Market Integrity Update - Issue 81 - April 2017
Issue 81, April 2017
- Market integrity report
- ASIC accepts enforceable undertaking from Barclays entities
- Former director fined for failing to notify market of share trading
- ASIC welcomes client money reforms
- Evaluating distributed ledger technology
- ASIC releases report on emerging market issuers
- Crowd-sourced funding
- Are your regulatory data compliance arrangements ready?
- AAT affirms ASIC’s banning of former client adviser
- Stories from the beat
- What’s new?
We have released our latest report on market integrity. Report 524 covers the work of ASIC’s Market Integrity Group for the period 1 July 2016 to 31 December 2016.
The Market Integrity Group is responsible for ensuring Australia’s financial markets are fair and efficient. It does this by setting standards and educating stakeholders, pursuing behavioural change and taking enforcement action to deter market misconduct.
The report looks at our reviews of market cleanliness, handling of confidential information and conflicts of interest, and the ASX equity market outage. It also looks at some of our key activities over the last six months in areas such as insider trading (Hochtief AG) and the management of wholesale spot foreign exchange businesses (CBA and NAB).
ASIC Commissioner Cathie Armour said, ‘ASIC works hard to protect the integrity of Australia’s financial markets – so that firms can thrive and investors can participate with confidence. To do this, we make sure that our gatekeepers’ conduct supports fair and efficient markets. Where we see misconduct, we will act.’
The Market Integrity Group’s ongoing priorities for 2017 are:
- firm culture and conduct risk
- confidential information and conflicts of interest
- technology risk and cyber resilience, and
- market innovation.
Market intermediaries are encouraged to share the webpage with their staff to increase awareness of ASIC’s recent actions and ongoing priorities.
We have accepted an enforceable undertaking (EU) from three Barclays foreign financial service providers. The EU follows concerns about significant breaches of the conditions of ASIC class order relief relied on by the entities, including the failure to notify ASIC of breaches within the required time frame.
The Barclays entities failed to disclose to clients that they were exempt from holding an Australian financial services (AFS) licence and that they are regulated by an overseas regulatory authority. For more details about the breaches, read the media release.
We were particularly concerned that the Barclays entities failed to report these material breaches within the 15-day time frame, automatically excluding themselves from the benefit of the ASIC class order licensing exemptions.
The duration and number of breaches, and the failure to report them in time, demonstrated serious, systemic weaknesses in the compliance controls implemented by the Barclays entities to meet their regulatory obligations.
Among other things, the EU requires:
- independent expert review and testing of the compliance framework implemented by the Barclays entities, and
- a $500,000 payment to The Ethics Centre for research and development into the provision of financial services to Australian clients.
Mr Angus Matthew Holt, a former director and executive chairman of Optiscan Imaging Limited, has been convicted and fined in the Maroochydore Magistrates Court for failing to lodge notices about his share trading during the period 13 January 2015 to 3 July 2015.
Mr Holt pleaded guilty to:
- nine charges of failing to notify ASX within 14 days of any change in a director’s interest in a listed public company, and
- three charges of failing to notify ASX within two business days of changes in his substantial holdings in a listed public company.
The Magistrate ordered that the 12 convictions against Mr Holt be recorded. Mr Holt was fined $4,500.
‘Investors and the market in general, have a legitimate interest in the trading by directors in the company. It is important that directors uphold their responsibilities to ensure market transparency and efficiency. Where ASIC becomes aware of repeated and lengthy failures to make the required disclosures, ASIC will bring the matter before the Courts,’ ASIC Commissioner Cathie Armour said.
The Commonwealth Director of Public Prosecutions prosecuted the matter.
Mr Holt voluntarily co-operated with ASIC in the investigation of the offences.
ASIC has welcomed the passage of reforms designed to strengthen protection of client money provided by retail derivative clients. The reforms will remove an exception that currently allows AFS licensees to use client money for a wide range of purposes, including for working capital – exposing them to greater risk of loss.
This amendment would require AFS licensees to hold retail derivative client money on trust. The requirement to hold client money on trust already applies to the vast majority of financial products and financial services under Australia’s client money regime.
The Treasury Laws Amendment (2016 Measures No. 1) Act 2017 also gives ASIC power to write client money reporting and reconciliation rules.
Prohibiting firms’ use of client money will ensure it is held on trust and repaid to clients in the event of insolvency. These changes will make sure that retail clients are protected when AFS licensees become insolvent.
Applying more formal and consistent standards to industry will also help ASIC to detect misuse of client money faster.
Industry have been given a 12-month transition period in which to implement the reforms and adapt to the new regime.
In the last few years, there has been intense interest in distributed ledger technology (DLT) – also known as blockchain technology – from operators of financial market infrastructure, financial institutions, financial services providers and innovative fintech firms around the world.
Last month, we released Information Sheet 219 Evaluating distributed ledger technology.
The information sheet includes an assessment tool for evaluating DLT-based services comprised of six broad questions. These are the questions that ASIC is likely to ask when we assess whether the use of DLT by a service provider or infrastructure operator would allow the person to meet their regulatory obligations.
- How will the DLT be used?
- What DLT platform is being used?
- How is the DLT using data?
- How is the DLT run?
- How does the DLT work under the law?
- How does the DLT affect others?
ASIC Chairman Greg Medcraft said, ‘This info sheet is for both existing licensees and start-ups. It will help to fast track our discussions with stakeholders and we want to use the framework as a conversation starter as the technology continues to evolve.’
Earlier this month we published Report 521 Further review of emerging market issuers. The report discusses our views on emerging market issuer activity and highlights how we have responded to the key challenges identified in Report 368 – some of which we continue to see in our market.
- provides key observations on regulatory issues relating to entities listed on Australian markets with substantial connection to emerging markets, and
- describes some of the regulatory initiatives that we have undertaken to address topical issues in our markets.
We have also sought to provide greater transparency around the risks associated with emerging market issuers through engagement with industry and stakeholders, surveillance, enforcement action, guidance, education and policy advice.
The report reminds issuers and gatekeepers of the importance of complying with their regulatory obligations when raising capital in our markets.
On 22 March 2017 parliament passed legislation to implement a crowd-sourced funding (CSF) regime. The Corporations Amendment (Crowd-sourced Funding) Act 2017 will allow start-ups and small businesses to raise funds from a large number of investors that invest small amounts of money.
The regime will reduce the regulatory requirements for public fundraising while maintaining appropriate investor protection measures.
A provider of CSF services must hold an AFS licence. From 28 September 2017, we will accept:
- applications from intermediaries for an AFS licence with authorisation to provide CSF services after this date, and
- applications to register new public companies or convert existing proprietary companies to be eligible for the corporate governance exemptions under the CSF regime.
To further assist the development of a CSF industry, we will shortly consult on:
- regulatory guidance for intermediaries seeking to provide CSF services
- guidance to assist companies seeking to raise funds on a platform of a CSF intermediary, and
- the operation of a secondary financial market in CSF securities, which will require an Australian market licence. The legislation introduces new exemption powers enabling a more tailored regulatory regime to facilitate the operation of specialised and emerging financial markets and clearing and settlement facilities, including for CSF securities.
On 28 July 2014 we introduced an enhanced regulatory data regime for market participants. The regime improves the efficiency of our surveillance function while reducing the number of requests for trading information that are sent to market participants.
To assist industry with the transition, we published an FAQ, updated Regulatory Guide 223 Guidance on ASIC market integrity rules for competition in exchange markets, and worked with individual market participants to improve the quality of regulatory data transmitted to ASIC.
Since 1 July 2016 we have been required to provide trade information, including regulatory data, to the ATO. Market participants’ obligation to collect and provide account identification information (including regulatory data for active clients) to the ATO will begin on 1 July 2017.
ATO’s access to ASIC’s trade information and regulatory data removes the burden from market participants of having to report client trade data to the ATO directly.
While we have taken a facilitative approach to correcting problems with regulatory data issues, from 1 July, any inconsistencies in regulatory data may result in additional work for market participants in meeting their ATO obligations. For example, using origin of order references such as ‘UNKNOWN’, or aggregated order references such as ‘VAR’ or ‘RET’, will prevent the ATO from identifying capital gains events for individual taxpayers. This may result in additional ATO reporting requirements, including information allowing the ATO to identify the investors involved in the trade and the extent of their involvement.
To minimise any potential additional work, you should test your regulatory data compliance arrangements against both ASIC and ATO requirements before 1 July 2017.
On 28 March 2017, the Administrative Appeals Tribunal (AAT) affirmed ASIC’s decision to ban former client adviser, Mr Ryan Batros, for five years from providing financial services.
Mr Batros executed client orders to sell securities in an ASX-listed mining company while he was in possession of non-public information about a forthcoming capital raising that was managed by his employer. When his trading was identified and he was directed to stop, he continued to execute a small number of trades on behalf of clients.
Mr Batros’ clients were largely sophisticated investors and the relevant orders were placed on an ‘execution-only’ basis. He did not communicate what knowledge he had about the company’s capital raising to his clients.
The AAT in reaffirming ASIC’s banning of Mr Batros made it clear that possessing inside information triggered a blanket prohibition to dealing in relevant securities. A client adviser who acts on an execution-only basis and does not communicate their knowledge to clients is not excused from this prohibition.
The AAT also dismissed the notion that a client adviser acting on an execution-only basis was only a ‘cypher’ or ‘conduit’ for processing client orders. Client advisers must exercise independent thought and consider whether, in the circumstances, they can execute a transaction having regard to the information they possess.
A market participant (who also holds an AFS licence) recently lodged a breach report after failing to comply with its requirements under the client money regime. Following an internal review, the participant notified ASIC that it had maintained a buffer in its client segregated accounts (CSAs). The market participant has since implemented a number of remedial actions.
Market participants of the ASX, ASX 24 and Chi-X markets (who are likely to also be AFS licence holders) regularly deal with large amounts of money on behalf of clients. Where money is paid to you by a client (or on behalf of a client) for a financial service, you must hold that money in a client money trust account or CSA.
Buffer money is money belonging to a market participant that is deposited or held in a client money trust account (or CSA in the futures market) to ensure that the client money trust account (or CSA) has adequate funding. You are reminded that buffer money is not client money and the practice of depositing or retaining buffer money in a client money trust account or CSA is not permitted.
We would like to remind you of your obligations to remove money that is not client money as soon as practicable. This should be done within one month after the money has been paid into the client money account. Because you are obliged to reconcile trust accounts by the end of each business day, it is best practice to remove non-client money the day after the reconciliation: Rule 3.5.9 of the ASIC Market Integrity Rules (ASX Market) 2010 and the ASIC Market Integrity Rules (Chi-X Australia Market) 2011, and Rule 2.3.2 of the ASIC Market Integrity Rules (ASX 24 Market) 2010. Failing to comply with the market integrity rules can attract a penalty of up to $1 million.
See Regulatory Guide 212 Client money relating to dealing in OTC derivatives and issues 25 and 36 of the Market Supervision Update, for more information about your client money obligations and the use of buffers.
ASIC’s Market Integrity Group has been busy over the last month. Click on the links below to see what else we’ve been up to:
- ASIC accepts enforceable undertaking from former Macquarie Equities Limited adviser
- ASIC reports on Sydney Stock Exchange’s listing standards
- Perth businessman Steven Robert Noske convicted of insider trading release