ASIC Market Supervision Update Issue 28
New rules on market structure
ASIC has today registered new market integrity rules to address risks emerging from developments in market structure, including growth in automated trading and the changing nature of dark liquidity.
The rules will be phased in over an 18-month period, as below:
|27 November 2012||Extreme price movement rules for ASX and Chi-X and amendments to crossings during takeovers apply|
|20 January 2013||Suspicious activity reporting rules apply|
|1 March 2013||Best execution transitional period ends|
|26 May 2013||Meaningful price improvement and block trade rules apply|
|28 October 2013||Market operator enhanced data reporting rules apply|
|10 March 2014||Participant enhanced data reporting and short sale tagging rules apply|
|26 May 2014||Participant automated trading rules apply|
|27 May 2014||Extreme price movement rules for the ASX SPI 200 Future apply|
Dark liquidity and HFT taskforces
In July, ASIC established two internal taskforces to undertake thematic reviews of issues related to dark liquidity and high frequency trading (HFT). These taskforces will deepen ASIC's understanding of the impact of these developments on market integrity and quality. Where appropriate, the taskforces will make recommendations to address any problems identified.
More specifically, the dark liquidity taskforce will seek to promote market integrity by ensuring dark pools are appropriately regulated, ensure participants act in the best interests of clients and take appropriate action for misconduct occurring in the dark. We will also look at whether clients have appropriate information about the dark pools that their orders are being placed in.
The HFT taskforce will analyse the prevalence, nature and impact of HFT in our market and abroad as well as drivers for growth. It will seek to promote market integrity by identifying and taking action against high frequency traders for non-compliance with market integrity rules and the Corporations Act.
The taskforces intend to publish their respective findings and any resulting recommendations in Q1 2013. As always, ASIC will consult on any recommendations with industry before proceeding with rule changes or law reform. ASIC expects to advise the Minister on any subsequent rule proposals in Q2 1013.
Obligations under market integrity rules
ASIC wishes to remind market participants that it expects best practise to be that in applying risk frameworks and principles around governance and compliance, that participants will have mapped out their business processes and operations in line with their obligations under the market integrity rules. In doing so, participants should have a summary of notification obligation which should ensure compliance with notification timeframes. ASIC's reminder stems from recent instances of market participants that have failed to provide appropriate advice and retail client adviser accreditation within the required timeframes.
For a summary of notification requirements, we suggest market participants refer to Regulatory Guide 214 Guidance on ASIC market integrity rules for ASX and ASX 24 markets(RG 214), Regulatory Guide 224 Guidance on ASIC market integrity rules for Chi-X market (RG 224) and Regulatory Guide 215 Guidance on ASIC market integrity rules for APX, IMB, NSXA and SIM VSE Chi-X markets (RG 215).
Furthermore, in applying for an Australian financial services licence, a market participant would have made a number of commitments to ASIC regarding compliance and risk management. ASIC Regulatory Guide 78 Breach Reporting by AFS licensees (RG 78) details breach reporting requirements which licensees should be aware of. Any significant breaches or likely significant breaches under section 912D of the Corporations Act 2001 must be reported within ten business days of becoming aware of the breach.
Market participants should contact their ASIC Relationship Manager if they have any concerns about meeting such requirements.
Markets Disciplinary Panel: J.P. Morgan Securities Australia Limited
On November 19, ASIC announced that J.P. Morgan Securities Australia Limited ('J.P. Morgan') 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 ('MDP'). This was for effecting, on two occasions, an Off-Market Special Crossing in securities (stock code 'NHF') of an Issuer, NIB Holdings Limited ('NIB'), on behalf of NIB during the term of an On-Market buy-back offer being conducted by NIB.
As a result, J.P. Morgan is alleged to have contravened subsection 798H(1) of the Corporations Act 2001 ("the Act") by reason of contravening Rule 6.6.1 of the ASIC Market Integrity Rules (ASX Market) 2010.
Consistent with guidance provided in ASIC Regulatory Guide 216 Markets Disciplinary Panel (RG 216), the MDP took various factors into consideration, including that:
- The execution of a Special Crossing during and pursuant to an On-Market buy-back by the Issuer, risks undermining the principles of fairness and transparency and so operates as a risk to public confidence in the Market;
- There were two Special Crossings, each in apparent breach of MIR 6.6.1. Special Crossing 2 being a repetition of Special Crossing 1 and substantially part of the same course of conduct;
- It is accepted by the MDP that the breaches were inadvertent and a result of human error;
- The J. P. Morgan Designated Trading Representative brought the matter to the attention of J. P. Morgan's Equity Compliance team when he realised his error;
- J. P. Morgan had an internal policy that referred to MIR 6.6.1 and upon becoming aware of the contraventions, immediately took an extensive range of remedial action to prevent a recurrence of the incidents;
- J. P. Morgan has no recorded history of non-compliance with the Market Integrity Rules;
- J. P. Morgan fully co-operated with ASIC throughout its investigation and did not dispute any material facts; and
- J. P. Morgan agreed not to contest the matter, thereby saving time and costs that would otherwise have been expended.
Important regulatory information
Pursuant to subparagraph 7.2A.15(4)(b)(i) and (ii) of the Corporations Regulations 2001, J.P. Morgan has complied with the infringement notice. Such compliance is not an admission of guilt or liability, or that J.P. Morgan has contravened section 798H(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.
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.