ASIC Market Supervision Update Issue 24
End to best execution transitional period exemption
The best execution transitional period under ASIC Market Integrity Rule 3.1.1 ends on 1 March 2013. This update outlines what we expect participants to do.
Since 31 October 2011 participants have been required to take reasonable steps to obtain the best outcome for their clients. Some participants have done this by accessing ASX TradeMatch; others have also accessed Chi-X and/or ASX PureMatch.
The transitional period in MIR 3.1.1 allowed participants to meet best execution obligations solely on ASX TradeMatch without accessing other markets until 31 October 2012. In March this year, we announced an extension to the transitional period to 1 March 2013 to give participants more time. We do not expect to extend the transitional period again.
In preparation for the expiry of the transitional period, and given the growth in Chi X’s market share, participants should be actively assessing whether or not accessing Chi-X will deliver better outcomes for their clients on a consistent basis at a reasonable cost.
The nature of this assessment may vary depending on the size and complexity of the participant's business. We understand there are a number of commercially available data analysis tools which may assist participants.
If the assessment indicates that accessing Chi-X consistently delivers better outcomes and the benefits outweigh the cost of access we expect participants to:
- implement appropriate systems and arrangements to access Chi-X. Access may be direct (i.e. as a member of Chi-X) or indirect (i.e. through another member of Chi-X);
- amend their best execution policies and procedures (MIR 3.2.1 and 3.2.2); and
- inform their clients about the change (MIR 3.3.1).
Where the assessment indicates that accessing Chi-X would not deliver better outcomes on a consistent basis at a reasonable cost, we do not expect participants to access Chi-X or amend their policies and procedures. However, we expect participants to continue to monitor whether they should access Chi-X or other markets in future.
We appreciate that accessing Chi-X or other markets may require system and process changes. We expect these changes to be implemented in a reasonable timeframe (within 3-6 months). For example, if a participant decides in September 2012 that it should access Chi-X, we expect changes to be implemented from 1 March 2013. Where there are constraints to implementing these changes in a reasonable timeframe participants should discuss this with ASIC early on.
ASIC will provide further information at a session being held by the Stockbrokers Association of Australia, in August.
Participant compliance visits: RADAR
ASIC will visit 60 entities throughout the next 11 months as part of its proactive Review Analyse Detect and Respond (RADAR) compliance initiative.
This will include 12 futures participants, 30 market participants, and 18 securities dealers (also referred to as indirect market participants, these are AFS licensees who are not market participants but sell securities products through a market participant).
The visits support ASIC's priorities of ensuring confident and informed investors and financial consumers, and fair and efficient financial markets by:
- assessing the risks associated with a participant's business;
- identifying any weaknesses or concerns in relation to the participant's business;
- highlighting ASIC's areas of focus;
- raising the participant's awareness of their obligations; and
- gathering intelligence for information and assessment purposes.
RADAR visits also provide participants with an opportunity to reflect and consider their businesses and compliance structures, and in some instances, uncover ways that they can more efficiently comply with their obligations.
Should participants have any questions in relation to RADAR, they are encouraged to contact their ASIC Relationship Manager.
ASX 24: trading around contract expiry
ASIC is responsible for the supervision of operators of financial markets and clearing and settlement facilities and of market participants.
As part of this, ASIC monitors all activity on the ASX24 market, with a focus on its strategic priority of fair and efficient financial markets. This includes futures markets during contract expiry periods.
ASIC reminds market participants of their obligations regarding appropriate Risk Management of Client Limits and Client Connections as per Part 2.2 of ASIC Market Integrity Rules (ASX 24 Market) 2010, and obligations under Rule 3.1.3 relating to entering of orders without intent to trade.
These obligations include, but are not limited to:
- pre-trade limits and rejection capabilities reflect prudent risk management;
- clients having the skills, facilities and procedures to operate a market connection; and
- orders and order systems complying with the rules; and
- a market participant not entering Orders where there does not exist an intent to trade
Participants should have pre-trade risk management systems and practices that can monitor and manage the total potential exposure they and their clients carry. Participants and clients should have the ability to fund all orders upon placement, not just execution.
Entering large numbers of orders into a market then cancelling the majority based on a perceived 'unfavourable' queue position, through either single or multiple trading participants, is contrary to the rule's intent.
This conduct can be suggestive of a lack of intent to trade. It also may contravene sections 1041A (market manipulation), 1041G (dishonest conduct) and 1041H (misleading or deceptive conduct) of the Corporations Act.
ASIC will be monitoring the above measures closely and will take action where appropriate.
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 email@example.com, or through your relationship manager.
For more information
Please see www.asic.gov.au/market-supervision.