this Chapter: (a) a security; (b) any of the following in relation to a registered scheme: (i) an interest in the scheme; (ii) a legal or equitable right or interest in an interest covered by subparagraph (i); (iii) an option to acquire, by way of issue, an interest or right covered by subparagraph (i) or (ii); (ba) any of the following in relation to a managed investment scheme that is not a registered scheme, other than a scheme (whether or not operated in this jurisdiction) in relation to which none of paragraphs 601ED(1)(a), (b) and (c) are satisfied: (i) an interest in the scheme; (ii) a legal or equitable right or interest in an interest covered by subparagraph (i); (iii) an option to acquire, by way of issue, an interest or right covered by subparagraph (i) or (ii); (c) a derivative; ... (g) a superannuation interest within the meaning of the Superannuation Industry (Supervision) Act 1993; ... (j) a debenture, stock or bond issued or proposed to be issued by a government; ... (m) anything declared by the regulations to be a financial product for the purposes of this section." 9It is to be noted that each of s 763A and s 764A are stated to be for "the purposes of the Chapter". Further, s 764A is expressly made subject to Subdivision D, which includes s 765A. 10Section 765A so far as relevant provides as follows: "765A(1) Despite anything in Subdivision B or Subdivision C, the following are not financial products for the purposes of this Chapter: ... (h) any of the following: (i) a credit facility within the meaning of the regulations; (ii) a facility for making noncash payments (see section 763D), if payments made using the facility will all be debited to a credit facility covered by subparagraph (i)." 11Section 765A is expressly stated to operate despite anything in Subdivision B (the definition subdivision which includes the definition of financial product) and Subdivision C. 12Allsop P has set out the definition of "Division 3 financial products". The opening words and the use of the other defined term "relevant Division 3 financial products" make it clear that it is only those financial products in subs (a)-(e) of s 1042A which are subject to the prohibition in s 1043A. The financial products in s 1042A, apart from those referred to in s 1042A(e), correspond with specific financial products defined in s 764A, namely; securities (s 764A(1)(a)); derivatives (s 764A(1)(c)); interests in managed investment schemes (s 764A(1)(b) and (ba)); debentures, stocks or bonds issued, or proposed to be issued, by a government (s 764A(1)(j)) and superannuation products (s 764A(1)(g)). Thus it is evident that the approach of the legislature was to take particular financial products from the overall set and limit the operation of Division 3 of Pt 7.10 to those products. 13Viewed in that light it seems to me that the inclusion of the words "financial products" in the opening words of the definition in s 1042A incorporates the whole of the definition of financial products as it applies to the products referred to in s 1042A(a)-(d), including any product specific exemptions such as those contained in s 761D(3) in relation to derivatives or general exemptions such as those contained in s 765A. There is nothing in the text of s 1042A to indicate that the legislature intended to widen the extent that the products in subs (a)-(d) would be treated as financial products for the purpose of Division 3 of Pt 7.10 of the Act. 14Such a construction is consistent with the provisions to which I have earlier referred which were stated to operate generally for the purpose of the Chapter. It also allows s 1042A(e) to operate harmoniously with s 1042A(a)-(d). The inclusion of the overarching definition "financial products" in that subsection would indicate that all exemptions were to be considered. It would be odd in those circumstances if the general exemptions were not to be considered in relation to the products referred to in subs (a)-(d). 15Further, the construction which I prefer means that the exceptions to s 1043A contained in s 1043H to s 1043J can operate harmoniously with s 1043A. The contravention in s 1043A relates to relevant Division 3 Financial Products whilst the exceptions referred to financial products. If the construction which I prefer is incorrect then in a case where the product in question would fall within s 1042A(a)-(d) but would be excluded from the general definition by virtue of s 765A, it would be necessary, contrary to the opening words of s 765A(1), to ignore the exemption for the purpose of s 1043H to s 1043J to give context to those sections in the particular case. 16It was suggested by the Crown that although the exemptions may be appropriate to other conduct in Ch 7 to which the definition is applicable, it was not appropriate to market misconduct of the nature of that prohibited by Division 3 of Pt 7.10. Even if such a proposition were correct, it cannot stand with the textual analysis to which I have referred. Further, it ignores the fact that the market manipulation provisions in Div 2 of Pt 7.10 use the general expression "financial products". 17For these reasons I agree with Allsop P and Barrett JA that the exemption in s 765A of the Act applies in considering whether a product is a Division 3 Financial Product for the purpose of Division 3 of Pt 7.10.

The second issue - Were the contracts credit facilities 18On a number of occasions senior counsel for Mr Joffe referred to the transactions underlying the contracts as equivalent to a loan taken out to purchase a security. However, the analysis of whether the arrangements constituted a credit facility must be undertaken by reference to the contractual rights and obligations agreed upon, not by reference to some perceived economic equivalence. 19Allsop P has conducted such an analysis and has concluded that the contracts were not credit facilities. I agree with his conclusion and his reasons. I also agree with the additional observations of Barrett JA.

Issue three - Are the contracts "contracts for the future provision of services" 20The exemption in s 761D(3)(b), in my opinion, requires focus on the purpose or object of the contract not by reference to any subjective intent of the parties, but objectively ascertained from the contractual terms. Another way of putting the question is that it involves looking at the substance of the contract: Pacific Film Laboratories v Federal Commissioner of Taxation [1970] HCA 36; (1970) 121 CLR 154 at 160, although as Walsh J stated (at 173-174) that is to some extent a statement of the question to be asked, rather than a test which produces the answer. 21In the present case the analysis conducted by Allsop P and Barrett JA reveals that the purpose and object of the contract was not to provide services, but rather to provide the acquirer of the derivative with a contract which by its terms would produce a profit or a loss dependent on the movement of the underlying securities nominated in it. The services identified by Allsop P and Barrett JA were, as stated by them, incidental to that purpose or object. 22The position may be contrasted with, for example, an agreement by a person to manage a portfolio of securities for another, the fee varying according to the increase in the value of the portfolio, measured against an index. Such an agreement would fall within the definition of derivative but would be exempted by the operation of s 761D(3)(b). It may, of course, fall within the general definition of financial product in s 763A(1)(a). 23Subject to these remarks, I agree with the conclusions and reasons of Allsop P and Barrett JA on this issue.

Conclusion 24In the circumstances I would make the following orders: 1 Leave to appeal granted. 2 Appeal dismissed. 25ALLSOP P: This is an application for leave to appeal under the Criminal Appeal Act 1912 (NSW), s 5F, and the appeal thereunder, should leave be granted. Leave should be granted. The matter is of public importance. 26The appellants are each charged with 10 counts of insider trading contrary to the Corporations Act 2001 (Cth). 27Each appellant filed a notice of motion seeking orders quashing six of the 10 counts against him. The orders were sought on the same basis, that is, that the charges brought by the relevant counts do not disclose offences known to the law and in particular do not disclose offences in contravention of s 1043A of the Corporations Act. 28The matter was heard by a judge of the common law division who dismissed each motion. 29The argument below and in this Court proceeded on the basis that the relevant arrangements made a with the counterparty in question could be analysed by reference to counts 3, 4 and 5 in the indictment. Those accounts were in the following terms: "And the said Director of Public Prosecutions further charges that: DANIEL SHAYNE JOFFE 3. Between about 20 September 2006 and 27 September 2006 at Sydney in the State of New South Wales, procured Nathan Stromer to acquire relevant Division 3 financial products, being 135,000 Contracts for Difference in AWB Limited (AWB) ('the financial products') whilst in possession of inside information concerning AWB that was not generally available, being information which if it was generally available a reasonable person would expect to have a material effect on the price of the financial products, and being information which the defendant knew, or ought reasonably to have known: (i) was not generally available, and (ii) if it were generally available, a reasonable person would expect it to have a material effect on the price or value of the financial products. Particulars The defendant possessed inside information to the effect of: AWB had informed Moody's that it (AWB) was about to announce to ASX that: (i) it would indemnify AWB (International) Limited (AWBI) for its legal costs arising from the Cole Inquiry, and any tax that might be assessed against AWBI in connection with transportation fees paid for wheat sold to Iraq (such tax amount estimated to be, on a worst case scenario approximately $259 million as at 30 September 2006); and (ii) AWB's most recent market guidance and wheat crop forecast for domestic wheat production for the 2006/07 crop (18-20 million tones) was no longer correct, and that the ABARE forecast production of 16.4 million tones was correct contrary to section 1043A(1)(d) of the Corporations Act 2001 (Cth) (Law Part Code 47861). And the said Director of Public Prosecutions further charges that DANIEL SHAYNE JOFFE 4. Between about 25 October 2006 and 26 October 2006 at Sydney in the State of New South Wales, procured Nathan Stromer to acquire relevant Division 3 financial products, being 54,200 Contracts for Difference in Boral Limited (Boral) ('the financial products'), whilst in possession of inside information concerning Boral that was not generally available, being information which if it was generally available a reasonable person would expect to have a material effect on the price of the financial products, and being information which the defendant knew, or ought reasonably to have known: (i) was not generally available, and (ii) if it were generally available, a reasonable person would expect it to have a material effect on the price or value of the financial products. Particulars The defendant possessed inside information to the effect of: On Wednesday 25 October 2006, Boral informed Moody's: The downturn in the USA market was going to be more severe than anticipated and the NSW market was still poor. As these two markets together accounted for about 60% of Boral's earnings, the profit results for the Financial Year ending 30 June 2007 will probably be lower than originally announced to the market. Boral was likely to inform the market of a downgrade of its previously announced expected profit after tax for the Full Year ending 30 June 2007 contrary to section 1043A(1)(d) of the Corporations Act 2001 (Cth) (Law Prt Code 47861). And the said Director of Public Prosecutions further charges that DANIEL SHAYNE JOFFE 5. Between about 10 November 2006 and 14 November 2006 at Sydney in the State of New South Wales, procured Nathan Stromer to acquire relevant Division 3 financial products, being 962,000 Contracts for Difference in Alinta Infrastructure Holdings (AIHCA) ("the financial products"), whilst in possession of inside information concerning AIHCA that was not generally available, being information which if it was generally available a reasonable person would expect to have a material effect on the price of the financial products, and being information which the defendant knew, or ought reasonably to have known: (i) was not generally available, and (ii) if it were generally available, a reasonable person would expect it to have a material effect on the price or value of the financial products. Particulars The defendant possessed inside information to the effect of: Alinta Limited (Alinta) had informed Moody's that it (Alinta) would on Wednesday 15 November 2006, announce a takeover bid for all of the issued partly paid stapled securities of AIHCA contrary to section 1043A(1)(d) of the Corporations Act 2001 (Cth) (Law Part Code 47861)." 30It was common ground that each of these arrangements were what the documentation to which I will refer called "Spot Contracts for Difference". 31Three issues were presented to the primary judge for consideration. First, the proper construction of the definition "Division 3 financial products" in s 1043A of the Corporations Act; secondly, whether the arrangements in the three counts were financial products or whether by reason of their being a credit facility within the meaning of s 765A(1)(h) and regulation 7.1.06 of the Corporations Regulations 2001 (Cth) they were not financial products; and thirdly, whether the arrangements were not "derivatives" because they were "contracts for the provision of future services" within the meaning of s 761D(3)(b) of the Corporations Act. 32The primary judge answered these questions in a manner conformable with the submissions of the Crown and dismissed the motions. 33In my view, his Honour was in error in the construction of the Corporations Act. Nevertheless, his Honour correctly concluded that the arrangements were not a credit facility nor a contract for the provision of future services. In those circumstances, his Honour was correct to dismiss the motions. 34Chapter 7 of the Corporations Act is concerned with financial services and markets. The objects of the Chapter are described in s 760A and include, as a central element, the promotion of public confidence in the fairness and honesty of markets for financial products. An important feature of that promotion of confidence is the presence of criminal offences for recognised market misconduct, including insider trading. The penalty for insider trading (contrary to s 1043A(1) and (2)) of up to ten years imprisonment reflects the seriousness of the conduct to the whole community in the undermining of confidence in the operation of financial markets, if conduct of this character occurs, or is thought to be prevalent. Confidence in the honesty and integrity of the financial markets is of the utmost importance in an economy and a society which depend significantly for their well-being on the efficient operation of such markets. 35By reason of the interlocking and interconnected definitional structure and drafting style of the Act, it is not straightforward to express with precision and brevity its operation. Leaving definitional complexity to one side, s 1043A prohibits a person who has "inside information" about "Division 3 financial products" from acquiring or disposing of them or procuring another to do so. 36The first question in the appeals concerns the meaning of the phrase "Division 3 financial products". The counts against each accused charged that the arrangements the subject of the charges were "Division 3 financial products". One begins this enquiry and analysis with two considerations firmly in mind: first, in such a closely structured and finely worded piece of legislation, the importance of the text is paramount; and, secondly, the provisions concerned provide for criminal offences, and their construction is to be approached accordingly. 37Division 3 of Part 7.10 deals with the insider trading prohibitions. Part 7.10 deals with market misconduct and other prohibited conduct relating to financial products and financial services. Division 1 of Pt 7.10 is of a preliminary nature; Division 2 concerns prohibited conduct other than insider trading and contains various criminal offences: ss 1041A, 1041B, 1041C, 1041D, 1041E, 1041F and 1041G; Division 3 deals with insider trading prohibitions; and Division 4 provides for defences and other matters. 38The definition of the phrase "Division 3 financial products" in s 1042A in Division 3 is that it means: "(a) securities; or (b) derivatives; or (c) interests in a managed investment scheme; or (ca) debentures, stocks or bonds issued or proposed to be issued by a government; or (d) superannuation products, other than those prescribed by regulations made for the purposes of this paragraph; or (e) any other financial products that are able to be traded on a financial market." 39It is to be noted immediately that paragraph (e) by the word "other" implies that each of (a)-(d) is a "financial product" that is able to be traded on a financial market. That supports the appellants' primary contention that though the phrase "Division 3 financial products" is separately defined "In this Division" (see the opening words to s 1042A), it is to be understood and interpreted as a species of "financial product" such that qualifications of, and limitations upon, the meaning of "financial products" apply to "Division 3 financial products". 40The arrangements the subject of the charges were said to be "Division 3 financial products" because they were "derivatives". The word "derivative" is defined in s 761A, being a definition section for "this Chapter" (see the introductory words of s 761A). Thus, the definition of "derivative" is not peculiar to Pt 7.10 or Division 3 thereof. The definition in s 761A takes one, in terms, to the meaning in s 761D. Section 761D is in the following terms: "(1) For the purposes of this Chapter, subject to subsections (2), (3) and (4), a derivative is an arrangement in relation to which the following conditions are satisfied: (a) under the arrangement, a party to the arrangement must, or may be required to, provide at some future time consideration of a particular kind or kinds to someone; and (b) that future time is not less than the number of days, prescribed by regulations made for the purposes of this paragraph, after the day on which the arrangement is entered into; and (c) the amount of the consideration, or the value of the arrangement, is ultimately determined, derived from or varies by reference to (wholly or in part) the value or amount of something else (of any nature whatsoever and whether or not deliverable), including, for example, one or more of the following: (i) an asset; (ii) a rate (including an interest rate or exchange rate); (iii) an index; (iv) a commodity. (2) Without limiting subsection (1), anything declared by the regulations to be a derivative for the purposes of this section is a derivative for the purposes of this Chapter. A thing so declared is a derivative despite anything in subsections (3) and (4). (3) Subject to subsection (2), the following are not derivatives for the purposes of this Chapter even if they are covered by the definition in subsection (1): (a) an arrangement in relation to which subparagraphs (i), (ii) and (iii) are satisfied: (i) a party has, or may have, an obligation to buy, and another party has, or may have, an obligation to sell, tangible property (other than Australian or foreign currency) at a price and on a date in the future; and (ii) the arrangement does not permit the seller's obligations to be wholly settled by cash, or by setoff between the parties, rather than by delivery of the property; and (iii) neither usual market practice, nor the rules of a licensed market or a licensed CS facility, permits the seller's obligations to be closed out by the matching up of the arrangement with another arrangement of the same kind under which the seller has offsetting obligations to buy; but only to the extent that the arrangement deals with that purchase and sale; (b) a contract for the future provision of services; (c) anything that is covered by a paragraph of subsection 764A(1), other than paragraph (c) of that subsection; (d) anything declared by the regulations not to be a derivative for the purposes of this Chapter. (4) Subject to subsection (2), an arrangement under which one party has an obligation to buy, and the other has an obligation to sell, property is not a derivative for the purposes of this Chapter merely because the arrangement provides for the consideration to be varied by reference to a general inflation index such as the Consumer Price Index." 41The form of s 761D reflects the drafting technique used elsewhere in the Chapter (and indeed in the Act): a definition in terms of some generality is given (in subs (1)); overriding specific inclusions (in subs (2)) are referred to; and specific exclusions are identified (in subs (3)), even if they are covered by the definition. A further exclusionary provision appears in subs (4). 42The exclusion in s 761D(3)(c) is by reference to s 764A(1), which sets out the specific inclusions to the definition of "financial products". The same drafting technique just mentioned is used in Pt 7.1 Div 3 in the definition of the phrase "financial product". There is a general definition of "financial product" in s 763A; there is the identification of specific inclusions of things that are financial products in s 764A; and, in s 765A, there are specific things that are identified not to be financial products despite anything in Subdivision B (containing s 763A) and Subdivision C (containing s 764A). Thus, the exclusion in s 761D(3)(c) is to remove anything from the meaning of "derivative" that was specifically included as a "financial product" by s 764A(1), other than "a derivative" as referred to in s 764A(1)(c). 43Nothing in the definition of "derivative" takes one to the terms of s 765A, which is the provision that contains over-riding exclusions from the meaning of "financial product". Nevertheless, if one is asking what is a "financial product", one is told that one kind is "a derivative": s 764A(1)(c) (and one goes, of course, to s 761D for the meaning of that phrase); but one is then told that even if something is a derivative according to the definition in s 761D, it is not a "financial product" if it satisfies any of the descriptions listed in s 765A, relevantly for present purposes s 765A(1)(h), "a credit facility within the meaning of the regulations." 44At this point, it is convenient to expose the three issues for consideration with some more precision. The first, as I have indicated already, concerns the meaning of "Division 3 financial products" in s 1042A. Is it restricted, relevantly here, to "derivatives" by reference only to the definition in s 761D, to which meaning s 765A(1) (relevantly para (h)) does not speak? Or, is one such product (derivatives) to be seen as a species of financial product such that, even though the definition of derivative (in s 761D) does not pick up the limitation found in s 765A(1)(h), because the "Division 3 financial product" is a type or species of "financial product", s 765A(1) (and so para (h)) is relevant to the enquiry since, even if a derivative, it is not a financial product if one or more of the paras in s 765A(1) is or are satisfied by the arrangement? 45The appellants argue for the latter approach and submit that a "Division 3 financial product" is so limited by s 765A(1), because they say these arrangements constitute a credit facility. 46The Crown argues for the former approach and submits that the phrase "Division 3 financial products" is not so limited by s 765A(1), because that phrase is defined to mean, amongst other things, derivatives. If it is a derivative (which is an enquiry that does not concern the operation of s 765A) it is a Division 3 financial product; that is, even if it would not be a financial product. This was the approach adopted by the primary judge. 47The second issue is whether the arrangements constitute a credit facility if the appellants are correct about the meaning of "Division 3 financial products". 48The third issue does not depend upon either the first or second issues. It is whether the arrangements were not "derivatives" within s 761D(1) because they were contracts for the future provision of services within the exclusion in s 761D(3)(b).

The first issue: the meaning of "Division 3 financial products" in s 1042A 49Ultimately a choice must be made as to the relationship between the defined phrase "Division 3 financial products" and the Chapter as a whole. On balance, in my view, textual considerations make it appropriate to recognise "Division 3 financial products" as a defined type of financial product such that matters which lead to the exclusion of arrangements from being "financial products" will likewise do so from their being "Division 3 financial products". This reflects an acceptance of the arguments of the appellants in this regard and a rejection of the approach of the Crown and the primary judge. 50The first textual indication is a general one. In s 760B, which contains an outline of the Chapter, Pt 7.10 is explained as covering "market misconduct and other prohibited conduct relating to financial products and services". 51The misconduct dealt with by Pt 7.10 Div 2 related to "financial products": market manipulation (s 1041A), false trading and market rigging by conduct such as creating a false or misleading appearance of active trading (s 1041B), or by conduct such as artificially maintaining a trading price (s 1041C), dissemination of information about illegal transactions (s 1041D), false or misleading statements (s 1041E), dishonestly inducing people to deal in financial products (s 1041F) and dishonest conduct (s 1041G). These offences are expressed at various levels of generality. Most concern activity in a financial market. Many concern trading in a financial market. 52Insider trading has a division of its own. That can be understood as reflecting its importance and the need for coherent comprehensive definition. From paragraph (e) of the definition of "Division 3 financial products" in s 1042A it can be seen that the subject of the phrase "Division 3 financial products" is financial products that can be traded on a financial market. Each of (a) through (d) is otherwise a species of included financial products within s 764A(1): securities: s 764A(1)(a) and s 761A; derivatives: s 764A(1)(c); interests in a managed investment scheme: s 764A(1)(ba); debentures, stocks or bonds issued or proposed to be issued by a government: s 764A(1)(j); and superannuation products (other than prescribed exceptions): s 764A(1)(g). Paragraph (e) helps one to understand that the things that are referred to in (a) to (d) are referred to in their capacity or sense as financial products. 53A derivative is both a financial product and a Division 3 financial product. But, it is not a financial product if it is also a credit facility. The introductory words of ss 764A and 765A ("Subject to Subdivision D ..." and "Despite anything in ... Subdivision C") enable one to conclude that in "this Chapter" (for the definition of s 761D), that is Chapter 7, something that is a credit facility is neither a financial product nor a derivative. 54That Division 3 financial products are financial products is also reinforced by the terms of s 1042D: "Division 3 financial products" are referred to as "the first-mentioned financial products". 55Other provisions in Division 3 utilise the phrase "financial products" in a manner consistent with the phrase "Division 3 financial products" being a species of "financial products": ss 1043D, 1043H, 1043I, 1043J(1), 1043K and 1043L(5). 56The reasoning of the primary judge at [147] of his judgment and the supporting submissions of the Crown do not persuade me to the contrary of the above conclusions. It can be accepted that a specific definition is given in Division 3. That is not, however, to distinguish it from a broader, less precise definition for non-criminal provisions in Division 2 of Pt 7.10. The provisions there include criminal offences. The comments of the primary judge as to the "convoluted provisions" by the technique of general definition, specific inclusion and specific exclusion in the definition of "financial products" overlooked the fact that the definition of "financial products" was integral to the criminal offences in Div 2 of Pt 7.10. 57Division 3 can be seen to be more specific and narrower than Div 2, by restricting the types of financial products to which it speaks: those in s 1042A ((a)-(e) in the definition of "Division 3 financial products"). With that narrower focus compared to the broader range of "financial products" in s 764A, the drafter nevertheless used terms elsewhere defined in s 1042A and the phrase "financial products" is otherwise used repeatedly in Div 3 of Pt 7.10. 58Thus, the arrangements the subject of the charges cannot be credit facilities for the purpose of s 765A(1)(h)(i) and regulation 7.1.06, if they are to be derivatives.

The second issue: were the arrangements a "credit facility" and as such not a "financial product"? 59Both this issue and the next require the arrangements to be examined. There is no suggestion that they are to be examined otherwise than by reference to their legal form in the documents tendered before the primary judge. There was no suggestion of sham. 60The meanings of "credit facility" and "credit" are as follows. 61In 2006, at the time of the alleged offences, regulation 7.1.06(1) of the Corporations Regulations dealt with "credit facility" as follows: "(1) For subparagraph 765A(1)(h)(i) of the Act, each of the following is a credit facility: (a) the provision of credit: (i) for any period; and (ii) with or without prior agreement between the credit provider and the debtor; and (iii) whether or not both credit and debit facilities are available; and (iv) that is not a financial product mentioned in paragraph 763A(1)(a) of the Act; and (v) that is not a financial product mentioned in paragraph 764A(1)(a), (b), (ba), (f), (g), (h) or (j) of the Act; and (vi) that is not a financial product mentioned in paragraph 764A(1)(i) of the Act, other than a product the whole or predominant purpose of which is, or is intended to be, the provision of credit; (b) a facility: (i) known as a bill facility; and (ii) under which a credit provider provides credit by accepting, drawing, discounting or indorsing a bill of exchange or promissory note; (c) the provision of credit by a pawnbroker in the ordinary course of a pawnbroker's business (being a business which is being lawfully conducted by the pawnbroker); (d) the provision of credit by the trustee of the estate of a deceased person by way of an advance to a beneficiary or prospective beneficiary of the estate; (e) the provision of credit by an employer, or a related body corporate of an employer, to an employee or former employee (whether or not it is provided to the employee or former employee with another person); (f) a mortgage: (i) that secures obligations under a credit contract (other than a lien or charge arising by operation of any law or by custom); and (ii) that is not a financial product mentioned in paragraph 763A(1)(a) of the Act; and (iii) that is not a financial product mentioned in paragraph 764A (1)(a), (b), (ba), (f), (g), (h) or (j) of the Act; and (iv) that is not a financial product mentioned in paragraph 764A(1)(i) of the Act, other than a product the whole or predominant purpose of which is, or is intended to be, the provision of credit; (g) a guarantee related to a mortgage mentioned in paragraph (f); (h) a guarantee of obligations under a credit contract." 62Regulation 7.1.06(3) defined "credit" for the regulation as meaning: "(3) In this regulation: credit means a contract, arrangement or understanding: (a) under which: (i) payment of a debt owed by one person (a debtor) to another person (a credit provider) is deferred; or (ii) one person (a debtor) incurs a deferred debt to another person (a credit provider); and (b) including any of the following: (i) any form of financial accommodation; (ii) a hire purchase agreement; (iii) credit provided for the purchase of goods or services; (iv) a contract, arrangement or understanding for the hire, lease or rental of goods or services, other than a contract, arrangement or understanding under which: (A) full payment is made before or when the goods or services are provided; and (B) for the hire, lease or rental of goods - an amount at least equal to the value of the goods is paid as a deposit in relation to the return of the goods; (v) an article known as a credit card or charge card; (vi) an article, other than a credit card or a charge card, intended to be used to obtain cash, goods or services; (vii) an article, other than a credit card or a charge card, commonly issued to customers or prospective customers by persons who carry on business for the purpose of obtaining goods or services from those persons by way of a loan; (viii) a liability in respect of redeemable preference shares; (ix) a financial benefit arising from or as a result of a loan; (x) assistance in obtaining a financial benefit arising from or as a result of a loan; (xi) issuing, indorsing or otherwise dealing in a promissory note; (xii) drawing, accepting, indorsing or otherwise dealing in a negotiable instrument (including a bill of exchange); (xiii) granting or taking a lease over real or personal property; (xiv) a letter of credit." 63The relevant arrangements were called "Contracts for Difference" or CFDs. The terms and legal content of such arrangements were to be found in two parts of a "Product Disclosure Statement" ("PDS") by CMC Markets Asia Pacific Pty Limited ("CMC" or "CMC Markets") issued 1 July 2005. The relevant terms appeared in part 1 of the PDS. Part 2 contained the schedules of rates for the different products. 64Part 1 of the PDS commenced with preparatory information and warnings about the speculative nature of dealing in CMC Products. It also made clear that one could not deal in CMC Products before an application so to do had been completed, submitted and approved. 65The relevant sections of part 1 of the PDS were: 1: Introduction; 2: Share, Index and Sector Contracts for Difference; 8: Risks of Dealing in CMC Products; 9: Other Matters You Should Note; 10: Taxation Considerations; 11: Margin Obligations; 16: CMC Agreement; 18: Glossary; and 19: Terms of Business. 66The Glossary in section 18 contains a large number of definitions. It would lead to prolixity to set out all relevant definitions. I will refer in the course of discussion to any critical aspect of these definitions. Definitions also appear in other parts of the contractual material. 67The introduction in section 1 contains explanations as to how dealing with CMC works. Various types of CFDs were offered by CMC - for shares, other securities, indices, sectors, gold, silver, commodities and treasuries, currencies and currency crosses: cl 1.1. One could deal with CMC, the latter acting as a principal, by telephoning the dealing desk or using CMC's internet platform, which had a back office and position keeping service: cll 1.2 and 1.3. The dealing platform allowed the latest real time price to be accepted by clicking "confirm" on the screen: cl 1.4. The prices on the dealing platform were CMC's prices, not the prices in the underlying market on which the CMC Products were based. Thus, the customer has a choice: the CMC Product, or the underlying asset: cl 1.5. CMC did not provide access to prices in the underlying market: cl 1.5. 68Clause 1.6 explained how CMC Markets determined the prices for its products. It is unnecessary to set this out at length. It is sufficient to say that CMC's prices were "based on the underlying mid-market price of the instruments in the underlying market and the application of a minimum spread which is applied at our discretion" (emphasis added). There was no predetermined percentage of variation from the price of the relevant underlying asset; and CMC might quote at its discretion different prices to different customers. 69A minimum account opening balance of $5,000 was required: cl 1.7. 70Initial and Variation Margins were required to be paid from time to time. They were explained in cl 1.9 (as well as defined in the Glossary). In cl 1.9 the following was said: "The Initial Margin is the deposit that must be made when buying or selling CMC Products to protect CMC against default by you. These margins are generally 5-20% of the underlying value of the CMC Product. The Variation Margin is the difference between the value of a CMC Product when it was initially bought or sold and its value marked to market at any given time using CMC's Underlying Contract Price." 71Clause 1.10 described the account administration, and, amongst other things, described the utility of CMC's real time dealing platform. 72Clause 1.17 described how to open and close CFD positions as follows: "A position is opened by buying or selling CFD's: · BUYING a CFD - To make a profit, you want the price of the underlying security, index or asset to rise. · SELLING a CFD - To make a profit, you want the price of the underlying security, index or asset to fall. A position is closed by you entering into an equivalent and offsetting position in the relevant share CFD. Closing your position may result in a profit or loss being realised on your Account. You may close part of an open position by executing an equivalent and offsetting position of a lesser amount than the open position." 73Clause 2.1 described share, index and sector CFDs, as follows: "Contracts for Difference allow you to receive most of the benefits of owning a security without having to actually own the security. In other words you do not take delivery of the security so any difference in the price between when you buy the CFD and when you sell it is settled in cash. The difference is either profit or loss. CFD's are also available on indices and baskets of securities. CFD's in relation to baskets of securities are known as Sector CFD's. Buying and selling the performance of a securities [sic] or index using a CFD is similar to buying the actual underlying instrument using a loan. You could borrow $10,000 from a bank to buy shares. You would receive the returns from the shares, but would pay interest on the loan to the bank. CFD's combine this process in a single transaction. For example, if you want to buy AUD$10,000 worth of Australian shares you will have to deposit with CMC Initial Margin of AUD$1,000. You will then be allowed to purchase $10,000 worth of Australian share CFD's (based on a 10% initial margin percentage). The full $10,000 value of the share CFD's will be subject to the share price performance. If you want to keep the share CFD's overnight you must pay a financing charge on the total nominal value of the position at the Financing Rate. If a share CFD position is not carried overnight you will pay no financing charge. As with the underlying securities, share CFD's allow you to benefit from normal market movements. Your open positions are valued every night at the close of business prices. Profits or losses are credited/debited to your Account each day. Adjustments relating to corporate actions, such as dividends, bonus issues and reconstructions in respect of the underlying security are also applied to your Account should they occur." 74Clause 2.1 then went on to describe adjustments for dividends (differently made on a long or short basis) to reflect what the holder of the underlying security would have received, after tax. 75Clause 2.2 explained the financing costs: "Share, index and Sector CFD positions carried overnight will incur financing costs for the total notional value of the position at the relevant CMC Financing Rate. If you are long a CFD you may pay interest to CMC, whilst if you are short you may receive interest from CMC at the relevant CMC Financing Rate. The CMC Financing Rates are set out in the most recent Part 2 of the PDS that you will have received." It will be important to understand that these so-called "financing costs" were not an interest charge for moneys lent or financial accommodation given. Rather, they constituted an element in the calculation of the sums by reference to which money is paid or received by a client. 76Clause 2.3 explained the charging of commission. 77Thus, CMC provided an opportunity for someone to deal in CMC's products identified as derived from an underlying instrument or market with costs and benefits reflecting financing charges, commission and dividends of the kind that would apply upon fully geared participation in the underlying market. 78The risks of dealing were described in section 8: price volatility, speculative nature, foreign currency exposure, interest rate fluctuation. Clause 8.7 described the segregated account in which money deposited by a client would be kept: "Any money that you deposit with CMC will be segregated from CMC's money and held and invested in accordance with the CMC Agreement. However, we are entitled amongst other things to: · withdraw, deduct or apply any amounts payable by you to CMC and/or any associate of CMC under the CMC Agreement from your moneys held in any segregated account or invested by CMC, including, without limitation, making a payment for, or in connection with, the margining, adjusting or settling of dealings in CMC Products entered into by you or the payment of finance charges, commissions or interest to CMC, with all such amounts belonging to CMC under the CMC Agreement; · pay, withdraw, deduct or apply any amounts from your moneys held in any segregated account or invested by CMC as permitted by the Australian Client Money Rules, and to use such moneys in our business from time to time, including for the payment of amounts to our counterparties. Your moneys may be co-mingled into one or more segregated account with other CMC customer moneys. We are also obliged to pay any moneys due to you in relation to dealings in CMC Products into a segregated account. Those obligations to you under the CMC Agreement and the CMC Products are unsecured obligations, meaning that you are an unsecured creditor of CMC." 79Clause 11.6 described margin calls as follows: "If the market moves against you and your equity balance falls below your Initial Margin you have the option to: · close one or more of your open position(s), in order to reduce your Initial Margin to the required level; and/or · remit further funds to your Account as deposit in order to maintain the Initial Margin. This is the first trigger level for margin, referred to as the 'Margin Call', below which you must remit additional funds to maintain your open positions. Once your equity falls below your Initial Margin requirement, it is advisable that you place a Stop-loss order with us to try to avoid a deficit balance on your account. Our policy is not to provide credit facilities on any Accounts." (emphasis added) The emphasised part of cl 11.6 is to be noted. 80In section 9, clauses 9.3 and 9.4 described a customer's obligations and an equity shortage, as follows: "9.3 Customer's obligations Your responsibilities under the CMC Agreement, including, but not limited to monitoring your positions and maintaining the required margin at all times under apply 24 hours a day. 9.4 Equity shortage You will not be allowed to deal in CMC Products except to reduce your open positions when there is a shortfall in your Account equity until such time as the equity balance is in excess of the required minimum equity balance. This is in addition to all other rights CMC has in such circumstances." 81All of the above was to a degree descriptive; nevertheless, together with cl 19 ("CMC Terms of Business"), it formed part of the "CMC Agreement" as defined in the Glossary. The introduction to cl 19 provided that CMC "will provide Services to you ... on the terms of": "A. these Terms of Business (including the Schedules); B. the current Parts 1 and 2 of CMC's PDS; C. the current FSG; and D. any additional terms and conditions issued by CMC in connection with the Services, which together are referred to as this 'Agreement'." 82The "Services" that would be provided and the terms on which they would be provided are set out in "Part 1 - General" of cl 19 in cll 3-12. 83Clause 19 - Terms of Business, cl 3, entitled "Services", was in the following terms: "3.1 Dealing Services: Subject to the Customer fulfilling their obligations under this Agreement, CMC may enter into transactions with the Customer in the following investments and instruments: (a) spot contracts for differences on single securities, baskets of securities, stock or other indices, currencies, Treasury Products, base and precious metals and commodities; (b) forward contracts for differences on single securities, baskets of securities, stock or other indices, currencies, Treasury Products, base and precious metals and commodities; (c) OTC options to acquire or dispose of any of the instruments falling within (a) or (b) above, including warrants; and (d) such other Derivatives as CMC may from time to time agree in writing. 3.2 Dealing as principal: In relation to any Contract, CMC will enter into such Contract as principal. 3.3 The Customer will, unless otherwise agreed in writing, enter into Contracts as principal. If the Customer acts on behalf of a principal, whether or not the Customer identifies that principal to CMC, CMC will not accept that principal as a 'client' (as defined in the Corporations Act), unless otherwise agreed in writing. 3.4 Advice: CMC will not provide any personal financial product advice to the Customer. If CMC enters into a Contract with the Customer this should not be taken by the Customer to mean that CMC recommends, or concurs with the merits of, the Contract or that the Contract is suitable for the Customer. 3.5 CMC may provide information or general financial product advice to the Customer. Any information or general financial product advice that CMC gives the Customer will not take into account the Customer's particular needs, objectives and financial circumstances. In particular, CMC will not give the Customer advice about whether the Customer should open, hold or close a Contract. 3.6 Before a Customer makes a decision, CMC recommends the Customer take into consideration whether any information or general financial product advice given by CMC is appropriate to the Customer's particular needs, objectives and financial circumstances, and if not, they should ask their financial adviser for personal financial product advice. 3.7 To the maximum extent permitted by law, CMC will not in any way be liable for any damages, loss or injury suffered or incurred by the Customer as a result of or arising out of, or in connection with: (a) any misinterpretation of any information or general financial product advice provided by, or on behalf of, CMC relating to a transaction entered into or proposed to be entered into by a Customer pursuant to this Agreement; (b) any information or general financial product advice provided by, or on behalf of, CMC in relation to any investments and instruments which the Customer may deal in under the Agreement, but this clause 3.7 will have no operation with respect to any fraud or dishonesty of CMC." (emphasis in original) 84Thus, the services were the entry as principal into contracts with a customer and the provision of information and general product advice. It will be necessary to return to this definition in dealing with the third issue. 85Clause 19 - Terms of Business, cl 5, concerned pricing. Clauses 5.1 and 5.2 were as follows: "5.1 CMC will quote prices which provide an indication of the prices at which it is prepared to deal with a Customer. Customers should note that: (a) CMC acts under this Agreement as a market maker, and accordingly, sets the applicable price at which it is prepared to deal with a Customer; and (b) prices that may be quoted and/or traded upon from time to time by other market makers or third parties do not apply to trades and dealings between CMC and the Customer. 5.2 Except where: (a) CMC exercises any of its rights to close out a Contract; or (b) a Contract closes automatically; it is the Customer's responsibility to decide whether or not they wish to deal at those prices. If the Customer decides to deal at the prices indicated by CMC, it may make an offer to CMC to deal at that price. CMC may choose, in its absolute discretion, whether to accept or reject any offer to deal made by any Customer." Thus, the customer placed an order for a Contract at a quoted price which CMC accepted or not in its discretion. 86Clause 19 - Terms of Business, cl 7, concerned the customer's obligation to monitor and pay margins. Clause 7.1 was as follows: "7.1 Customer's obligation to pay: The Customer must pay to CMC: (a) such sums of money by way of deposits or margin as CMC may require under this Agreement, including but not limited to such margin rates as are specified in the Rates Schedule and subject always to the Minimum Equity Balance; (b) such sums of money as may from time to time be due to CMC under a Contract (including, without limitation, charges specified in the Rates Schedule from time to time) and such sums as may be required in or towards clearance of any debit balance on any Account; and (c) such sums of money as CMC may from time to time require as security for the Customer's obligations to CMC." Thus, cl 7.1 of cl 19 is to be read with cl 8.7 in respect of the operation of the segregated account referred to above and with cll 9.5, 12.4, 17 and 18.11 of cl 19 - Terms of Business, below. 87Clause 19 - Terms of Business, cl 7.15, dealt with the time for forwarding of money as follows: "For the avoidance of doubt, CMC is not obliged to allow the Customer time to forward further funds to meet such margin as is required under this clause 7 before exercising its right to close out the Customer's positions under this Agreement. However, CMC may in its absolute discretion allow the Customer time to forward funds so as to meet their margin requirements, in which event that permission is only effective once it is confirmed in writing by CMC, and only to the extent specified in the written notice given by CMC." This clause provided for the possible granting of time to pay as an indulgence in the "absolute discretion" of CMC. 88Under cl 19 - Terms of Business, cl 8, CMC had wide power to close out all or part of a customer's positions, to limit the size of open positions and to refuse orders for new positions. 89Clause 19 - Terms of Business, cl 9, referred to the obligation to hold money in segregated accounts which were pooled customer accounts, the interest benefits from which accrue to CMC. Clause 9.5 provided for the authority given by the customer to CMC to debit the segregated account for the customer's payment obligations as follows: "9.5 The Customer irrevocably and unconditionally authorises CMC and/or any Associate of CMC to: (a) withdraw, deduct or apply any amounts payable by the Customer to CMC and/or any Associate of CMC under this Agreement from the Customer's moneys held in any segregated account or invested by CMC, including, without limitation making a payment for, or in connection with, the margining, adjusting or settling of dealings in Contracts entered into by the Customer or the payment of interest or finance charges to CMC, it being acknowledged and agreed by the Customer that such amounts belong to CMC under this Agreement and may be used by CMC in its business from time to time, including for the payment of amounts to CMC's counterparties; (b) pay, withdraw, deduct or apply any amounts from the Customer's moneys held in any segregated account or invested by CMC as permitted by the Australian Client Money Rules, it being acknowledged and agreed by the Customer that any such amounts that belong to CMC may be used by CMC in its business from time to time, including for the payment of amounts to CMC's counterparties; (c) deal with any property, other than money, given to CMC in accordance with the terms and conditions of this Agreement, including, without limitation: (i) dealing with such property in connection with the margining, adjusting or settling of dealings in Contracts entered into by the Customer; or (ii) selling or charging in any way any or all of the Customer's property which may from time to time be in the possession or control of CMC or any of CMC's Associates following the happening of a Specified Event; (d) deal with any property, other than money, given to CMC as permitted by the Australian Client Money Rules." As to the summary of this, see cl 8.7 set out above. CMC was entitled to deduct from the segregated account any moneys that the customer was obligated to pay. Thus, as soon as a customer was obliged to pay money to CMC it could be deducted from the segregated account. This was reinforced expressly in cll 12.2-12.4 of cl 19 - Terms of Business, and cll 17 and 18.11 below. 90Clause 19 - Terms of Business, cl 12, concerned payments. Clauses 12.2-12.5 provided as follows: "12.2 If on any date the same amounts are payable under this Agreement in respect of the same Account by each party to the other in the same currency, then, on such date, each party's obligations to make payment of any such amount will be automatically satisfied and discharged. 12.3 If the aggregate amount that is payable by one party exceeds the aggregate amount that is payable by the other party in the same currency, then the party by whom the larger aggregate amount is payable must pay the excess to the other party and the obligations to make payment of each party will be satisfied and discharged. 12.4 Unless specified otherwise in this Agreement, all amounts due to CMC (or agents used by CMC) under this Agreement will, at CMC's option: (a) be deducted from any funds held by CMC for the Customer; or (b) be paid by the Customer in accordance with the provisions of the relevant difference account, Contract Note or other advice, such as t he daily or monthly statement. 12.5 If the Account shows a credit balance, the Customer may request CMC to send to the Customer a cheque or effect payment by alternative means in respect of such amount as the Customer may specify. However, CMC may at its discretion elect to withhold any payment requested (in whole or in part) due to the Customer if: (a) open positions on the Account show notional losses; and/or (b) CMC reasonably considers that funds may be required to meet any current or future margin requirement on open positions due to underlying market conditions; and/or (c) in accordance with clause 32.3 of this Agreement, the Customer has any contingent liability to CMC or to any of its Associates in respect of any other account of the Customer opened with them; and/or (d) CMC reasonably determines that there is an unresolved dispute between CMC and the Customer in connection with this Agreement or any related Contract; and/or (e) CMC considers it necessary or desirable to enable CMC to comply with its regulatory or legal obligations, and CMC will, except where clause 12.5(e) of this Agreement applies, notify the Customer as soon as reasonably practicable if it decides to take action." 91Part II of cl 19 was entitled "Spot Contracts for Difference". Clauses 13-19 of cl 19 were additional to the general clauses in Part I of cl 19. All of the relevant arrangements the subject of the charges were Spot contracts for difference. 92Clause 19 - Terms of Business, cl 13, defined a "Spot" somewhat more elaborately than the definition in the Glossary as: "'Spot' means any Contract, other than a Forward, which is a contract for difference entered into between CMC and the Customer with the purpose of securing a profit or avoiding a loss by reference to fluctuations in the price of underlying property or an index (the 'Underlying')." (emphasis in original) 93Clause 19 - Terms of Business, cl 14, then described "the purpose of a Spot", as follows: "14.1 The purpose of a Spot is to secure a profit or avoid a loss by reference to fluctuations in the price of the underlying property or an index (the 'Underlying'). In the context of the Services, the Underlying may be: (a) a single Security or Grey Market Security; (b) a basket of Securities; (c) an Index; (d) an exchange rate between two currencies; (e) a Treasury Product, (f) a base or precious metal; (g) a commodity; (h) such other investment as CMC may from time to time agree in writing. 14.2 CMC and the Customer agree that it is an express term of each Spot that: (a) neither party: (i) acquires any interest in or right to acquire; and (ii) is obliged to sell, purchase, hold or deliver or receive: Securities, Related Securities, Grey Market Securities, Related Index Futures Contracts, currencies, Treasury Products, base or precious metals or commodities or any other underlying investment by virtue of any Spot; and (b) the rights and obligations of each party under the Spot are principally to make and receive such payments as are provided for in this Part II of this Agreement and on any Contract Note." It is to be noted that profit is secured "by reference to fluctuations in the price of the underlying property or an index", but there is no obligation to deliver such underlying property. The profit (or the loss) is made by reference to payment obligations under the contract. This provision is central to the proper characterisation of these CFDs: They are not contracts to buy or sell either the underlying security or any asset of CMC; rather, they are contracts to pay money by reference to the terms of the contract and by reference to fluctuations in the underlying price against the chosen contract price. 94Clause 19 - Terms of Business, cl 15, dealt with pricing: CMC quoted a price "on which the Customer may offer to trade". CMC could amend the quote or accept the offer. 95Clause 19 - Terms of Business, cl 16, dealt with margin calculations. 96Clause 19 - Terms of Business, cl 17, dealt with the mechanism of accounting on each day. This clause is also critical to understanding the nature, characterisation and operation of the contract. At the close of business each day, commencing on the date of the transaction and during each business day "during the term of the Spot", CMC would do the following: "17.2 CMC will determine the Underlying Contract Price in accordance with paragraph 3 of the relevant part of the Schedule. 17.3 CMC will calculate the Contract Value, which will equal: Underlying Contract Price x Contract Quantity 17.4 If on the date of the transaction: (a) the current Contract Value exceeds the Opening Value, the Short Party will pay to the Long Party such excess; (b) the Opening Value exceeds the current Contract Value, the Long Party will pay to the Short Party such excess. If, on any Business Day during the term of the Spot (including the Closing Date): (c) the current Contract Value exceeds the Contract Value on the preceding Business Day, the Short Party will pay to the Long Party such excess; (d) the Contract Value on the preceding Business Day exceeds the current Contract Value, the Long Party will pay to the Short Party such excess. 17.5 Where the Customer is the Long Party and express reference is made in the Rates Schedule to interest payable by the Customer, CMC will debit from the Account an amount equivalent to the overnight interest to the next Business Day equal to the Relevant Interest Rate plus the relevant Interest Percentage on the Contract Value. Such debit amount will accrue for each day or part day (taking the annual rate divided by 365 or 360 according to relevant practice) up to and including the Settlement Date. 17.6 Where the Customer is the Short Party and express reference is made in the Rates Schedule to interest receivable by the Customer, CMC will credit to the Account an amount equivalent to overnight interest to the next Business Day equal to the Relevant Interest Rate minus the relevant Interest Percentage on the Contract Value. Such credit amount will accrue for each day or part day (taking the annual rate divided by 365 or 360 according to relevant market practice) up to and including the Settlement Date. 17.7 Any payments due under this clause 17 will, subject to clause 18.11 of this Agreement, be made by CMC adjusting the Account with effect immediately after Close of Business of the relevant Business Day." 97Clause 18.11 was in the following terms: "18.11 Any payment due by either CMC or the Customer under clause 17 of this Agreement or this clause 18 in respect of dates on or after the Closing Date will be made by CMC adjusting the Account at Close of Business on the Settlement Date." Thus, on each day calculations would be made by reference to daily prices as to the value of the contract in question, including by reference to interest in the Rates Schedule. This calculation of contract value gave rise to immediate daily payment obligations by CMC or by the customer. If the payments were obliged to be made by the customer, the provisions of cll 12.2-12.5 of cl 19 and cl 8.7 would apply and deductions would be made from the segregated account and, if necessary, a margin call made. No giving of credit was involved. An obligation to pay (or an entitlement to receive) by the customer arose at the end of each day and payment was made immediately (or credit received immediately). 98Clause 19 - Terms of Business, cl 17.2, refers to the "relevant part of the Schedule". At the end of the clauses in cl 19, there are five schedules. The first contains further definitions (cl 1.1), which included definitions relevant to the above. 99For the purposes of cl 19 - Terms of Business, cl 17.2, paragraph 3 of Part 1 of the first schedule dealt with "close of business accounting". It set out how the Underlying Contract Price of a Spot" would be calculated: "3.1 Traded Securities: The Underlying Contract Price of a Spot on a single Security will equal the mid market price of the relevant Security at the close of trading on the relevant exchange on such Business Day. 3.2 If such Underlying Contract Price is determined on a day on which the exchange on which the relevant Security has its primary listing is closed, it will equal the mid market price of the relevant Security at the close of trading on the preceding Business Day for which such exchange was open. 3.3 The Underlying Contract Price of a Forward on a single Security will be a mid price calculated under paragraph 2.4 above. 3.4 Baskets: The underlying Contract Price of a Spot on a Basket will equal the weighted sum of the mid market prices of the constituent Securities at the close of trading on the relevant exchange on such Business Day. 3.5 If such Underlying Contract Price is determined on a day on which the exchange on which each constituent Security has its primary listing is closed, it will equal the mid market price of the constituent Securities at the close of trading on the preceding Business Day for which such exchange was open. 3.6 The Underlying Contract Price of a Forward on a Basket will be a mid price calculated under paragraph 2.7. 3.7 Grey Market Securities: The Underlying Contract Price of a Spot or Forward on a Grey Market Security will be a mid price calculated under paragraph 2.10 above. 3.8 Indices: The Underlying Contract Price of a Spot or Forward on an Index will be a mid price calculated under paragraph 2.13 above." 100The references to paragraphs 2.4, 2.7, 2.10 and 2.13 were to paragraphs in the preceding clause dealing with CMC listings, as follows: "2.4 The Underlying Contract Price of a Forward on a single exchange traded Security to which Limited Hours Trading applies will be a bid or offer price (whichever is applicable) calculated by CMC in accordance with paragraph 2.3 and adjusted by CMC as it considers representative, fair and reasonable to take account of the Relevant Interest Rate differential to the Specified Date and, in accordance with paragraph 5.2 below, any dividends or distributions accruing before or on the Specified Date. ... 2.7 Baskets: subject to paragraphs 2.9 and 5, the Underlying Contract Price of a Spot or Forward on a Basket will be a bid or offer price (whichever is applicable) calculated by CMC by applying the CMC Spread to the weighted sum of the mid prices of the constituent Securities in accordance with the companies' market capitalisations. ... 2.10 Grey Market Securities: The Underlying Contract Price of a Spot or Forward on a Grey Market Security will be determined by CMC (acting reasonably) with reference to any publicly available price or range of prices, as adjusted by CMC from time to time having regard to the trading positions of CMC's customers in such Spot or Forward. ... 2.13 Indices: The Underlying Contract Price of a Spot or Forward on an Index will be a bid or offer price (whichever is applicable) calculated by CMC by applying the CMC Spread to the market price determined by CMC to be representative, fair and reasonable having regard to the current price of any Related Index Futures Contract and any other matter reasonably considered by CMC to be appropriate." 101Clause 19 - Terms of Business, cl 18, dealt with closing a Spot. A Spot closed automatically five years after it was entered into: cl 18.3 and para 4 of Pt 1 of the first schedule. A customer could give instruction to close a Spot by entering an equivalent and opposite trade. CMC could close out a Spot if it had a right to do so under the agreement: see cl 18.1. The relationship between closing a Spot and the calculation of the Underlying Contract Price for Spot for cl 19 - Terms of Business, cl 17.2, and para 3 of Pt 1 of the first schedule is apparent from cl 19 - Terms of Business, cll 18.7, 18.8 and 18.9. Clause 18.7 provided that, subject to cll 18.8 and 18.9: "... a Spot will close automatically at Close of Business on each Business Day and be replaced by an equivalent Spot with effect immediately after Close of Business on such Business Day provided that this will not affect the automatic closing of a Spot under clause 18.3 of this Agreement, such that the 5 year period will run from the date on which the Spot was first entered into, and provided further that when such Spot closes automatically under clause 18.3 of this Agreement, it will not be reopened in accordance with this clause 18.7 of this Agreement." Thus the determination of the daily Underlying Contract Price and of daily payment obligations was contractually effected by closing out (automatically and without the need to enter an actual contract) each outstanding position and replacing it with an equivalent Spot immediately thereafter (automatically and without the need to enter an actual contract). Thus, the immediately arising daily obligation to pay or entitlement to receive money arose from the daily closing out of the Spot position. 102Clauses 18.8 and 18.9 reflect how this automatic closing out worked where a customer had long and short positions and two or more Spots: "18.8 If the Customer is long and short a Security or an Index (irrespective of the date on which either Spot closes automatically under clause 18.3 of this Agreement), CMC will, with effect immediately after Close of Business on the Closing Date, close the relevant long and short Spots and record in the Account the balance (if any) of the Customer's then outstanding long or short position in that Underlying, as appropriate. If there is more than one Spot in relation to the particular Underlying, CMC may close out whichever Spot it considers appropriate. 18.9 Where the Customer has two or more Spots: (a) which are in respect of the same Underlying; and (b) where the Customer is in all such Spots either the Long Party or the Short Party; CMC will, with effect immediately after Close of Business on each Business Day replace such Spots with a single aggregated Spot equivalent to the total of the Contract Quantities of each such Spot. The date on which such replacement Spot will expire automatically under clause 18.3 of this Agreement will be the latest of the expiry dates of each of the original Spots." 103The appellants argued that the above legal relationship amounted to a credit facility. The argument was that the taking of an open position gave rise to the liability of a customer for the price of the subject of the contract. The obligation to pay this price was deferred by payment of a deposit until a margin was called for or until a closing by the acquisition of a contra position. Thus, the balance of the purchase price was a debt. Emphasis was placed on the explanation in cl 2.1 that "buying and selling the performance of a securities or index using a CFD is similar to buying the actual underlying instrument using a loan". See generally cl 2.1 above. 104That, with respect, is too simplistic, and it is wrong. There was no provision which provided for the delivery of property, whether chose in action or physical. Rather, to use the language of cl 1.4, by a contract, the customer "opens a position" or does "a deal". Initial and Variation Margins were required to be paid. These were a percentage of the value of the Product. The legal rights of the parties, reflecting the underlying commercial purpose, were to receive or pay money from day to day by reference to the difference between the price agreed at the buying or selling of the CMC Product and the underlying asset. The nature of the contract as one to "deal" is made clear by cl 1.4, cl 1.17 and by cl 19 - Terms of Business, cll 3.1, 5.1, 13 and 14, noting in particular cl 14.2. In cl 2.1, the expression "buying and selling the performance of a securities or index" is used. It reflects the nature of the contract - not to buy or sell an asset for a deferred price, but to open a position by reference to which a future fluctuating price will cause a profit or a loss by the engagement of payment obligations, based on the daily comparison between the contract price and the fluctuating price. 105There was no obligation upon the customer to pay for any asset bought or to receive money for any asset sold. The concepts of buy and sell are embedded within being "long" or "short". Each is a notional concept: see the definitions of "Long Party" and "Short Party" in Schedule 1 to cl 19 - Terms of Business. The customer's obligations to pay are in cl 19 - Terms of Business, cl 7.1: deposits, margins, sums due from time to time under a Contract, sums to clear a debit balance and sums as security. There is no provision for payment of a price. The sums due from time to time under a contract, for Spot contracts, are calculated under cl 19 - Terms of Business, cll 17 and 18. Each day, a contract value is assessed by reference to the price at which the arrangement was entered and the underlying contract price. This was effected by the automatic closing of the Spot and its replacement by an equivalent Spot. Immediate payment obligations (whether by the customer or CMC) then arose; and payment would be immediately effected - not of a deferred price, but by reference to a difference at the close of the day (or, if closed earlier, at that earlier time). As to immediate payment, see cll 8.7, 9.3, 9.4 and 11.6 and cl 19 - Terms of Business, cll 7, 9, 12, 17 and 18. 106The payment obligations incorporated (if there is a position open overnight) a calculation of interest, whether debited to a "Long Party" or credited to a "Short Party". This is the amount "equivalent to the overnight interest": cl 19 - Terms of Business, cll 17.5 and 17.6. The interest rate is debited or credited to the "total notional value of the position": cl 2.2. This is not a credit charge for money lent or foregone by either CMC or the customer. The total notional value represents the full potential loss on the face of a position if the underlying asset was without value. Charging interest on "notional value" enabled the CMC Product and the risks involved to mimic a fully geared transaction in relation to the underlying asset. 107The treatment of dividends also reflects the attempt to treat the contractual rights of the parties in respect of making and receiving payments under the contract (see cl 19 - Terms of Business, cl 14.2) close to the underlying security. Thus, an adjustment will be made to the Account by reference to a dividend or distribution attributable to any security on which a Spot is based: cl 19 - Terms of Business, Schedule 1, Part I, cl 5. 108There was no lending of money; there was no deferred price for property. As was stated in cl 11.6, CMC's "policy is not to provide credit facilities on any Accounts". The object of the Spot CFD is clearly stated in cl 19 - Terms of Business, cl 14: it is not to buy or sell property for a price, but to pay or receive money by the operation of the contract. The legal and accounting mechanisms of that can be seen in cl 19 - Terms of Business, cll 17 and 18. 109Turning to the definitions of "credit facility" and "credit" in the regulations. Analysed thus, no deferral of the payment of a debt occurred, and there was no form of financial accommodation, for any period whatsoever. No part of the definitions set out above was engaged.

The third issue: were the arrangements a "contract for the future provision of services" for the purposes of s 761D (3)(b) and so not a derivative? 110It can be accepted that upon opening an account with CMC, a customer became entitled to receive access to CMC's dealing software: cl 1.16. The nature of it and the charges for it were described in cl 1.16: "When you open an account with CMC you will receive access to the CMC dealing software known as MarketMaker®. The software, once installed, not only gives you access to prices and trading opportunities, but also a range of additional information sources. CMC's dealing software allows you to place orders, view charts relating to market movements, gain access to your real-time back office Account statements and monitor a real-time news service for any market moving stories. A monthly fee may be charged by CMC for use of its or a third party provider's software or source of information. Details of any such charge are set out in Part 2 of the PDS." 111One thing this allowed was the placing of orders, that is, the entry into contracts. 112Segregated margin accounts were kept. 113The daily marking to market of contracts was undertaken. 114It was submitted by the appellants that the attendant mechanisms for the operation of the account or contracts of the customer as I have earlier described are such that the relevant CFD contracts answer the description of "contracts for future services". 115As earlier set out, cl 19 - Terms of Business, in its Introduction and in its cl 3, describes "Services" being provided to the customer. Those services, however, are as set out in that cl 3: the entry into contracts, such as Spot contracts entered here, into which the customer and CMC enter as principals. Upon entry into those contracts obligations arise (on the customer or CMC) on a daily basis to pay money by reference to the prices and mechanisms that I have earlier described. Nowhere is there a payment for undertaking a service. The attendant mechanisms and facilitating services are collateral to the primary obligations to pay that I have described. Whether or not a contract falls within s 761D(3)(b) is a question of characterisation based on the legal incidents of the contract. The character of these CFDs is most aptly taken from cl 19 - Terms of Business, cll 13 and 14: each is a contract for the difference between a contract price and a fluctuating underlying price under which, based on daily calculations, the parties (CMC and the customer) come under obligations to pay sums of money to each other. The facilities provided by CMC (services if you will) make this arrangement efficient and expeditious. In no commercial sense, however, is the customer risking its money, or paying, for the receipt of these services. It does so (using the words of cl 19 - Terms of Business, cl 14) "to secure a profit or avoid a loss by reference to the fluctuations in the price of the underlying property or an index". 116In International Litigation Partners Pte Ltd v Chameleon Mining NL [2011] NSWCA 50; 276 ALR 138, Giles JA, Hodgson JA and Young JA approached s 761A(3)(b) somewhat differently to each other: see [88], [132] and [241]. None of the reasoning of their Honours requires the conclusion that this is a contract for future services. At [88] Giles JA approached the matter as a question of substantial characterisation. At [132] Hodgson JA referred to what determines the amount to be paid as being the provision of future services. It might be said, here, that the customer is paying for the service of CMC setting its price by reference to the underlying security. That, however, is wholly unreal. The money is paid or received under contractual obligations set by reference to comparative prices, one fixed, one fluctuating. The contract is not to obtain the service of the fixing, on a day to day basis, of the fluctuating price, or to obtain any other service, but to pay or receive money upon that daily fixing. The High Court did not deal with s 761D(3)(b) on the appeal. 117I have read the reasons of Barrett JA on this issue and I agree with them. 118For the above reasons, in each application the orders should be: 1.Leave to appeal granted. 2. Appeal dismissed. 119BARRETT JA: The circumstances giving rise to the applications for leave to appeal and the appeals themselves are set out in the judgments of Bathurst CJ and Allsop P. Their Honours also identify the three questions that must be answered by reference to the legislative provisions in force at the time of the alleged offences, that is, whether the particular "contracts for difference" (or "CFDs"): (a) were, disregarding any positive answer to (b) or (c) following, "Division 3 financial products" (so as to be capable of being "relevant Division 3 financial products"); (b) were a "credit facility" and as such not "financial products"; (c) were a "contract for the future provision of services" and therefore not "derivatives". 120Relevant provisions of the Corporations Act 2001 (Cth) and the Corporations Regulations 2001 (Cth) appear in the judgments of the other members of the Court and will not be repeated save as may be desirable to supply emphasis or context.

121Provisions within s 1043A prohibit certain forms of conduct in relation to "relevant Division 3 financial products". 122Section 1042A defines both "Division 3 financial products" and "relevant Division 3 financial products". Only if something is first found to be within the definition of "Division 3 financial products" can it be within the definition of "relevant Division 3 financial products". Both definitions, being within s 1042A, are located in Division 3 of Part 7.10 of Chapter 7. 123Section 761A defines "financial product". It does so for the purposes of Chapter 7 as a whole - including Division 3 of Part 7.10. Section 761A ascribes to "financial product" the "meaning given by Division 3", that is, Division 3 of Part 7.1 (ss 762A to 765A). 124Three reasons combine, in my opinion, to produce the result that particular items are within the s 1042A definition of "Division 3 financial products" only if they are first found to be within the s 761A definition of "financial product". 125The first reason is that the term "financial products" is used in the description of what it is that the s 1042A definition of "Division 3 financial products" defines. There is no reason why s 761A, which applies to the whole of Chapter 7, does not inject the content of its own definition of "financial product" into the last two words of the "Division 3 financial products" label - so that the opening words are the equivalent of: "'Division 3 financial products' means those financial products that are ..." 126That reading of the opening words is supported by the second reason. It comes from the word "other" in paragraph (e) of the s 1042A definition of "Division 3 financial products". The catch-all "any other financial products that are ..." in paragraph (e) indicates that all of the foregoing items (those in paragraphs (a) to (d)) are regarded as "financial products" or, putting this another way, that, to the extent that any of the paragraph (a) to (d) categories, viewed separately and in its own right, includes something that is not a "financial product", the category is to be taken into account only to the extent that it is "financial product". If paragraph (e) were not intended to inject this message into each of paragraphs (a) to (d), it would not include the word "other". 127The third reason is that several specific exceptions to a s 1043A prohibition are framed in terms of "financial products", rather than either "Division 3 financial products" or any of the components in paragraphs (a) to (d) of the definition of "Division 3 financial products". An example s 1043I which says that there is no contravention of s 1043A(1) if, in certain circumstances defined by reference to attributes of the actor and the actor's state of mind, a transaction or agreement is entered into "in relation to financial products". If the object of the s 1043A(1) prohibition were not "financial products", according to the definition of "financial product" applicable to Chapter 7 generally, there would be no need for the exception to refer to "financial products" as distinct from "Division 3 financial products". 128My conclusion therefore is that the conditions essential to a finding that the CFDs with which these proceedings are concerned are "relevant Division 3 financial products" as defined by s 1042A(1) include a condition that they are "financial products" according to Division 3 of Part 7.1 (ss 762A to 765A) so as to be caught by the s 761A definition of "financial products" that applies for the purposes of Chapter 7 as a whole. Satisfaction of that condition is a prerequisite to inclusion in the s 1042A(1) definition of "Division 3 financial products" from which "relevant Division 3 financial products" takes its meaning. 129It is not controversial that the CFDs are of the description in paragraphs (a) to (c) of s 761D(1), with the result that they are "derivatives" as defined by s 761D and s 761A (and accordingly "Division 3 financial products" by force of paragraph (b) of the s 1042A definition of that term); but that this is subject to the effect of specific exceptions and exclusions. Some exceptions and exclusions cut down what would otherwise be the extent of the "derivative" definition. Others operate to reduce what would otherwise be the content of the definition of "financial products". 130The two exceptions or exclusions that arise for consideration are: (a) that created by s 765A(1)(h)(i) which provides that, despite anything in Subdivision B or Subdivision C of Division 3 of Part 7.1, "a credit facility within the meaning of the regulations (other than a margin lending facility)" is not "financial products"; and (b) that created by s 761D(3)(b) which provides that, subject to a qualification concerning s 761D(2) of no present relevance, "a contract for the future provision of services" is not a "derivative" for the purposes of Chapter 7 even if covered by the definition in s 761D(1).

131Allsop P has set out at [61] and [62] the relevant definitions of "credit facility" and "credit". There is no conceivable basis on which (and no submission that) any of paragraphs (b) to (h) of the definition of "credit facility" in regulation 7.1.06(1) applies. The only possibility requiring attention is that there was, in terms of paragraph (a)(i), "the provision of credit . . . for any period . . .". 132The core meaning of "credit", for these purposes, comes from the following words in the definition of "credit" in regulation 7.1.06(3): "a contract, arrangement or understanding . . . including . . . any form of financial accommodation". 133The import of those words was referred to by the members of the High Court in International Litigation Partners Pte Ltd v Chameleon Mining NL [2012] HCA 45. French CJ, Gummow, Crennan and Bell JJ said (at [28]): "The expression 'a contract, arrangement or understanding ... [for] any form of financial accommodation' (emphasis added) is of considerable width of denotation. For example, an agreement by a bank to lend its name to a bill of exchange for the accommodation of its customer provides a form of financial accommodation, as is reflected in the expression 'accommodation bill'. The same may be said for the provision of a guarantee of the obligations to the creditor of the principal debtor. The extension by a bank to a customer of an overdraft facility provides a form of financial accommodation in respect of the presently undrawn portion of the overdraft. Further, the inclusion of the words 'arrangement or understanding' indicates that regard may be had to matters of substance as well as of form." 134Heydon J also noted the breadth of the concept, observing (at [43]) that, in ordinary usage, "accommodation" denotes anything that supplies a want. 135Consideration of the "credit facility" question arising in this matter makes necessary an examination of the contractual provisions that create or constitute the CFDs. Those provisions are found in CMC's "product disclosure statement" (or "PDS") and allied documents, including the "FSG" (or "financial services guide") and the "CMC Terms of Business". 136Relevant provisions of the documents are set out in the judgment of Allsop P. The stage is set, as it were, by the following: "Before you begin dealing in CMC Products you must complete an Application Form and be approved by CMC." "CMC Products are offered on and from the date of this PSD solely on the basis of the information and representations contained in this PDS, the most recent Part 2 of the PDS and the other documents comprising the CMC Agreement ..." "Your dealings in CMC Products with CMC on and from the date of this PDS will be undertaken in accordance with the following documents that you will have received from a CMC representative or downloaded from our website: the CMC Terms of Business (including the Schedules) (as amended from time to time); the most recent Part 2 of the PDS, being the Rates Schedule; and the most recent FSG (and any supplementary FSG). These documents individually and together, as the case requires are referred to as the 'CMC Agreement' in this PDS. These documents are all available at www.cmcmarkets.com.au." "CMC Products [definition]: The products that CMC offers to its customers from time to time under the terms and conditions of the CMC Agreement." "CMC offers the following CMC Products to its Australian resident customers: Contracts for Differences (CFD's) in respect of shares and other securities; [other CFD's]" "Contract for Difference (CFD) [definition]: A contract with CMC whose value fluctuates by reference to fluctuations in the price of an underlying instrument, which may be either Spot or Forward." "Spot [definition]: Any CFD, other than a Forward entered into between CMC and a customer." "Forward [definition]: Any CFD entered into between CMC and a customer with the purpose of securing a profit or avoiding a loss by reference to fluctuations in the price of the underlying instrument for delivery at a specified date in the future." "Underlying Instrument" [definition]: the underlying asset, property or index with reference to which the value of a Spot or Forward is determined; or the subject of an option." "CMC is a market maker, not a broker, and accordingly will act as principal, not as agent, in respect of all transactions with you." 137"You" here refers, depending on context, to a person who is contemplating becoming a "customer" of CMC or a person who has become such a "customer". 138A "customer" relationship with CMC (as principal) arose from the submission of an application form by the would-be customer and CMC's approval of the applicant as a customer. At that point and upon the customer's paying to CMC an account opening deposit (usually a minimum of $5,000), the applicant became a "customer" of CMC and had an "account" with CMC. Also, a "CMC Agreement" existed at that point between CMC and the customer. 139The "CMC Agreement" thus formed was a contract pursuant to which the customer might, entirely at the customer's discretion, initiate individual "contracts" (that is, CFDs) with CMC, as principal, by resort to stated internet or telephone procedures. The CMC Agreement, the content of which derived from the PDS and related documents, constituted an overarching contractual framework within which each individual "contract" between CMC and its customer arose upon and by means of the initiating step taken by the customer. That initiating step caused stipulations contained in the CMC Agreement to become operative in relation to the particular circumstances identified by the customer in the internet or telephone communication. 140Each such new contract initiated by the customer was a "CFD" (as defined) based, in a way to be mentioned presently, on an "underlying instrument". For present purposes, the underlying instruments were shares and other securities traded on the stock market of a securities exchange. 141Each individual contract made within the framework of the CMC Agreement had terms fixed by a combination of the content of the CMC Agreement, the state of the customer's account for the time being and particular components (most notably price) fixed in accordance with the CMC Agreement at the time of the customer's initiation of that separate contract. 142A particular contract entered into within this framework might involve the customer's "buying" a CFD or "selling" a CFD. The substance of the contract was the same in each case, in the sense that the performance obligations, based on matters concerning the underlying instrument and its market price, were the same whether the contract was for the "buying" or the "selling" of a CFD. The distinction between "buying" and "selling" came merely from the customer's objective. The customer's making of the contract was regarded as "buying" if the objective was to profit from a rise in the price of the underlying instrument, while the customer was regarded as "selling" if the objective was to profit from a fall in the price of the underlying instrument. 143A contract did not involve or envisage ownership of any underlying instrument by either CMC or the customer; nor, despite the "buy" and "sell" terminology, was there any agreement to transfer anything in return for a money consideration. The obligations of the customer and CMC "are principally to make and receive such payments as are provided for in" the terms that make up the particular CFD. The underlying instrument played no part beyond the fact that its market price from time to time was a principal determinant in the calculation of money amounts to be paid and received as between the parties. 144The customer was able to realise the desired profit by entering into an equal but opposite contract if and when the market price of the underlying instrument increased or decreased to a point where the profit was obtainable by that means. In the same way, the customer might crystallise a loss (and avoid the possibility of greater loss, at the same time foregoing the possibility of any eventual profit) by entering into an equal but opposite contract at an appropriate time. 145The customer's action to crystallise profit or loss was described as "closing" of the "position" represented by the original contract between the customer and CMC. If "closing" did not occur in this way (or under provisions enabling CMC to impose "closing" under certain circumstances), "closing" occurred automatically on the fifth anniversary of the creation of the contract. 146This, however, was subject to provisions which caused a contract to "close" automatically immediately after the end of trading on each and every business day and to be replaced by an equivalent contract, but on the basis that the new contract's ultimate automatic closing after five years was calculated from the making of the original contract subsequently replaced on a day-by-day basis. 147The effect of these provisions was that, throughout the period beginning upon the making of a particular contract and ending five years later (or at earlier "closing" in accordance with the contract terms), a new contract became binding each business day and replaced the immediately preceding contract. 148This day-by-day closing is a very important aspect. As a consequence of day-by-day closing, CMC became obliged to determine, at the end of tading on each business day, the "underlying contract price" and the "contract value" of the closed contract. This was done by reference to the then prevailing market price of the underlying instrument. 149If, in the light of that determination, the "contract value" on the particular day was greater or less than the "contract value" on the immediately preceding day, a payment obligation in respect of the difference was triggered (which party paid and which received depended on the nature of the contract). The payment was due immediately and was effected immediately by CMC's adjusting the customer's account with CMC. 150Where the payment obligation was in the customer's favour, it was discharged by an increase in the balance of the account (owed by CMC to the customer) where the payment obligation was in CMC's favour, it was discharged by a reduction in the balance of the account and money was appropriated by CMC. Such increases and reductions occurred day-by-day as new contracts continued to supersede their predecessors. 151CMC produced periodical statements showing the customer's position with respect to the customer's account, open positions and transactions (as to transactions, this was in addition to individual "contract note" notification regarding each new contract when initiated). 152Before seeking to enter into a particular CFD contract with CMC, a customer had to have a balance in the customer's account at least equal to the "initial margin" for the contract (the "initial margin" was a percentage of the notional value of the contract). If the account balance at that time was insufficient, the customer had first to make a payment to CMC to bring the balance up to the level of the "initial margin". 153The balance of the customer's account at a particular time was referred to as the customer's "equity balance". Changes in the "equity balance" occurred by reason of changes in the market value of underlying instruments and the customer's trading activity. These matters were explained in the documents as follows: "The equity (or balance) of your Account will fluctuate according to the money you have deposited in your Account, the dealings conducted on your Account and positions held. During the trading day your Account balance(s), including all open positions, are valued against the prevailing market rate. Therefore your equity balance is constantly calculated in line with market movements. The balance is calculated at the end of the day using the mid-closing rates (or the last dealing price). The equity balance is used to assess your available margin against current positions, and any potential new positions you may wish to take. The balance is used to establish if there is a requirement for additional margin deposits on your Account." 154A "shortage in equity" occurred when the equity balance fell below the required initial margin. When that happened, the customer was required to remedy the shortage by either paying money to CMC or closing positions to reduce the initial margin. When the customer came to occupy that position, the customer was said to have become subject to a "margin call"; the "margin call" being, in substance, the monetary obligation of the customer to eliminate the shortage. 155All money paid to CMC by the customer (as well as money received by CMC on behalf of the customer) was required to be "held by CMC in one or more segregated accounts". CMC was authorised to resort to the customer's account to satisfy amounts payable by the customer to CMC, including margin calls. 156If the customer's account showed a credit balance, the customer could ask CMC to pay the amount to the customer. CMC could, however, elect to withhold a requested payment if open positions of the customer showed notional losses and in certain other situations which, generally speaking, indicated a clear possibility of money becoming payable by the customer to CMC. 157The foregoing description omits reference to certain adjustment mechanisms. There were, for example, adjustments for notional interest on credit and debit balances, with emphasis on the word "notional", since there was never any principal indebtedness upon which interest could accrue. There were also adjustments for notional items such as dividends on the underlying instrument so that the financial position of the customer, in that respect, was assimilated to the position of an actual holder of the underlying instrument (as I have said, the arrangement did not require or contemplate actual holding of the underlying instrument by anyone). All such quasi-interest, quasi-dividends and other like items were merely calculation factors to ensure that the financial positions of the parties were the same as if they had occupied (as creditor, debtor, holder of instruments or otherwise) positions that they did not in fact occupy at all. The several items only ever reflected in adjustment of the amounts to be paid periodically by one party to the other. 158The effect of the contractual provisions that became operative by force of the CMC Agreement when the customer initiated a new contract was that there was established, at the end of trading on each subsequent business day (and on ultimate closing), an amount that was then payable by the customer to CMC or by CMC to the customer; and the record of the financial relationship between them (being the customer's account) was altered to reflect an appropriate increase or decrease in the amount held for the customer by CMC. The requirement that one party pay the other did not arise at any time because of a loan, forbearance or any other granting of concession, indulgence, deferral or benefit. It arose because the prevailing market price of the underlying instrument, when factored into calculations dictated by the CMC Agreement in relation to the individual contract, produced a particular figure and the contractual terms themselves required payment of that amount. The right to receive and the obligation to pay were created by the terms of the CMC Agreement and the operation of those terms upon and in relation to circumstances (particularly the market price of the underlying instrument) prevailing from time to time. 159The CMC Agreement, when made (including by the applicant's lodgement of the account opening deposit), did not require anyone to pay anything, although it did contain provisions which, in the light of future events, would become the source of obligations to pay and rights to receive. Those obligations and rights became operative, however, only at future times and entailed immediate payment. 160There was accordingly no "form of financial accommodation" as referred to in paragraph (b)(i) of the definition of "credit" in regulation 7.1.06(3).

The third issue - "contract for the future provision of services"

161Section 761D(3)(b), as in force at the relevant time, excluded from the definition of "derivatives": "a contract for the future provision of services." 162It was submitted on behalf of the applicants that each individual contract (or CFD) arising from an initiating step taken by the customer in accordance with the CMC Agreement entailed the provision of certain services thereafter by CMC to the customer - indeed, that the individual CFD was dependent on essential and ongoing services being provided pursuant to the CFD by CMC in the future for as long as the position remained open. 163An important "service" of this kind was, it is said, the making available by CMC of an equivalent but opposite position upon the customer's request so that the customer might close a position as and when the customer chose to do so. Another "service" was said to be the making by CMC of payments required to be made by it. The applicants also point to the provision and deployment by CMC of electronic systems, software and other facilities (including for account keeping, preparation of statements, assembling and processing of data concerning underlying instruments and the provision of real-time reporting and calculations) necessary to make workable the interaction of the parties envisaged by each individual contract created pursuant to the CMC Agreement. 164As Allsop P notes (at [116]), brief observations of members of the Court of Appeal in International Litigation Partners Pte Ltd v Chameleon Mining NL [2011] NSWCA 50; (2011) 276 ALR 138 as to the meaning of "a contract for the future provision of services" do not determine the question arising in this matter. It is necessary to construe the definition. 165The key word in the phrase "a contract for the future provision of services" is "for". It denotes the role that the "future provision of services" must be found to play in the performance of a contract in order to bring the contract within the relevant description. The word "for" is commonly used in this way to delineate classes or categories of contracts: hence, for example, "contract for services" (as distinct from "contract of service), "contract for works" and "contract for the sale of goods". 166Provisions derived from s 17 of the Statute of Frauds 1677 formerly made it necessary to identify with precision a "contract for the sale of any goods, wares, and merchandises". The question whether a contract under which an artist was commissioned to paint a portrait (and to supply the necessary paint and other materials) was a contract "for" the sale of goods was answered in the negative in Robinson v Graves [1935] 1 KB 579. A test based on the "substance" of the contract was adopted. Greer LJ, after referring to an earlier case about the manufacture and supply of false teeth (Lee v Griffin (1861) 1 B&S 272; 121 ER 716), said at 587: "If you find, as they did in Lee v Griffin, that the substance of the contract was the production of something to be sold by the dentist to the dentist's customer, then that is a sale of goods. But if the substance of the contract, on the other hand, is that skill and labour have to be exercised for the production of the article, and that it is only ancillary to that that there will pass from the artist to his client or customer some materials in addition to the skill involved in the production of the portrait, that does not make any difference to the result, because the substance of the contract is the skill and experience of the artist in producing the picture." 167Slesser LJ said (at 591) that "the material, the paint and the canvas, were merely ancillary to the actual technical work of producing the work of art", so that the contract was one for work and labour; while Roche LJ referred (at 593) to "the history and reality of the transaction involved in the painting of a portrait of this kind" and "the nature of the contract between the parties". 168Although it has been criticised as imprecise (see, for example, Deta Nominees Pty Ltd v Viscount Plastic Products Pty Ltd [1979] VR 167), this "substance of the contract" approach has been applied - with some reservation - in the High Court: Pacific Film Laboratories Pty Ltd v Federal Commissioner of Taxation [1970] HCA 36; (1970) 121 CLR 154 at 160 (Barwick J, McTiernan J concurring) and 173-4 (Walsh J). While the "substance of the contract" may sometimes be difficult to delineate, the approach based on it does emphasise that a contract cannot properly be characterised in a particular way (that is, in the particular instance, as a contract "for" sale) when the essentials of the particular character are "only ancillary" or incidental. 169That, to my mind, is the position here when one approaches the question of characterisation of each CFD and asks whether it is "a contract for the future provision of services". There can be no doubt that CMC undertook to do the several things mentioned at [163] above, that the relationship of the parties was such as to require it to do those things and that the viability of that relationship and the effectuation of the parties' purpose depended on CMC's acting in that way. But the particular acts of CMC were no more than ancillary or incidental to the primary purpose and effect of the contractual relationship - which was to create, in a synthetic way, financial results that would have been produced by actual transactions in the market for the underlying instruments. The parties achieved that purpose by stipulating exclusively for payments between them of calculated sums. The "substance" of the contract was the creation and implementation of a financial relationship producing for both the customer and CMC, in the form of payments of money, certain financial outcomes based on the market performance of underlying instruments. The provision by CMC of the several facilitating elements did not form part of that substance. 170In my opinion, therefore, the individual contracts were not contracts "for" the "future provision of services" and s 761D(3)(b), as in force at the relevant time, did not exclude them from the definition of "derivatives".

171For these reasons, I agree that the orders proposed by the Chief Justice and the President should be made.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 25 January 2013

Joffe v R; Stromer v R

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (14 paragraphs)

Legislation Cited (3)

Cases Cited (9)

Cited By (9)