ASIC Market Supervision Update Issue 25
Use of buffers and client money trust accounts
ASIC would like to remind market participants of their obligations relating to client money and the use of buffers.
Buffer money is the term used to describe money added by a market participant to the trust account to ensure that the client money trust account has adequate funding.
Market participants of the ASX and Chi-X markets (who are likely to also be Australian financial services (AFS) licence holders) regularly deal with large amounts of money relating to financial products on behalf of clients. Market participants are required to hold client money trust accounts (or segregated trust accounts) on behalf of investors who pay them to trade in financial products on a financial market on their behalf.
Division 2 of Part 7.8 of the Corporations Act 2001 sets out the obligations for AFS licensees in relation to client money. Part 3.5 of the market integrity rules for ASX and Chi-X also provides obligations relating to client money for market participants trading on ASX and Chi-X markets. These client money provisions are prescriptive with respect to establishing and maintaining a client money trust account. This includes when money is required to be paid into, and in what circumstances money can be withdrawn from the client money trust account.
Buffer money is not client money, as it does not fall within the client money definition in section 981A(1) of the Corporations Act, and cannot be considered to be money for the purposes of a client money trust account. Accordingly, the practice of depositing buffer money in a client money trust account or segregated account is not permitted.
Further on the topic of client money trust accounts, and Corporations Act requirements relating to them, ASIC reminds participants of their 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. As participants are obliged under market integrity rule 3.5.9 to reconcile trust accounts by the end of each business day, ASIC expects best practice to be that non-client money is removed the day after the reconciliation.
Failing to comply with the market integrity rule can attract a penalty of up to $1 million.
Markets Disciplinary Panel: Citigroup Global Markets Australia Pty Ltd
ASIC recently announced that Citigroup Global Markets Australia Pty Ltd (Citigroup) had paid a penalty of $30,000 to ASIC in order to comply with an infringement notice given to it by the Markets Disciplinary Panel (the MDP).
The penalty was for the entry of a Priority Crossing in the ordinary shares of Fantastic Holdings Limited (ASX code: FAN) on 20 May 2011, that allegedly resulted in the market for FAN not being both fair and orderly.
As a result, Citigroup is alleged to have contravened subsection 798H(1) of the Corporations Act 2001 (the Corporations Act) by reason of contravening market integrity rule 5.9.1 of the ASIC Market Integrity Rules (ASX Market) 2010 (MIR 5.9.1), which provides that that ‘a Market Participant must not do anything which results in a market for a product not being both fair and orderly, or fail to do anything where that failure has that effect'.
The MDP was satisfied that a Citigroup Designated Trading Representative (DTR) had entered a Priority Crossing for 119,231 ordinary shares in FAN, at a price of $0.024 instead of $2.40, which resulted in the trade price of FAN falling 99%, from $2.42 to $0.024.
Consistent with guidance provided in ASIC Regulatory Guide 216 Markets Disciplinary Panel (RG 216), the MDP took various factors into consideration. Some of these factors were that the conduct appears to have been inadvertent on the part of the Citigroup DTR, that Citigroup contacted the ASX within eighty seconds of the entry of the order, and Citigroup did not derive any actual or potential benefit from the contravention, nor did it contest the matter.
ASIC takes this opportunity to remind market participants of their obligation to prevent similar erroneous orders that are significantly away from the market price. This can include implementing new ‘fat finger filters’ and the introduction of quarterly ‘Market Access’ reviews on DTR access, filters, AOP administration, training and knowledge. ASIC also notes that compliance with the infringement notice is not an admission of guilt or liability and Citigroup is not taken to have contravened s798H(1) of the Corporations Act.
The MDP is a peer review body that exercises ASIC’s power to issue infringement notices and accept enforceable undertakings in relation to alleged breaches of the market integrity rules.
The market integrity rules are made by ASIC and apply to market operators, market participants and prescribed entities under the regulations.
Penalties are determined in accordance with relevant guidance issued in RG 216.
ASIC Market Supervision Report: January to June 2012
On 13 August, ASIC released its fourth report on the supervision of Australian financial markets and market participants, Report 296: ASIC Supervision of markets and participants: January to June 2012 (REP 296).
From a surveillance perspective, the report identified an increase in trading alerts compared to the previous period, as ASIC continues its calibration of alert parameters as a result of the introduction of market competition in October 2011. Notably, the period saw 36 matters referred for investigation – up from 23 for the previous period. These matters involved potential insider trading (13), market manipulation (5), possible breaches of the market integrity rules (15) and of the continuous disclosure obligations (3). Eight of the referrals for possible breaches of the market integrity rules were from ASIC's Wholesale Markets team, relating to conduct in the ASX 24 market.
ASIC's Senior Executive Leader of Market and Participant Supervision Greg Yanco said that ‘During the reporting period, ASIC focused on detecting market integrity rule breaches, including those on the ASX 24 market. We also uncovered trading issues which had the potential to create false and misleading appearances.
‘ASIC continues to work closely with market participants on order management including problematic algorithms. It is an area of focus, and we will be engaging with participants actively in coming months, especially given the potential for market disruption when things go wrong.’
ASX Trade Production Environment: Business Continuity Testing
On Saturday 13 October 2012, ASX will be commencing a series of business continuity tests of its trading platforms.
The tests will be conducted with a 'normal trading' environment and with an expectation that all trading participants will participate.
ASIC supports the initiative, one which goes to the heart of market integrity, and reminds participants to register. Registrations close on 5 October 2012.
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 firstname.lastname@example.org, or through your relationship manager.
For more information
Please see www.asic.gov.au/market-supervision.