ASIC Market Supervision Update issue 21

Previous issues

Upgrade for ASIC's market surveillance system

The Federal Government has announced a budget commitment for ASIC to invest in a market surveillance system allowing it to plan for a future that includes greatly increased message traffic, new technologies and trading techniques, increased competition between trading venues and the increasing globalisation of capital markets

The market surveillance system will improve on technology which was originally designed for a single market – not multi market – and not across markets with different products. The system will allow for greater capacity and capability, as well as cope with the increase in HFT and algorithmic trading. The enhanced market surveillance system will have superior capabilities to search data records and identify suspicious trading, by connecting patterns and relationships, which is beneficial in detecting insider trading relationships, and consistent with ASIC's strategic priority of maintaining fair and efficient financial markets. With Australia now achieving some of the highest levels of share ownership, market integrity and efficiency is an ASIC priority, and the new system promotes this through the prevention, detection and deterrence of market misconduct.

Stock markets are the engine room for economic growth in Australia. The new surveillance system will promote the integrity of our stock markets through the prevention, detection and deterrence of market misconduct. This in turn, will contribute to the confidence of investors, and the efficiency of our capital markets.

The cost of the enhanced surveillance system reflects the increase in the cost of supervision due to the increase in the complexity of trading methods used in our market with the advent of competition and the dispersed trading venues (the licensed exchange markets and dark pools operated by the large investment banks). The funding has been provided on the basis of full cost recovery from the industry.

The model for cost recovery is a matter for Treasury who, we understand, will take advice from the government. It has also established the Cost Recovery Panel of industry representatives that will advise the government on issues regarding recovery of the cost of market supervision. As a percentage of market turnover, the actual cost of market supervision is favourable compared with overseas jurisdictions. The funding cost itself we expect will be smoothed out to minimise impact, and will be outweighed by the medium to long-term benefits of competition, and of well regulated fair and efficient markets.

ASIC looks forward to engaging further with industry on this topic.

Crossing system reporting

Market participants operating crossing systems are reminded of their obligations, under Part 4.3 of the ASIC Market Integrity Rules (Competition in Exchange Markets) 2011 (Competition MIRs). ASIC has issued guidance on the obligations arising from operating such systems. These can be found in Section E of Regulatory Guide 223, Guidance on ASIC market integrity rules for competition in exchange markets (RG 223).

Under the MIRs, a crossing system is 'any automated service provided by a Participant to its clients which matches or executes Client Orders with Orders of (a) the Participant; or (b) other clients of the Participant'. This means that any automated and or systematic matching of client orders may be subject to the rule, including participants' use of vendor-provided crossing-system solutions. This includes a system that matches an order with an order currently reflected in the market. For example a system that identifies orders in the market operator's order books that it can match and report as priority or NBBO crossings. Orders matched on-market by a market operator's trading system that are “accidental crossings” are not subject to this reporting.

Participants operating such systems also have reporting and notification obligations under Part 4.3 of the Competition MIRs. In particular, participants are required to send a Crossing System Initial Report (Initial Report) no later than 20 business days before the participant begins to operate the crossing system. This places an obligation to self report on crossing systems, and address at least the matters listed at Table 11 of RG 223. Once the system is operating, participants are required to send a Crossing System Monthly Report (Monthly Report) within 20 business days of the end of the previous month. This report needs to include the daily aggregated information on orders and trades (as per Competition MIR 4.3.3), and any changes provided in the Initial Report. For example, a participant changing its method of matching and executing trades, including moving from ASX's priority crossing to reliance on the off-order book 'at or within the spread' exception, or reporting to a different market operator, should notify ASIC in its Monthly Report. For more information, participants should contact their ASIC relationship manager.

Participants are also reminded that the Monthly Report must comply with the guidance in paragraphs 199-203 of RG 223, including the file name and file type. ASIC is finding that some crossing system operators are not following the correct format, and not using the correct identifier for the crossing system. ASIC can provide participants with a sample report on request.

We look forward to industry's cooperation in this matter, and remind participants there are penalties (up to a maximum of $100,000) for failing to take account of these obligations.

Carbon financial products: adviser training and financial requirements 

ASIC has released its final policies on adviser training and financial requirements for entities and individuals providing financial services in relation to carbon emissions units. This follows the consultation process undertaken in Consultation Paper 175 Carbon markets; Training and financial requirements (CP 175).

The relevant policies have been incorporated into the existing Regulatory Guide 146 Licensing: Training of financial product advisers (RG 146), and Regulatory Guide 166 Licensing: financial requirements (RG 166). RG 146 sets out ASIC's minimum standards for the training of all advisers providing financial product advice to retail clients, and RG 166 sets out ASIC's current policy on financial requirements for AFS licensees.

RG 146 now includes guidance specifically about specialist knowledge requirements for advisers wishing to provide financial product advice to retail clients on emissions units. It is expected this content will help advisers ensure they are fully trained and competent to provide such advice.

Given this may be the first time many entities will come under ASIC's regulation, ASIC has also released an updated version of Regulatory Guide 236 Do I need a licence to participate in carbon markets? (RG 236). RG 236 provides guidance on whether AFS licence is needed to provide financial product advice and other services in relation to carbon markets and emissions units. It also spells out the steps involved and further information on the process.

The carbon pricing mechanism will start on 1 July 2012, and will require certain entities to incur a charge for their carbon emissions, unless they acquire and surrender the number of units that represents their total annual emissions. The Clean Energy Legislative Package includes the Clean Energy Act 2011 (Clean Energy Act), is the main piece of this legislation setting up the carbon pricing mechanism and the Carbon Credits (Carbon Farming Initiative) Act 2011 (CFI Act), which covers the Carbon Farming Initiative.

 

Training and competency: Designated Trading Representatives

 

Trading participants are reminded of their Designated Trading Representatives (DTRs) obligations under ASIC/ASX Market Integrity Rules (ASX MIRs). This relates to role, function and training.

ASX MIR 2.5.5(b) requires DTRs of a trading participant to be suitably qualified and experienced to deal in products which the DTR submits orders for, on behalf of the Trading Participant. Furthermore (at ASX MIR 2.5.5(c)), before submitting trading messages on behalf of the Trading Participant, each DTR needs to have demonstrated to the Trading Participant knowledge of the Dealing Rules governing the dealing and reporting Market Transactions on the Trading Platform, and the relevant practices of the Market Operator.

Participants should note ASIC routinely considers these obligations as part of its surveillance, in addition to assessing the capabilities of DTRs. Participants are further reminded a failure to comply with this, or any part of the obligations in ASX MIR 2.5.5, can attract a penalty of up to $1,000,000.

Participants with DTR queries should contact their ASIC relationship manager.

 

FAQs: Chi-X – removal of threshold on hidden orders

ASIC continues to update the Market Competition – FAQs and additional information section of the ASIC homepage, responding to questions from industry on the interpretation and application of the competition market integrity rules, and the introduction of competition more generally.

In particular, ASIC has provided an FAQ on hidden orders, noting Chi-X has changed its operating rule procedures with effect from 4 May 2012, removing the $20,000 threshold previously applied to its fully hidden limit and pegged-order types. Chi-X previously consulted on this change in March 2012. ASIC will monitor this change's impact to Chi-X's operating rule procedures, which has been subject to a number of conditions, on trading behaviour and price formation.

Contact ASIC

Market participants should contact ASIC for market integrity issues and ASX for operational issues. Contact ASIC’s Market and Participant Supervision group on 1300 029 454 and you will have these voice menu options:

  • Option 1 for real time market matters
  • Option 2 for other market related matters
  • Option 3 for Participant enquiries or matters
  • Option 4 for Market wide announcements.

Or you can reach the Market and Participant Team by email market.participants@asic.gov.au, or through your relationship manager.

For more information

 

Please see www.asic.gov.au/market-supervision.

Last updated: 30/03/2021 09:35