ASIC Market Supervision Update Issue 37
Suspicious activity reporting – ASIC Update
Under ASIC market integrity rule 5.11.1, participants of the ASX and Chi-X markets must notify ASIC if they have reasonable grounds to suspect that a person has placed an order or entered into a transaction while in possession of inside information, or which has the effect of creating or maintaining an artificial price or a false or misleading appearance in the market or price for trading in financial products. This is known as the suspicious activity reporting (SAR) rule.
The SAR rule commenced on 20 January 2013. Since then, ASIC has received a total of 51 SAR reports from 14 market participants. Of these reports, one market participant was responsible for almost 25% of the total. Four other market participants each submitted five or more SAR reports.
The importance of SAR to ASIC is reflected in the number of reported matters being referred to ASIC's Enforcement team for further investigation. Nine of 51 or 17% of SAR reports received to date have been referred to Enforcement.
The vast majority of market participants have not submitted any SAR reports in the period 20 January 2013 to 31 July 2013. ASIC would like to remind all market participants of their obligations under ASIC MIR 5.11.1. To ensure compliance with this market integrity rule, ASIC will inspect breach registers of market participants in the near future as part of its Participant Compliance Surveillance Review program. We will also consider whether matters that come to our attention in other ways should have been reported under the SAR rule.
Updates to market supervision cost recovery arrangements
Legislative amendments have been made to update the market supervision cost recovery regime from 1 July 2013.
The cost recovery regime recovers funding the Government provides for ASIC's additional market supervision costs since the transfer of market supervision to ASIC on 1 August 2010. From 1 August 2010 to 31 December 2011, cost recovery fees were applied to market operators only. Fees on ASX and Chi-X cash equity market participants for the performance of ASIC's market supervision functions were introduced from 1 January 2012.
Key features of the updated cost recovery regime include:
- fees will still be charged quarterly in arrears (market participants will receive their first invoice statement from ASIC for the quarter ending 30 September 2013 by mid-October 2013)
- a new quarterly minimum fee of $1,835 will be applied to every market participant of ASX or Chi-X (including both trading and non-trading participants)
- cost recovery allocated to market participants' transactions or trading activity will reduce and cost recovery allocated to messaging activity will increase; and
- late payment penalty fees have been made simpler and more efficient to administer.
Letters have been sent to all trading and non-trading market participants introducing the changes and providing an explanation of how the changes affect them. Please contact your ASIC relationship manager if your firm has not received this correspondence. Market participants are reminded to update their billing contact details with their relationship manager if these have changed since the last invoice statement from ASIC was received.
To assist market participants familiarise themselves with the changes, we have published responses to a number of frequently asked questions about cost recovery. Further details and background information about this topic are also available from our dedicated cost recovery webpage. See:
Payments can be made by mail (cheque), EFT or BPAY or in person at any ASIC Service Centre. If you choose to pay at an ASIC Service Centre, please bring a copy of your ASIC Market Supervision Invoice Statement with you.
Operators and participants are encouraged to make cost recovery payments before the due date to avoid late payment penalty fees.
New rules on dark liquidity and high-frequency trading
ASIC has released its market integrity rules on dark liquidity and high-frequency trading. The rules will be implemented in stages over nine months. We have also released guidance on the rules which clarifies our expectations of market operators and participants. Details about the new rules (including implementation dates) and guidance are outlined in Media Release 13-213MR.
The rules address the following issues:
- crossing system transparency and disclosure
- crossing system fair treatment
- crossing system monitoring
- crossing system controls
- enhanced conflict of interest obligations; and
- order flow incentives.
- manipulative trading circumstances of order; and
- manipulative trading rules harmonised.
The release of the new rules follows extensive internal analysis and consultation with industry on dark liquidity and high-frequency trading. Earlier this month, we published Report 364 Response to submissions on CP 202 Dark liquidity and high-frequency trading: Proposals (REP 364) which summarises the key issues that arose out of submissions on these issues and our responses to those issues. ASIC will release guidance on automated trading and market manipulation in coming months.
Report into hybrid securities
ASIC has released a report discussing offers of hybrid securities in the Australian market since the GFC, in particular, the extensive issuance of hybrid securities from November 2011 to June 2013.
In Australia, more than $18 billion was raised by companies between November 2011 and June 2013 through the issue of ASX-listed hybrid securities. There were approximately 75,000 investors in hybrid securities last year, two thirds of whom were self-managed superannuation funds.
The terms of hybrid securities are often very complex and many involve heightened risks for retail investors, such as risks deriving from long maturities and more complex features such as interest deferral or potential conversion into ordinary shares. The overall complexity of hybrid securities makes clear, concise and effective disclosure to investors in a prospectus more difficult.
Report 365 Hybrid securities (REP 365) describes ASIC's efforts to engage with hybrid issuers and the brokers that sell hybrid securities so that their features and risks are clearly disclosed and they are not being mis-sold. The report also outlines the investor warnings and education about hybrid securities which we have provided through the media and on ASIC's MoneySmart website.
ASIC Commissioner John Price said, ‘We have responded to the increased issuance and popularity of hybrids by working with issuers and their advisers, as gatekeepers, to help improve prospectus disclosure and ensure selling messages are not misleading. But there is more work to be done and we will investigate any reports of misconduct (e.g. misleading promotion or inappropriate comparisons with other products), crackdown on misleading ads, and consider what names or labels hybrid products are given to ensure they do not confuse investors’.
Markets Disciplinary Panel
On August 8, ASIC announced that Instinet Australia Pty Limited (Instinet) had paid a penalty of $130,000 to comply with an infringement notice given to it by the Markets Disciplinary Panel (MDP). The penalty was for not having in place at all times, as required, an appropriate automated filter in its Automated Order Processing (AOP) system to address the issue of wash trades or trades where there is no change in beneficial ownership (NCBO).
As a result of Instinet’s failure to have an appropriate automated filter in its AOP system, the MDP had reasonable grounds to believe that Instinet contravened Rule 5.6.1(a) of the ASIC market integrity rules (ASX Market) 2010 and thereby contravened section 798H(1) of the Corporations Act 2001 (Corporations Act).
The MDP issued Instinet with an infringement notice specifying a penalty of $130,000. Consistent with guidance provided in ASIC Regulatory Guide 216 Markets Disciplinary Panel, the MDP took various factors into consideration, including that:
- Instinet's failure to ensure that it had appropriate automated filters in place had the potential to damage the efficiency and integrity of the market
- the NCBO trades did not represent genuine, bona fide trades, but gave the appearance that they were. As such they interfered with the integrity of the market and proper functioning of the ASX Trading Platform
- Instinet was on notice of the NCBO Crossings due to its SMARTS daily post trade reports that reported NCBO trades
- Instinet ought to have identified the regulatory risk associated with the Crossings on the basis of the SMARTS reports and escalated the issue
- Instinet’s conduct continued for an unacceptable and extended period of time in the circumstances
- Instinet did not take timely action to rectify the breach
- Instinet's misconduct was careless and irresponsible in the context of its regulatory obligations
- Instinet cooperated with ASIC throughout its investigation.
Important regulatory information
Pursuant to subparagraph 7.2A.15(4)(b)(i) and (ii) of the Corporations Regulations 2001, Instinet Australia has complied with the infringement notice. Such compliance is not an admission of guilt or liability, and they are each not taken to have contravened subsection 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. Infringement notices for this and other matters can be accessed using this link: MDP Infringement Notices Register.
Market participants should contact ASIC for market integrity issues and ASX and Chi-X respectively 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.