JUDGMENT No. eum t Sal cal Fon CATCHWORDS CORPORATIONS LAW- "futures contract" - whether a Low Exercise Price Option (LEPO) is a futures contract within s.72(1) Corporations Law - "commodity" - "commodity agreement" - "Chapter 8 obligation" - whether securities underlying LEPO can constitute a "commodity" - whether underlying securities are capable of delivery in relevant sense - whether security transfer form is an instrument creating or evidencing a thing in action - whether economic imperative arising out of #EPO constitutes a Chapter 8 obligation. CORPORATIONS LAW - securities - "option contracts" - whether securities options are securities for the purposes of s.92(1) Corporations Law. Corporations Law, 5.9, §.72(1), 8.92(1) Shoreline Currencies (Aust) Pty Ltd v Corporate Affairs Commission (1986) 11 NSWLR 22. Carragreen Currencies Corporation Pty Ltd v Corporate Affairs Commission of New South Wales (1986) 7 NSWLR 705. Laybutt_v Amoco Australia Pty Ltd (1974) 132 CLR 57. YDNEY_F' RES EXCHANGE LIMITED v_ AUSTRALIAN EXCHAN LIMITED No. NG 3432 of 1994 RECEIVED Sackville J. "2 NOV 1994 2 November 1994 COURT OF Sydney. FEE USTRALIA PRINCIPAL REGISTAY FEDERAL COURT OF AUSTRALIA ) NEW SOUTH WALES DISTRICT REGISTRY ) No. NG 3432 of 1994 GENERAL DIVISION ) BETWEEN: SYDNEY FUTURES EXCHANGE LIMITED Applicant AND: AUSTRALIAN STOCK EXCHANGE LIMITED Respondent CORAM: SACKVILLE J. PLACE: SYDNEY DATE: 2 NOVEMBER 1994 MI E F_QRDER THE COURT: 1. ORDERS THAT the application be dismissed. 2. DECLARES that a financial instrument to be known as and designated by the Respondent as a Low Exercise Price Option, being an instrument to be regulated in accordance with the Business Rules of the Respondent, in the form of the document referred to as DJW5 in the affidavit of David John White sworn 10 October 1994, is a security within the meaning of section 92(1) of the Corporations Law. 3. ORDERS that the applicant pay the costs of the respondent. NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. FEDERAL COURT OF AUSTRALIA ) NEW SOUTH WALES DISTRICT REGISTRY ) No. NG 3432 OF 1994 GENERAL DIVISION ) BETWEEN: SYDNEY FUTURES EXCHANGE LIMITED Applicant AND: AUSTRALIAN STOCK EXCHANGE LIMITED Respondent CORAM: SACKVILLE J. PLACE: SYDNEY DATE : 2 NOVEMBER 1994 ON: R NT Int ction This case involves "LEPOs", creatures of the age of acronyms. The term "LEPO" is short for Low Exercise Price Option. The respondent, the Australian Stock Exchange Ltd ("the ASX"), announced, on i7 July 1994, its intention to list LEPOs for trading on the Australian Options Market. On 22 July 1994, the board of the Australian Stock Exchange Derivatives (known, naturally enough, as "the ASXD") made amendments to the business rules of the ASX to facilitate trading in LEPOs. The ASXD is a committee to which the board of the ASX has delegated the power to make and amend the rules of the ASX relating to derivatives (that is, markets derived from underlying commodities or securities). Certain of the amended business rules have been submitted to the Australian Securities Commission ("the ASC") and have been allowed by the Attorney-General, pursuant to s.774 of the Corporations Law. The applicant, the Sydney Futures Exchange Ltd ("the SFE") is approved as a futures exchange under s.1126 of the Corporations Law. The respondent is not so approved. The SFE claims that a contract, arrangement or understanding upon the terms of a LEPO would constitute a "futures contract" within the meaning of 8.72(1) of the Corporations Law. It also claims that a market for the regular acquisition and disposal of LEPOs would be a "futures market" within the meaning of the definition in s.9 of the Corporations Law. The SFE therefore contends that the respondent is proposing to conduct an unauthorised futures market, 1n contravention of s.1123 of the Corporations Law. It claims declaratory and injunctive relief. The ASX has filed a cross claim seeking a declaration in the following terms: A declaration that a financial instrument to be known as and designated by the Respondent as a Low Exercise Price Option, being an instrument to be regulated in accordance with the Business Rules of the Respondent...is a security within the meaning of section 92(1) of the Corporations Law. The ASC intervened in the proceedings pursuant to s.1330 of the Corporations Law and made submissions on questions of law. LEPOs The apparently straightforward issue in the litigation gives rise to considerable difficulties of statutory construction. Before proceeding to the terms of the Corporations Law it is helpful to identify the characteristics of a LEPO. The following explanation is taken from an explanatory booklet published by the ASXD and from the evidence of Dr G.J. Twite, a senior lecturer in finance at the Australian Graduate School of Management at the University of New South Wales. LEPOs are call options which typically have an exercise (or strike) price of between one and ten cents. They have a "European expiry" - that is, they are exercisable only on the last trading day before expiry of the option. This is in contrast to an "American expiry", whereby an option can be exercised at any time up to the date of its expiry. LEPOs are described by the ASXD as "deliverable contracts", normally covering 1,000 shares of the underlying stock. If the taker of the LEPO elects to exercise at expiry, delivery (to employ the term used by the ASXD) of the 1,000 shares will be taken from the writer of the LEPO, at the exercise or "Strike" price. Delivery takes place in these circumstances, under special provisions relating to shares underlying LEPOs. These provisions in turn rely on the "FAST" and "CHESS" systems of transfer of title to securities, to which reference will be made later. LEPOs, because they have a very low exercise price, will usually be "deep in the money" options. That is, because LEPOs have such a low exercise price, the market price of the underlying shares will be greater - and ordinarily substantially greater - than the exercise price. Thus LEPOs will ordinarily have an intrinsic value. This differs from standard exchange-traded options, which have a selection of exercise prices. These may be "out-of-the- money", in the sense that the market price of the shares may be, or at least may fall below the exercise price of the option. Some standard options will become worthless by the date of expiry, because the exercise price turns out to be greater than the then value of the underlying share at that time. By contrast, as the ASXD explanatory booklet says: "because LEPOs are deep~in-the-money call options with nominal exercise prices, it is likely they will always expire in-the-money." LEPOs have a "delta" of near one. Delta is a measurement of the correlation between the movements in the value of an option (the "premium") and movements in the price of the underlying stock. Because the exercise price is nominal, the option premium tracks movements in the stock price very closely. It follows that the taker of a LEPO holds a position similar to buying the underlying share and the writer of the LEPO has a position similar to selling the share. However, LEPOs are not an exact substitute for ownership of the underlying shares. For example, the taker does not receive dividends on the shares and cannot exercise the voting rights attached to the shares. LEPOs are to be margined in accordance with the Theoretical Intermarket Margining System ("TIMS"). TIMS is a risk based margining methodology developed in Chicago in 1986. The use of this methodology, as applied to LEPOs, will have the effect of reducing the net payment required by the taker of the LEPO to an amount less than the premium payable for the LEPO. TIMS is intended to work in the following way in relation to LEPOs: (i) the premium payable by the taker is debited to the taker's account and credited to the writer's account on registration; (ii) the taker receives a credit for the current market price of the LEPO, while the writer receives a debit for the same price; (iii) an initial risk margin is calculated for the position and paid by both taker and writer; (iv) any remaining credit can be used to offset other debit premiums or risk margins relating to options within the same class. This system creates a commercial advantage for takers of LEPOs, namely, that an investor does not have to fund the full price of the shares at the outset, but pays only an initial margin to open a contract. For this reason an investor potentially can enjoy high leveraged returns on invested funds. As explained in the booklet published by the ASXD, LEPOs can be used as hedges, to lock in a future buying or selling price of shares. They can also be used by speculators, as an alternative to buying or selling shares. Trading of LEPQOs LEPOs are to be traded using the existing trading and administrative infrastructure of the ASXD. In general, the establishment of a market for options has been achieved by standardisation of contract size, expiry date and exercise price. Since all contracts for a given expiry are exactly alike, the rights and obligations under an option contract can readily be discharged and transferred (in effect) from one party to another. A trader who buys or takes an option as an opening transaction May cancel the right to exercise that option by selling or writing a matching option. This process is known as "closing out". Option contracts have four components, namely, contract size, expiry date, exercise price and premium. The contract size is standardised at 1,000 shares of the underlying stock. The AOM uses a range of different expiry cycles, although a quarterly cycle (such as March, June, September, December) is often employed. The expiry date for all stock options is the last Friday of the expiry month. The exercise price of an option is the stipulated buying or selling price for the underlying share should the option be exercised. Investors are usually provided with a range of exercise prices, set by Options Clearing House Pty Ltd ("OCH"), which administers the system of options trading. The exercise price will affect the premium (or price) of the option, which is arrived at by negotiation between the taker and writer of the option. Of course, as already noted, LEPOs will have a very low exercise price and can be exercised only on the expiry date. The Options Market The options market in securities has operated since 1976 and trading in options is controlled by the Australian Options Market. The Australian Options Market is described in a brochure entitled Understanding Options Trading as a wholly owned subsidiary of the ASX. In any event, the rules governing trading on the AOM are the business rules of the ASX. All clients are required to abide by those rules. Options are bought and sold by "open outcry" on the trading floor, with the administration undertaken by OCH. OCH is also a wholly owned subsidiary of the ASX and serves as the clearing-house for all option transactions. Investors themselves are not regarded by the ASXD as parties to option contracts. Approved clearing members enter into option contracts on behalf of their client and take on responsibilities as principals both to the clearing members on the other side of the contract and to OCH. An investor must have an account approved by a clearing member before being permitted to buy or sell options. The responsibilities of OCH include registering all option contracts traded on the Australian Options Market, guaranteeing performance of contracts to clearing members, calling margins and deposits and maintaining a depository for the lodgment of scrip and bank guarantees where required. ASX Rules for LEPOs The amended ASX business rules relating to LEPOs (including the proposed amendments) establish a number of requirements. To be eligible as underlying securities for LEPOs the securities must be quoted on the stock exchange and must be characterised by a substantial number of outstanding shares or stock units which are widely held and actively traded in the primary market (rule 7.1.9(b)). In addition the securities must be "FAST eligible securities" or "CHESS Approved securities". I return to FAST and CHESS shortly. The market capitalisation of the underlying securities must ordinarily exceed $2 billion (rule 7.1.9(d)). Delivery of the underlying securities upon the exercise of an option and payment of the total exercise price is to be in accordance with the Securities Clearing House Business Rules. (The Securities Clearing House is the ASX Settlement and Transfer Corporation Pty Ltd, which is approved under s.779B of the Corporations Law as the clearing house for transactions in CHESS Approved securities.) Upon exercise of a call option the relevant clearing member 15 to make full cash payment of the exercise price or procure his or her client to do so. Upon allocation of an exercise notice, the clearing member is to deliver the underlying securities in accordance with the SCH Business Rules. Where a put option is exercised, the clearing member is also to deliver the underlying securities in accordance with the SCH Business Rules (rule 7.1.17(3)). Rule 7.1.17(3) (qd) provides as follows: "Notwithstanding any other provision in these Rules or in the SCH Business Rules, the obligation of a Clearing Member to deliver Underlying Securities upon the exercise of a LEPO shall not be settled by the delivery of a share certificate." Accordingly, on the exercise of a LEPO, no share certificate changes hands as part of the settlement process. "FAST" stands for Flexible Accelerated Security Transfer System. In essence, FAST involves an uncertificated register maintained by the company itself. The system is regulated by the ASX business rules. Under the FAST system, the ASX provides a transaction setting service, whereby the obligations of brokers to deliver and make payments are netted off. Broker to broker transactions are replaced, through a process of "novation", with contracts between the selling broker and the clearing house company (TNS Clearing Pty Ltd) and between the buying broker and the company, replacing broker to broker obligations. A delivery netting service nets off a particular broker's obligation to deliver (or entitlement to receive) securities to (or from) other brokers. Similarly, payment obligations or entitlements are netted off: (see ASX business rules, rules 4.35 ff). There is therefore ordinarily no transfer between brokers corresponding to the number of shares involved in a particular transaction. Although the FAST system was not the subject of explanatory evidence, it seems that the selling broker (not the transferor) validates a transfer form, which provides authority to the company to alter its register to rescind the transaction: Ford's Principles of Corporations Law 6th ed. (1992) at 284 n. Where a broker duly completes the form and adds the appropriate stamp, the broker is deemed to have given statutory warranties relating to the entitlement of the transferor to sell or dispose of the securities: rpo. ions w, 8.1105; Schedule 2. "CHESS" stands for Clearing House Electronic Subregister System. This system is governed by the SCH Business Rules. According to a booklet, Legal Issues in CHESS Phase 1 2nd ed. (1992), which was in evidence, the characteristics of CHESS Phase 1 are as follows: "2.1 CHESS provides an electronic subregister for uncertificated holdings of each class of CHESS approved securities. Each CHESS subregister is administered by the Securities Clearing House ("SCH") and forms part of the issuer's relevant securities register for the purposes of the Corporations Law. 2.2 The electronic subregister facilitates the registration of transfers of securities. In the paper environment, transfers are registered by the issuer's securities registry upon delivery of a paper transfer and (except where the securities are held in uncertificated form under the FAST system) the relevant securities certificate. There is therefore an inevitable delay between settlement of a transaction and registration of a transfer to reflect the transaction. 2.3 The CHESS subregister is electronically linked to the issuer and CHESS participants, with the consequence that for all practical purposes, delay between settlement and registration is eliminated. 2.4 CHESS is being introduced ir two phases. Phase 1 implements the subregister concept and permits electronic transfer of CHESS approved securities. However, broker/broker settlements will continue through the existing BBS {broker /broker settlement] system operated by the ASX." The CHESS system builds on the changes already made through the FAST system. Phase 1 of CHESS continues the netting off practices implemented in relation to broker/broker settlement. However, CHESS involves an electronic sub-register and adjustments to the subregister take place electronically. This is recognised in the Corporations Law which defines "document", for presently relevant purposes, to include, in the case of "an SCH-regulated transfer", an electronic message: s.1097(1). The authority for a company maintaining an electronic register is also contained in the Corporations Law, ss.209, 1306. The transfer "document" attracts statutory warranties by the member organisation whose identification code shows that it has effected the transfer: s.1109E(1). The Futures Market Unchallenged evidence was given by Mr P.W. Warne, a director of the Sydney Futures Exchange Ltd ("the SFE") as to the operations of futures markets. Although not directly relevant to the issues of statutory construction, it provides useful background material. The following is taken from his evidence. A futures market, in point of financial theory, is a market in which people buy and sell things (including financial instruments) for future delivery. A futures contract, generally speaking, involves an agreement to buy and sell a specified quantity of something at a specified delivery date. The price is the variable, determined competitively by open outcry on the trading floor or through a computer-based marketplace. The major economic function of futures markets is to manage the price risk associated with holding the underlying commodity (using that word neutrally) or financial instrument. It also allows the risks associated with being required to hold a commodity or financial instrument in the future to be managed. Those exposed to risks shift them to another person. That other person may be someone with an opposite physical market risk or a speculator. The two basic categories of persons participating in futures markets are hedgers and speculators. Hedgers deal in the physical commodity, such as wool, and rely on futures contracts to manage price risk by transferring the risk to speculators (or those requiring the commodity at some time in the future). Speculators aim to make profits from correctly anticipating the direction of price changes. They are attracted to the futures market by the leverage principle, which allows them to take advantage of price changes affecting a large quantity of a traded commodity, for a comparatively small outlay. The SFE currently lists eight types of futures contracts, as well as futures options (that is, options to buy or sell futures contracts at or before a set date). These include wool futures contracts; 90-day bank accepted bill futures contracts (involving agreements to buy or sell $500,000 90-day accepted bank bills at specified future dates); share price index ("SPI") futures contracts (involving agreements related to movements in the All Ordinaries Index of the ASX); and individual share futures ("ISFs") contracts (relating to parcels of 1,000 shares in one of seven major stocks). The last category was introduced by the SFE in May 1994. Futures exchanges operate on the basis that contracts are registered with a clearing house. Only members of the clearing house are entitled to have futures and option contracts registered with the clearing house. The clearing house processes, accounts for and settles all futures contracts registered with it. The clearing house also becomes a party to all contracts traded on the exchange by the process of novation, whereby the clearing house becomes the buyer to each selling Member and the seller to each buying member; and guarantees the performance of futures and options contracts to clearing members. In general, clearing houses value contracts registered with them at a final closing or settlement price each day. The resulting profits and losses are settled with its members the next day. This process is known as "marking to market". Clearing brokers and members then settle with their clients. The Sydney Futures Exchange Clearing House ("the SFECH"), the clearing house for the SFE, settles its contracts by a process known as "settling contracts to market". Under this process, all open contracts at the end of each trading day are deemed to be closed or liquidated at the settlement price and replaced by identical open contracts at the same price. Holders of open futures contracts may terminate such contracts by different means. Usually, such contracts on the SFE are terminated by liquidation. Holders of a bought position sell the contract; holders of a sold position buy an equivalent contract. If futures contracts of deliverable commodities are not liquidated on the market but are left open until the maturity date, the obligation of each party is to take or give delivery of the specified commodity that is the subject of the contract. In the case of cash settled contracts (like ISF contracts), settlement at the maturity date takes place at an official settlement price struck when trading closes. The Legislation: Futures Contracts and Securities The Corporations Law prohibits a person establishing or conducting an "unauthorised futures market": 5.1123. An unauthorised futures market means a futures market that is neither a futures market of a futures exchange nor an exempt futures market: s.9. A futures market is a market or exchange at which futures contracts are regularly acquired or disposed of. A futures exchange means, relevantly, a body corporate in relation to which an approval to conduct a futures exchange has been given by the Minister under s.1126 of the Corporations Law: see s.9. As already mentioned, the ASX does not have an approval under s.1126 and it does not conduct an exempt futures market. In addition a person must not deal in a futures contract on another person's behalf, or hold out that the person carries on a futures broking business (that is, the business of dealing in futures contracts on behalf of other persons), unless he or she holds a futures brokers licence or is an exempt broker: s.1142. It was said by Mr Hely QC, who appeared with Mr Speakman for the SFE, that the critical question, for the purposes of the present case, is whether trading in LEPOs is within the definition of "futures contract" in s.72 of the Corporations Law. Section 72(1) provides as follows: 72(1) (Meaning of "futures contract"] A futures contract is: (a) a Chapter 8 agreement that is, or has at any time been, an eligible commodity agreement, or adjustment agreement; (b) a futures option; or (¢c) an eligible exchange-traded option; other than: (d) a Chapter 8 agreement: (i) that is: (A) a currency swap; (B) an interest rate swap; (C) a forward exchange rate contract; or (D) a forward interest rate contract; and (ii) to which an Australian bank, or a merchant bank ... is a party; or (@) wees However, for reasons I shall explain, I think that it is necessary also to take account of the definition of "securities" in s.92(1), in determining whether trading in LEPOs by the ASX contravenes s.1123 of the Corporations Law. Section 92(1) provides as follows: 92(1) [ "securities" ] Subject to this section, "securities" means: (a) ss. (b) shares in, or debentures of, a body corporate or an unincorporated body; or (c) prescribed interests; or (d)... (e) an option contract within the meaning of Chapter 7; but does not include a futures contract... Chapter 7 of the Corporations Law prohibits a person from establishing or conducting an unauthorised stock market: s.767. A "stock market" is defined to mean a market or exchange at which (inter alia) offers to sell, purchase or exchange securities are regularly made or accepted: s.9. However, in determining whether a market is a stock market, regard is not to be had to the making at that market of futures contracts: s.97. The concluding words of the definition of "securities" appear to suggest that a transaction within the concept of a "futures contract" cannot come within the definition of "securities". Futures Contracts (Paragraph (a)) In order to determine whether an agreement is within paragraph (a) of the definition of "futures contract" in s.72(1), it is necessary to consider the definitions of "Chapter 8 agreement", "relevant agreement", "commodity", "commodity agreement" and "eligible commodity agreement". These are as follows: "Chapter 8 agreement" means: (a) a relevant agreement; (b) a proposed relevant agreement; (c) a relevant agreement as varied, or as proposed to be varied; (d) ... (ee) «.. "relevant agreement" means an agreement, arrangement or understanding: (a) whether formal or informal or partly formal and partly informal; (b) whether written or oral or partly written and partly oral; and (c) whether or not having legal or equitable force and whether or not based on legal or equitable rights; "commodity" ... means: (a) any thing that is capable of delivery pursuant to an agreement for its delivery; or (b) without limiting the generality of paragraph (a), an instrument creating or evidencing a thing in action; "commodity agreement" means a standardised agreement the effect of which 1s that (a) a person is under a Chapter 8 obligation to make delivery; or (b) a person is under a Chapter 8 obligation to accept delivery; at a particular future time of a particular quantity of a particular commodity for a particular price or for a price to be calculated in a particular manner, whether or not: (c) the subject matter of the agreement is in existence; (d) the agreement has any other effect; or (e) the agreement is capable of being varied or discharged before that future time; "eligible commodity agreement" means a commodity agreement (in this definition called the "relevant agreement"), where, at the time when the relevant agreement: (a) unless paragraph (b) applies - is entered into; or (b) if the relevant agreement is not a commodity agreement at the time when it is entered into - becomes a commodity agreement; it appears likely, having regard to all relevant circumstances (other than the respective intentions of the person in the sold position, and the person in the bought position, under the relevant agreement), including, without limiting the generality of the foregoing: (c) the provisions of any agreement; (d) the rules and practices of any market; and (e) the manner in which the respective Chapter 8 obligations of persons in sold positions, and persons in bought positions, under agreements of the same kind as the first-mentioned agreement are generally discharged; that: (f) the Chapter 8 obligation of the person in the sold position under the relevant agreement to make delivery in accordance with the relevant agreement will be discharged otherwise than by the person so making delivery; (g) the Chapter 8 obligation of the person in the bought position under the relevant agreement to accept delivery in accordance with the relevant agreement will be discharged otherwise than by the person so accepting delivery; or (h) the person in the sold position, or bought position, under the relevant agreement will assume an offsetting bought position, or offsetting sold position, as the case may be, under an agreement of the same kind as the relevant agreement; "Chapter 8 obligation" is defined in s.55(1): "A Chapter 8 obligation, or a Chapter 8 right, is an obligation or right, as the case may be, whether or not enforceable at law or in equity." Futures Contracts - Paragraph (b The term "futures option", referred to in para.(b) of the definition of "futures contract" in s.72(1), is defined in s.9 as follows: "futures option" means an option or Chapter 8 right to assume, at a specified price or value and within a specified period, a bought position, or a sold position, in relation to an eligible commodity agreement or in relation to an adjustment agreement. "Bought position", in relation to a commodity agreement or futures contract which is a commodity agreement, means "the position of a person who, by virtue of the agreement is under a Chapter 8 obligation to accept delivery in accordance with the agreement". The definition of "sold position" is equivalent, with the word "make" substituted for the word "accept". An "adjustment agreement" is defined to mean a standardised agreement, the effect of which is that a person will be under a Chapter 8 obligation to pay or receive money, depending on a particular future "state of affairs" including fluctuations in the value or price of a commodity or in an index. Futures Contracts - Paragraph (c) The term "eligible exchange-traded option", employed in paragraph (c) of the definition in s.72(1), appears to be intended to embrace options traded on a futures market, over "commodities" or over cash adjustments based on movements in stock indices: see J.S. Currie, Australian Futures Regulation (1994) at 42. The definition is as follows: "eligible exchange-traded option" means a contract that is entered into on a futures market of a futures exchange and under which a party acquires from another party an option or right, exercisable at or before a specified time: (a) to purchase from, or to sell to, that other party a specified quantity of a specified commodity at a price specified in, or to be determined in accordance with, the contract; or (b) to be paid by that other party an amount of money to be determined by reference to the amount by which a specified number is greater or less than the number of a specified index, being the Australian Stock Exchanges All Ordinaries Price Index or a prescribed index, as at the time when the option or right is exercised. Securities - Option Contract It is convenient at this stage to note the definition of "option contract", which is referred to in para.(e) of the definition of "securities" in s.92(1) of the Corporations Law. "option contract", in Chapter 7, means: (a) a contract under which a party acquires from another party an option or right, exercisable at or before a specified time, to buy from, or to sell to, that other party a number of specified securities, or of a specified class of securities, being securities of a kind referred to in paragraph 92(1)(a),(b),(c) or (d), at a price specified in, or to be determined in accordance with the contract; or (b) a contract entered into on a stock market of a securities exchange or on an exempt stock market, being a contract under which a party to the contract acquires from another party to the contract an option or right, exercisable at or before a specified time: (i) to buy from, or to sell to, that other party an amount of a specified foreign currency, or a quantity of a specified commodity, at a price specified in, or to be determined in accordance with, the contract; or (ii) to be paid by that other party an amount of money to be determined by reference to the amount by which a_ specified number is greater or less than the number of a specified index, being the Australian Stock Exchanges All Ordinaries Price Index or a prescribed index, as at the time when the option or right is exercised. The definition, by using the words "in Chapter 7", seems to contemplate that the definition of "option contract", will be relevant to Part 7 of the Corporations Law, which is concerned, inter alia, with securities exchanges and stock markets. It should be noted that paragraph (b) of the definition of "option contract" corresponds very closely to the definition of "eligible exchange-traded option". However, in one case the transaction is assumed to take place on a stock market of a securities exchange, while in the other it is assumed to take place on a futures market. Thus, an option to purchase a specified quantity of a "commodity" may be entered into either on a stock market or a futures market. The SFE's Arqument Mr Hely put forward a process of statutory construction to support his contention that a LEPO is within the definition of "futures contract" in s.72(1) of the Corporations Law and is therefore excluded from the definition of "securities" in s.92(1). In particular, he submitted that a LEPO is "a Chapter 8 agreement that is...an eligible commodity agreement" within paragraph (a) of the definition of "futures contract" in s.72(1). 'ommod it: Mr Hely submitted that paragraph (a) of the definition of "commodity" is satisfied. He contended that a share is a "thing" for the purposes of that paragraph. While "thing" is not defined, Mr Hely pointed out that Part 7.13 of the Corporations Law, which concerns title to and transfer of securities, provides that a share or other interests of a member in a company "(a) is personal property; (b) is transferable or transmissible as provided by the articles...; and (c) subject to the articles...is capable of devolution by will or by operation of law" (8.1085(1)). Mr Hely contended that a "thing" includes anything that can be the subject of a property right. Next, Mr Hely submitted that a share is "capable of delivery" for the purposes of paragraph (a) of the definition of "commodity". Mr Hely pointed out that the Corporations Law itself recognises that shares could be capable of delivery. Thus s.235(1)(d) requires the company to keep a register including particulars of certain contracts under which a person has the right "to call for or to make delivery of shares". Similarly, s.846(3)(d)(ii) contains an exception against a prohibition on short selling of securities where the certain conditions are satisfied. These include the case where arrangements have been made before the time of the sale that will enable "delivery of securities of the class sold" to be made within three business days of the transaction effecting the sale. Yet again, s.262(3) refers to a charge on 2 personal chattel as including "a charge on any article capable of complete transfer by delivery" other than (inter alia) a "marketable security". This implies, said Mr Hely, that a marketable security is regarded as capable of transfer by delivery. Furthermore, the market itself recognised that shares are capable of delivery, in such documents as the business rules of the ASX and the ASXD's explanatory booklet on LEPOs. For example, the booklet refers to LEPOs as "deliverable contracts". The ASX business rules refer specifically to a broker's obligation to "deliver non-CHESS Securities" (rule 4.1D) and provide for the situation where securities "remain undelivered" (rule 4.4(4)(a)). In the alternative, Mr Hely contended that LEPOs satisfy paragraph (b) of the definition of "commodity". He accepted, however, that it is necessary to consider the definition as it applies separately to the FAST and CHESS systems of securities transfer. Mr Hely submitted that the transfer validated by the broker and used in FAST is an "instrument" for the purposes of paragraph (b). Mr Hely also submitted that the transfer creates or evidences a number of choses in action. He identified these as the following: (1) a right against the company to obtain registration; (ii) a right against the transferor's broker to enforce the warranties created by s.1105(2) of the Corporations Law, including warranties that the transferor is or is entitled to be its registered holder of the securities and is legally entitled to sell them; and (iii) a right against the transferor to require it to deal with the shares for the benefit of the transferee. Mr Hely relied on s.1097(1) of the Corporations Law, which, as has been seen, defines "document" for the purposes of Part 7.13, Division 3. That Division deals with the transfer of marketable securities and marketable rights. For the purposes of the Division "Document" "in relation to a transfer, includes, in the case of an SCH regulated transfer, an electronic message or other electronic communication". "Transfer" is defined to include any change in the ownership of a quoted security. A "transfer document", in relation to a "proper SCH transfer", means the document that is taken under the SCH Business Rules to effect the transfer: s.1097(1). There appeared to be no dispute between the parties that the securities underlying LEPOs are within the definition of "SCH- regulated transfer". Mr Hely submitted that, if a "document" could be electronic, so could an "instrument", since it is merely an undefined subset of "document". Commodity Agreement Mr Hely submitted that, on the assumption that securities constitute a "commodity", a LEPO 1s "a commodity agreement" as defined in the Corporations Law. In this connection there was no dispute that a LEPO was a "Standardised agreement", as that phrase is used in the definition of "commodity agreement". (See Shoreline Currencies (Aust) Pty Ltd v Corporate Affairs Commission (1986) 11 NSWLR 22, at 30.) Mr Hely contended that the effect of the LEPO agreement is that a person (the taker of the LEPO) is "under a Chapter 8 obligation to take delivery". (It will be recalled that s.55 defines Chapter 8 obligation to mean "an obligation...whether or not enforceable at law or in equity".) Mr Hely relied on three separate arguments to reach this result. (i) The agreement constituting the LEPO creates an economic imperative whereby the taker of the LEPO is, for all practical purposes, obliged to exercise the option. It is necessary to have regard to the nominal exercise price and the fact that the taker is bound to pay the premium assessed by reference to the full value of the underlying security (even though payment might be deferred under TIMS). It followed that, except in the "most calamitous" circumstances, the taker of the LEPO will exercise the option or close it out. A Chapter 8 obligation is something which a person is to do in consequence of some agreement, arrangement or understanding such as a LEPO. The understanding between the parties is that the taker will so act. As Mr Hely put it, there can be a real obligation flowing not from legal enforceability, but from the consequences of not acting in conformity with (ii) the terms of the agreement. Whatever the form of the transaction, the commercial substance of a LEPO is that the taker will act ina particular way - viz, to exercise or close out the option. For this purpose Mr Hely relied on Shoreline Currencies (Australia) Pty Ltd v Corporate Affairs Commission at 35. There Lee J. went behind the terms of a written agreement to take account of how a foreign currency contract was carried out. The written agreement could not fall within the definition of "adjustment agreement" because the client was obliged to pay a fixed number of United States dollars and to receive a fixed number of Japanese yen. Therefore there was no amount to be calculated depending on "a particular state of affairs existing at a particular future time" (as the definition required). But evidence of the practice actually adopted showed that the arrangement was in substance a leverage contract involving two foreign currencies and the Australian dollar, with the client's obligation to pay or entitlement to receive moneys being dependent on movements in exchange rates. Mr Hely submitted that the present case is similar because it can be predicted to involve a uniform pattern of conduct - that is, exercise or closing out of the deep-in-the-money option. (iii) Mr Hely also relied on the reasoning of Hodgson J. in Carragreen Currencies Corporation Pty Ltd v Corporate Affairs Commission of New South Wales (1986) 7 NSWLR 705, at 715-716. In that case the plaintiff granted options to customers to purchase foreign currency for a specified period upon payment of a deposit and certain fees. The customers obtained the opportunity of benefiting from an adverse movement of the foreign currency against the United States dollar, but were not exposed to the risk of loss from movements in the other direction. Hodgson J. held that the agreement was a "commodity agreement" within the definition in s.4(1) of the Futures Industry (New South Wales) Code. The definition included a standardised agreement, the effect of which was that "a person [was] under an obligation to make delivery". "Obligation" was defined to include "an obligation enforceable neither at law nor in equity". Hodgson J. held that obligations must include conditional obligations. It was true that an option was not necessarily to be regarded as a conditional contract (compare Laybutt v Amoco Australia Pty Ltd (1974) 132 CLR 57, at 71-76 per Gibbs J.), but might be characterised as an irrevocable offer. But the definition of agreement for the purposes of the Futures Industry (New South Wales) Code included a "proposed agreement". In his Honour's view, an option granted to enter an agreement amounted at least to a proposed agreement. Thus the fact that the obligation was conditional on the exercise of the option and the payment of the price did not prevent it being an "obligation". Mr Hely submitted that the reasoning should lead to a LEPO being regarded as imposing an obligation upon the writer of the option to make delivery of shares, thereby satisfying the definition of "commodity agreement". Eligible Commodity Agreement Finally, on the assumption that LEPOs constitute a "commodity agreement", Mr Hely submitted that they also constitute an "eligible commodity agreement". He put this on the basis that at least one of the requirements specified in paragraphs (f), (9) and (h) of the definition must be satisfied. Mr Emmett QC, who appeared with Mr Weber for the ASX, accepted that if Mr Hely's earlier arguments succeeded, there was no dispute that LEPOs are eligible commodity agreements. Consequences of the Argument Mr Hely's argument has the virtue of being a relatively straightforward approach to complex statutory provisions. It also has some textual support. For example, I appreciate the force of his argument that shares must be "capable of delivery" within paragraph (a) of the definition of commodity. It is undeniable that the Corporations Law and indeed the very business rules governing LEPOs refer to the "delivery" of shares or underlying securities. Similarly, the respective definitions of "futures contract" in s.72(1) and "securities" in s.92(1) appear to be mutually exclusive, as the concluding words of s.92(1) suggest. Yet there are other considerations that strongly suggest that at least some of Mr Hely's submissions would lead to consequences that should not lightly be regarded as intended by the Parliaments that have adopted the Corporations Law. One difficulty with at least some of the reasoning employed by Mr Hely is that it inevitably leads to the conclusion that trading in securities options on a stock market of a stock exchange contravenes s.1123 of the Corporations Law. Yet the Australian Options Market has been in operation since 1976 and was known to be in operation at the time the Corporations Law and its predecessors containing the relevant definitions were framed. It will be remembered that, on Mr Hely's argument, shares are a "commodity" within s.9, because they are things "capable of delivery pursuant to an agreement for their delivery". Moreover, he argued that a LEPO is a "commodity agreement" because it creates a "Chapter 8 obligation". One of his arguments to support this conclusion was that a writer of an option is obliged, albeit contingently, to make delivery of a particular quantity of shares at a specified price. If that reasoning is correct, any securities option is a "futures contract". Accordingly, since futures contracts cannot be "securities", they cannot be traded, except on an approved futures exchange. Not only is this difficult to reconcile with the history of the development of the relevant markets in Australia but, as will be seen, the Corporations Law itself specifically contemplates that securities options will be traded on a stock market. It is important, in my view, that the question of construction of the statutory definitions be approached having regard to the legislation as a whole and, where appropriate, to the historical background. In particular, while the definition of "securities" in terms excludes "futures contracts", I think it is helpful to consider the statutory components of the term "securities". This sheds light, in my view, upon the intended scope of the paragraph (a) of the definition of "commodity" and, therefore, of the other components of the definition of "futures contracts". Section 92(1) identifies several specific categories of dealings as within the definition of "securities". These include shares in a body corporate and prescribed interests. Section 92(1)(e) specifically designates "an option contract within the meaning of Chapter 7" to be within the definition. The phrase "option contract" is defined in s.9. The definition of "option contract" has two limbs. The first, in paragraph (a), covers a contract under which a person acquires from another party an option to buy from or sell to the other party a number of specified securities at a price determined by the contract. It follows that a securities option is within the definition of "securities" in s.92. Dealings in securities are regulated by Chapter 7 of the Corporations Law. Chapter 7 includes a requirement that a market at which securities are regularly sold or traded must be conducted on the stock market of a specified or approved stock exchange: s.767. Therefore paragraph (a) of the definition of "option contract" contemplates that securities options will be traded on a stock market. Indeed, Chapter 7 itself contemplates that securities options will be entered into on the stock market of a stock exchange. Section 778 of the Corporations Law, for example, provides that nothing in a gaming or wagering law affects the validity of an options contract entered into on such a market. It seems to me that s.778 is intended to refer to both of the categories of dealings within the definition of "option contract" in s.9, and cannot be confined to those with paragraph (b) of the definition. Given that securities options are within the definition of "securities" and that the legislation contemplates that they will be traded on a stock market, it would be curious if securities options are to be regarded also as "futures contracts". On Mr Hely's argument, this would expose a stock market trading in such options to the risk of conducting an unauthorised futures market in contravention of s.1123 of the Corporations Law. To put the matter another way, there would seem to be internal inconsistency in legislation which, on the one hand, contemplates that securities options will be traded on a stock market of a stock exchange and, on the other, prohibits such trading except on an approved futures market. The definition of "option contract" is, in my opinion, significant for another reason. Paragraph (a) of the definition, as has been seen, refers to securities options. Paragraph (b) refers separately (inter alia) to a contract entered into on a stock market whereby one party acquires an option to buy a quantity of a "commodity" at a specified price. This of course plainly contemplates that commodities options can be traded on a stock market. More significantly for present purposes the definition of "option contracts" distinguishes between securities options (paragraph (a)) and commodities options (paragraph (b)). If securities, including shares, were intended to be regarded as a "commodity" for the purposes of the Corporations Law, there would have been no need to distinguish between the two in the definition of "option contract". This suggests that the term "commodity" may not have been intended to embrace shares. The ence of the Regulatory Re I have referred previously to the existence of the Australian Options Market and the fact that it would be curious if the Corporations Law were intended to place at risk a market in securities options that had operated for a decade and a half. This conclusion is supported by the separate development of the regulatory regimes over the securities and futures industries, although they are now located within the same enactment. The first statutory regulation of the futures industry was effected by the Futures Markets Act 1979 (NSW). A national regulatory scheme commenced with the Futures Industry Act 1986 (Cth), which was applied by each of the States. That Act introduced definitions of "futures contract", "commodity", 'commodity agreement" and "eligible commodity agreement". The definitions were in similar, but not identical terms to the equivalent definitions in the Corporations Law. The conduct of the market in securities options predated both the 1979 New South Wales and the 1986 national scheme. The Securities Industries Act 1980 (Cth) and the State laws adopting it, had been in force for some six years before the enactment of the Futures Industry Act 1986 and the implementing State laws. The Explanatory Memorandum accompanying the Futures Industry Bill 1986, to which I was referred in argument, contained the following passages: "Overlap with SIA 9. It is not practicable to attempt to incorporate the futures legislation into the SIA. To do so would make the SIA a complex and cumbersome piece of legislation, and would fail to take account of the differences between the futures and securities markets. Whereas securities markets are concerned with the transfer of title in property, a major function of a futures market is to facilitate risk management rather than enable title in property to be transferred. 10. In order to provide an appropriate framework for the various 'products' traded on futures and securities exchanges, it is proposed that the following regime will apply: (a) The Futures Industry Bill will: (i) apply to futures contracts, options over futures contracts, and to commodity options traded on a futures exchange (it should be noted that, at this stage, the Futures Industry Bill will not apply to deliverable commodity options not traded on aé_=e futures exchange) ; (c) The SIA will apply to: (i) securities and commodity options traded on a stock exchange (but not options over futures); (ii) the marketing of discretionary accounts or of a right to participate in a commodity pool. NOTE: A dealing in a futures contract will not be a dealing in securities for the purposes of the SIA...". The Explanatory Memorandum supports the view that the definition of "future contracts" employed in the Futures Industry Act 1986 was not intended to embrace securities options traded on the stock market of a stock exchange. Rather, these were to be governed by the Securities Industries Act 1980. That Act contained a definition of "securities" substantially in the terms of the definition in s.92(1) of the Corporations Law. Securities Options and s.72(1)(a) One way of accommodating the proposition (assuming it to be correct) that the Corporations Law was not intended to prevent securities options being regarded as securities, might be to read paragraph (a) of the definition of futures contracts as not intended to refer to options at all, whether in relation to securities or commodities. I think there 1s a good deal to be said for this view. Section 72(1) specifically includes two classes of option within the definition of "futures contract". These are futures options (s.72(1)(b)) and eligible exchange- traded options (s.72(1)(c)). As noted earlier, each of these concepts is defined, the latter so as to cover commodities options and stock indices options traded on futures markets. It is at least plausible that s.72(1)(b) and (c) deals exhaustively with options, to the extent they are intended to be included within "futures contracts". (Of course, this would not necessarily prevent securities options being traded upon a futures market, depending on whether such options are within the definition of "eligible exchange-traded option". This in turn would depend on whether "commodity" in that definition includes shares.) A difficulty in the path of this argument is created by the decision of Hodgson J. in Carragreen Currencies Corporation Pty Ltd v Corporate Affairs Commission. There his Honour held that an option to purchase foreign currency was an "eligible commodity agreement" within s.72(1)(a), as well as a "futures option" within s.72(1)(b). Hodgson J. concluded that there was an obligation on the writer of the option to make delivery of the currency and therefore the definition of "commodity agreement" was satisfied (at 715-716). On his Honour's reasoning, an "obligation to make delivery" included a conditional obligation, although he also relied on the definition of "agreement". In his view, an option was at least a proposed agreement. Neither Mr Emmett nor Mr McFarlan QC (who appeared with Mr Kunc for the ASC as intervener) submitted that I should decline to follow Carragreen. In these circumstances, despite my reservations, I think that I should assume that options are capable of coming within s.72(1)(a) of the Corporations Law. "Commodity" and Shares On the assumption that options can come within s.72(1)(a), I nonetheless do not think that LEPOs can be the subject of an "eligible commodity agreement" within s.72(1)(a). This is because, in my view, shares underlying LEPOs are not intended to be encompassed within the definition of "commodity". Paragraph (a) of that definition refers to "anything that is capable of delivery pursuant to an agreement for its delivery". As I have said I appreciate the force of Mr Hely's argument. It is clearly in accordance with commercial and, for that matter statutory language to refer to the delivery of shares. But I think that in the context in which the definition of "commodity" appears, "capable of delivery" has a narrower meaning. The context to which I refer concludes the terms of other definitions (notably "option contracts") and the historical evolution of the regulatory regimes. Having regard to those matters, I think that paragraph (a) of the definition of commodity is intended to be limited to items, the legal title to which is capable of being passed by physical delivery of the item or (perhaps) by delivery of a document evidencing title to the item. The effect of physical delivery of itself may not necessarily be to pass legal title. For example, under the legislation governing the sale of goods, property passes when the parties intend that it should, subject, in the case of unascertained goods, to the goods being ascertained: see, for example, Sale of Goods Act 1923 (NSW), ss.21, 22. But title is capable of passing by physical delivery, in accordance with the agreement of the parties. It may be that paragraph (a) of the definition is intended to be confined to tangible items of trade. So much is suggested by the use of the word "thing" in paragraph (a), in contrast with the phrase "thing in action" in paragraph (b). On the other hand, paragraph (b) is expressed to operate "without limiting the generality of paragraph (a)". But even if paragraph (a) extends to choses in action, I do not think it is intended to cover things, legal title to which cannot pass by means of the physical delivery of a tangible item or a document representing title. This approach accords essentially with the submission made by Mr Emmett. In support of this contention he referred to passages in Pollock and Wright, Possession in the Common Law, 1990 ed, at 46, 57 ff, in which the learned authors explore the significance of "delivery" as an element in the transfer of possession of and title to goods. The historical significance of delivery as a key concept in relation to the transfer of possession and title to goods is, in my view, helpful in construing paragraph (a) of the definition of "commodity". The term "commodity" as defined is plainly not confined to tangible items of commerce (since paragraph (b) of the definition refers to things in action). But tangible items are at the heart of the concept of "commodity". The New Shorter Oxford English Dictionary defines "commodity" to mean "{a] thing of use or value, specifically a thing that is an object of trade, especially a raw material or agricultural crop." In Shoreline Currencies (Aust ty Ltd v rporate Affairs Commission, at 30-31, Lee J. referred to two definitions from the Oxford English Dictionary: "a thing of 'commodity', a thing of use or advantage to mankind; esp. in plural, useful products, material advantages, elements of wealth"; "{a] kind of thing produced for use or sale; an article of commerce, an object of trade; in plural, goods, merchandise, wares, produce". It is true that, depending on the context, the word can bear a wider meaning. For example, in The Frederick VIII [1917] P 43, it was held that bonds of the German Government were within a wartime Order in Council intended to restrict German commerce and "to prevent commodities of any kind reaching or leaving Germany". In the light of the objectives of the Order in Council it is hardly surprising that a broad view was taken of the term. But I do not think the same imperatives apply to the paragraph (a) of the definition of "commodity". The conclusion I have expressed also seems to me to be consistent with the development of the requlatory legislation. The Futures Markets Act 1979 (NSW) contained no definition of "commodity". It simply defined a "commodity futures contract" as one whereby one party agrees to deliver to the other party at a specified future time a specified quantity of a particular commodity at a specified price. In 1982 a definition was inserted by the Futures Markets (Amendment) Act 1982 (NSW), Schedule 1, cl.1(a). But this simply included "a bill of exchange" and anything prescribed as a commodity. In 1984 a unit of foreign currency was prescribed as a commodity: Futures Markets (Foreign Currency) Regulations 1984 (NSW). The Futures Industry Act 1986, and the Futures Industry Codes of the States, introduced the definition of "commodity" now to be found in the Corporations Law. They also introduced a definition of "futures contracts" broader than that employed in the New South Wales legislation. Thus the scope of the legislation governing the futures industry has been expanded, independently of the wording or construction of the definition of "commodity" or "commodity agreement". There 1s, in my view, nothing in Shoreline Currencies v Corporate Affairs Commission inconsistent with the conclusion I have expressed. There Lee J. held that "commodity" as defined could be applied to foreign currency in circumstances in which it is dealt with as part of a business of buying and selling foreign currency. Trade in foreign currency was no different from trading in other kinds of commodities and, in his Honour's view, foreign currency was plainly capable of delivery. It is perhaps worth noting that, if Lee J. had come to a contrary conclusion, the business conducted by the plaintiff (which had sought to restrain the Corporate Affairs Commission from proceeding with an inquiry under the Futures Industry (New South Wales) Code) would not have been subject to a regulatory regime. Of course there is a regulatory regime governing trading in shares and other securities. If the view I have expressed is correct, in my opinion it follows that a share is not within paragraph (a) of the definition of "commodity", since shares are not capable of delivery in the relevant sense. A share is the interest of a shareholder in the company. That interest comprises rights and obligations defined by legislation and the memorandum and articles of association of the company: Archibold Howie P Ltd _v Commissioner of St Duties (NSW) (1948) 77 CLR 143, at 156. Under the Corporations haw, a share is personal property and is transmissible as provided by the articles: s.1085(1)(a), (b). A certificate issued by a company specifying shares in accordance with the statutory forms is prima facie evidence of the title of the member to those shares: s.1087(2). Under the general law, a buyer of shares does not acquire legal title to the shares until the buyer's name is entered in the register, although a specifically enforceable agreement may create an equitable interest in shares: Ford's Principles of Corporations Law, 6th ed (1992) at 283; Corporations Law, s.1085(2)(b); compare Re Rose [1952] Ch.499. In the case of off-market transfers a company is not to register a transfer of shares until a proper instrument of transfer has been delivered: s.1091(1). The handing over of a transfer does not convey legal title. Share scrip does not constitute or amount to a bearer security: Federal Commissioner of Taxation v Clarke (1927) 40 CLR 246 at 285, per Higgins J. Delivery and Underlying Securities The concept of delivery is even more difficuit to apply specifically to securities underlying LEPOs, that are to be transferred in consequence of the exercise of the option. As already noted, the dealing in those securities is not to be settled by the delivery of a share certificate. Furthermore, the securities must be eligible for either the FAST or CHESS systems. For present purposes I do not think that it is appropriate to distinguish between settlement of dealings under the FAST or CHESS systems. As Mr Hely observed, it would be strange if there were differences according to whether a paper form for an electronic signal is employed to effect a change in a sub- register. But in neither case does the transferor execute a transfer or hand over anything to the transferee. The netting off process serves to settle obligations as between brokers, but not on a transaction by transaction basis. The transfer of individual parcels of shares is effected by the recording of the information contained in a broker's transfer from an electronic communications. The traditional form of settlement of a sale of shares involves the handing over of a transfer of shares, in registrable form, together with the share scrip. This is followed by registration of the transfer. Even if that traditional form of settlement can be regarded as "delivery" of the shares, it is difficult to apply the same approach to shares underlying LEPOs, transferred through the FAST and CHESS systems. Not only is there no document which effects a transfer of the legal title when delivered or handed over, but there is no document at all handed over to the transferee. This is not simply because documents have been replaced by electronic messages. It is because a quite different process is utilised to effect settlement between brokers. Indeed in the case of options, the writer and taker of the option are not regarded as principals to the transaction, the respective clearing house members accepting responsibilities as principals. In these circumstances, even if the traditional form of settlement of shares could be regarded as delivery for the purposes of paragraph (a) of the definition of "commodity", I do not think that the settlement of securities of the kind that can underlie LEPOs involves "delivery" in a relevant sense. Such securities are therefore not capable of delivery within paragraph (a). Commodity - Paragraph (b) Mr Hely, in the alternative, relied on paragraph (b) of the definition of "commodity". That paragraph refers to "an instrument creating or evidencing a thing in action". Mr Hely, recognising that no share certificate is to be involved in the transfer of securities underlying LEPOs, did not address the position if a certificate were to be handed over to the transferee on settlement. Accordingly, it is not necessary to consider whether such a certificate could answer the description of an "instrument creating or evidencing a thing in action". In a transaction effected under the FAST system, there is no transfer between the brokers of shares corresponding precisely to a particular transaction. As has been noted previously, the netting off procedure means that any transfer between brokers is limited to the net total due from one to another. The only document (whether on paper or in electronic form) that, relevantly, is referable to the particular quantity of shares to be transferred is the security transfer form to be validated by the transferor's broker and which results in an amendment to the company's register. It seems to me that there is a difference between pre-existing instruments that can be the subject matter of a standardised agreement for sale and purchase (such as bills of exchange) and those that are simply the means of giving effect to a transaction already entered into. The transfer stamped by the broker, while it attracts statutory warranties, is not the subject of an agreement for sale or purchase. It is simply the direction to the company to make entries in its register to record the transferee as the person legally entitled to the specified quantity of shares. The company is itself entitled to act on that direction: s.1091(1). The transfer is not executed by the transferor and only comes into existence to allow the transferee to obtain registration of the shareholding that is the subject of the antecedent transaction. Accordingly, I do not think that the transfer answers the description of "an instrument creating or evidencing a thing in action" for the purposes of paragraph (b) of the definition of "commodity". Even if it does, I do not think that a LEPO gives rise to an obligation to make or accept delivery of that or any other existing instrument as a commodity. The definition of commodity agreement refers (inter alia) to a standardised agreement, the effect of which is that a person is under an obligation to make or accept delivery of a quantity of a particular commodity. If the commodity is the transfer (whether in paper or electronic form), it is not the subject of the agreement. Nor is the "effect of" the agreement to require the person to make or accept delivery of a quantity of that commodity - that is, the transfer. Accordingly, in my opinion, even if (contrary to my view) the transfer is capable of being a "commodity", that would not convert a LEPO into a "commodity agreement". In other words, neither the LEPO, nor the settlement of the transaction involving the underlying securities, involves an agreement the effect of which is to make or accept delivery of the particular form of transfer contemplated under the FAST and CHESS systems. Chapter § Obligations If the conclusions I have reached are correct, there is no need to consider whether a LEPO creates a "Chapter 8 obligation", at least for the purpose of determining whether LEPOs are "futures contracts" for the purposes of s.72(1) of the Corporations Law. If the shares underlying a LEPO do not constitute a "commodity", the LEPO itself cannot constitute a "commodity agreement" as defined. Even if there is a "Chapter 8 obligation" it is not to make or accept delivery of a particular commodity. A LEPO cannot therefore constitute a futures contract. It is therefore not excluded from the definition of "securities" by the concluding words of s.92(1). However, the question of whether the economic imperatives arising out of a LEPO are such that the taker is under a "Chapter 8 obligation" to exercise the option and accept delivery was argued. Furthermore, although this does not seem to have been expressly adverted to in argument, the conclusion that LEPOs are not futures contracts does not necessarily mean that they are securities. It is still necessary to determine that they are "option contracts" and therefore within s.92(1)(e). Accordingly, I should deal, albeit briefly, with this issue, as well as the associated question of whether the commercial substance of the transaction is such that the taker is obliged to exercise or close out the option. The concept of an obligation, "whether or not enforceable at law or in equity", is not easy to apply to a commercial marketplace. The primary meaning is suggested by the first two definitions in the Shorter Oxford English Dictionary: "1. The action of binding oneself by oath, promise or contract to do or forbear something; 2. Law. An agreement, enforceable by law, whereby a person or persons becomes bound to the payment of a sum of money or other performance". These definitions emphasise that an element of enforceability - or being bound - is at the heart of the meaning of "obligation". However, the alternative meaning in the Shorter Oxford English Dictionary indicates that enforceability may be a matter, not of legal remedies or recourse, but of moral force: "3. Moral or legal constraint, or constraining force or influence; the condition of being morally or legally obliged or bound". A person might be said to be under an obligation to do something by reason of a duty owed to another person, even if the duty is a moral one, not susceptible of legal remedies. An example is an arrangement, specifically expressed not to give rise to legal consequences, under which one person agrees with another to undertake a particular course of conduct. The party who defaults can be said to breach his or her duty to the other party, even though the only consequences may be disapproval or condemnation. The key concept, in my view, is that of being bound or under a duty to another person, whether there is a legal mechanism for enforcement of the duty or not. It is undeniable that, having entered into a LEPO, the taker of the option has a powerful incentive to exercise the option or close it out. That incentive, it can be accepted, will be so great for a deep-in- the-money option, that it will almost always be exercised or closed out. But he or she is not bound to do so, in the sense of owing a duty to the writer of the option or anyone else. The express terms of the option confer that choice upon the taker. And, as Mr Hely conceded, there may be circumstances, albeit rare and "catastrophic", when the taker chooses not to exercise or close out the option. A choice does not cease to be available because the circumstances in which it will be exercised one way rather than another are rare. One difficulty with an argument that equates economic imperatives with an "obligation" is that it is extremely difficult to draw the line. Securities options may be written in the course of a series open for trading that are deep-in-the-money - that is, because of price movements since the series opened the strike price may be very low in comparison to the value of the underlying securities. On Mr Hely's argument, the taker of such an option would be under a Chapter 8 obligation to exercise it because, from an economic perspective, the taker would have no practical alternative. I do not think that this result can have been intended. Nor do I think, on the assumption that shares can be a commodity, that such a deep-in-the-money option constitutes a "futures contract". I appreciate that Mr Hely's argument stressed the fact that the definition of "commodity agreement" specifies a standardised agreement "the effect of which" is that a person is under a Chapter 8 obligation to make or take delivery (as the case may be). I do not think that this carries the matter further. The effect of the agreement is to be judged by its terms. The terms give the taker of the option the legal entitlement to choose whether or not to exercise the option. The terms no doubt create a state of affairs in which the taker has a powerful, ordinarily irresistible motive to exercise the option. But that motive does not in my view involve any duty or commitment to the writer of the option such as would make the word "obligation" appropriate to describe the taker's position. Indeed, as was pointed out in argument, the writer of the option ordinarily would be delighted if the option were not exercised. If this happy state of affairs were to eventuate he or she would retain the premium and the shares. Finally, reference was made by Mr Hely to Shoreline Currencies y_Co x irs Commission. But that case did not involve the issue of whether an incentive to adopt a particular course of action created by an agreement amounted to an obligation to follow that course of action. The significance of the evidence in that case was that an agreement which, on its face, worked in one way, in practice was carried out in quite another. In my opinion, that does not bear on the question in this case, where the parties to the LEPO will act in accordance with its terms. Conclusion For the reasons I have given the application should be dismissed. Although the cross-claim seeks a declaration in relation to future events, no submission was made that if the case were otherwise made out, the Court should decline to make the declaration. Accordingly, I make the declaration sought in the cross-claim. The SFE should pay the costs of the ASX. There should be no order for costs in respect of the ASC as intervener. I certify that this and the preceding 47 pages are a true copy of the Reasons for Judgment of the Honourable Justice Sackville. Associate: pve fe A Dated: 2 November, 1994 Heard: 13 & 14 October 1994 Place: Sydney Decision: Appearances: 2 November 1994 Mr P.G. Hely QC and Mr M. Speakman instructed by Corrs Chambers Westgarth, Solicitors, appeared for the applicant. Mr A.R. Emmett QC and Mr R. Weber instructed by Minter Ellison Morris Fletcher, Solicitors, appeared for the respondent. Mr R.B.S. Macfarlan QC and Mr F. Kunc instructed by Mr P. Stepek of the Australian Securities Commission, appeared on behalf of the Australian Securities Commission as intervener.