ASIC Market Supervision Update Issue 44

Other issues


Guidance on regulatory data requirements

ASIC has published additional guidance – in the form of frequently asked questions - on the regulatory data requirements that apply from 28 July 2014. Rule 5A.2.1 of the ASIC Market Integrity Rules (Competition in Exchange Markets) 2011 (ASIC Market Integrity Rules (Competition)) requires a participant to provide to a market operator the regulatory data set out in Rule 5A.2.3 of the ASIC Market Integrity Rules (Competition). The purpose of this guidance is to provide further clarity about the regulatory data requirements in Rule 5A.2.3.

The FAQs provide information relating to:

Execution venue
  • Link to list of ‘Crossing System IDs’ published on ASIC website
  • Clarification that execution venue information only required for off-order book transactions
  • Examples of when execution venue information must be provided
Capacity of participant
  • Clarification for use of the option ‘both principal and agent’
  • Hedging swap trades using principal account is considered ‘principal trading’
Origin of order or transactions
  • Identification of the ultimate ‘originator’, with additional examples
  • Need for consistency in the use of identifiers
  • Guidance as to one-off trade services
Intermediary ID
  • Clarification on what is an intermediary, with additional examples
  • Intermediary ID not required for orders received from an intermediary using non-AOP methods such as telephone or email
  • Clarification that only the intermediary dealing directly with the market operator needs to be identified
Directed wholesale indicator
  • Definition of ‘wholesale client’ for purposes of this rule
  • Clarification of meaning of ‘non-discretionary execution and routing instructions’
  • Clarification that indicator only required for orders entered via AOP
  • Examples of when wholesale indicator is ‘yes’ or ‘no’
Booking purposes transactions
  • Regulatory data requirements do not extend to ‘booking purposes’ transactions
Requirement to retain or record regulatory data sent to a market operator
  • Recommendation that participants record data sent to a market operator, although no specific obligation to do so. Participants are reminded of existing order/trade record-keeping requirements under other market integrity rules.

Read the guidance

If participants have any questions, they should contact their Relationship Manager.

Possible instances of fraud

ASIC's Market and Participant Supervision team has recently been advised that some brokers are being targeted as part of a fraud syndicate.

To date, the fraud has affected Shareholder Reference Number (SRN) sales, with the fraudster allegedly requesting the sales of shares from an SRN. This type of request is made via a broker, with the broker verifying certain details before then selling the stock.

The alleged fraudster has been able to provide personal details (as part of the verification process) such as the client's full name, address, date of birth, the share trading account number, the SRN, the share code and the quantity of shares that are held at the share registry. This may imply that mail has been intercepted at some stage.

The alleged fraudster also supplied certified copies of a driver's licence and passport. The stamp used to certify the documents contains the name of a law firm in South Africa. However, it appears that the stamp may be a fake. After the sale, the funds have been deposited to a bank in Thailand where they are immediately withdrawn.

MPS reminds participants of measures that can be taken to counter such activity, including:

  • making a phone call once the request is received to verify certain details such as the client's middle name and date of birth. The inability to answer these questions correctly and without hesitation may suggest further enquiries should be made; and
  • for international clients that require an account to be opened (not necessarily limited to SRN), a participant may require documents required for the account opening process to be certified at an embassy.

Participants are encouraged to be alert and aware of any activity regarding the sale of shares from an SRN. 

Hybrid securities 

ASIC's Market and Participant Supervision team recently conducted a number of surveillance activities involving the review of promotional material issued by Participants for new issues of hybrid securities.

The review was prompted by ASIC’s Report 365 Hybrid securities (REP 365), which considered hybrid securities in the Australian market since the global financial crisis. REP 365 identified the significant involvement of retail investors in the primary market for hybrid securities. This also included self-managed super funds. The Report also noted that over $20bn has been raised through hybrid issues since November 2011, with three quarters of that amount raised by banks and other financials.

Reviews by ASIC's Market and Participant Supervision team identified that some promotional material did not include a balanced disclosure of features and risk. In some of the samples reviewed, key risks were not given adequate prominence. ASIC encourages participants to apply the principals outlined in Regulatory Guide 234 Advertising financial products and services (including credit): Good practice guidance (RG 234) and to also consider REP 365 when preparing promotional material for hybrid securities.

 

Key points of RG 234

Good practice guidance is relevant to promoters of financial products, financial advice services, credit products and credit services, and publishers of promotions about these products and services

  • Applies to any communication whose purpose is to inform consumers about or promote financial products, financial advice services, credit products or credit services
  • It applies to all types of financial products, including:
    • Investment products
    • Risk products
    • Non-cash payment facilities
    • Credit facilities
  • Good practice guidance applies to:
    • Returns, features, benefits and risks
    • Warnings, disclaimers, qualifications and fine print
    • Fees and costs
    • Comparisons
    • Past performance and forecasts
    • Use of certain terms and phrases
    • Target audience
    • Consistency with disclosure documents
    • Photographs, diagrams, images and examples
    • Nature and scope of financial advice and credit assistance

There were however some positive features in the promotional material reviewed, in particular prominent disclosure of some key risks including the non-viability trigger required by APRA for bank issued hybrid securities. Some of the better promotional material listed also included links to the section on hybrid securities on the MoneySmart website.

Hybrid securities are often very complex and therefore carry a higher risk of being mis-sold to retail investors. While there are relatively simple features such as maturity, they come with more complex features such as potential interest deferral or potential conversion. Like many complex products, hybrid securities test the limits of a disclosure-based regime.

ASIC will continue to monitor the promotional material for hybrid securities as part of its business as usual surveillance of participants.

 

Markets Disciplinary Panel

ASIC recently announced the payment of three penalties by market participants for the purposes of complying with infringement notices issued by the Markets Disciplinary Panel (MDP).

 

Commonwealth Securities Limited

On March 17, ASIC announced that Commonwealth Securities Limited (Commsec) had paid a penalty of $55,000 to comply with an infringement notice given to it by the MDP. The penalty was for conduct which resulted in a market for a security not being both fair and orderly.

By reason of its conduct, the MDP had reasonable grounds to believe that Commsec had contravened MIR 5.9.1(1)(b) of the ASIC Market Integrity Rules (ASX) 2010, and thereby contravened subsection 798H(1) of the Act which requires compliance with the market integrity rules.

The MDP issued Commsec with an infringement notice specifying a penalty of $55,000. Consistent with guidance provided in ASIC Regulatory Guide 216 Markets Disciplinary Panel (RG 216), the MDP took various factors into consideration, including that:

  • MIR 5.9.1 is aimed at promoting confidence in the integrity of the market. Imposing a strict obligation on Market Participants not to do anything which results in a market for a Product not being both fair and orderly, is critical in maintaining the integrity of the market
  • The misconduct had the potential to damage the reputation and integrity of the market, as the entry of the Relevant Order into the ASX Trading Platform caused the price of the security to increase from the last traded price of $0.94 to $10.00, being a 964% increase
  • CommSec took steps to prevent recurrence of the breach by upgrading its Trading System
  • CommSec did not derive any actual or potential benefit from the breach
  • There was one breach of MIR 5.9.1
  • CommSec had two prior contraventions found against it by the MDP for non-compliance with the market integrity rules
  • CommSec co-operated with ASIC throughout its investigation and did not dispute any material facts; and
  • CommSec agreed not to contest the matter, thereby saving time and costs that would otherwise have been expended

For further details of the background of this matter see MDP Circular 2014/03.

 

Instinet Australia Pty Ltd

On March 17, ASIC also announced that Instinet Australia Pty Ltd (Instinet) had paid a penalty of $50,000 to comply with an infringement notice given to it by the MDP. The penalty was for conduct which resulted in a market for a security not being both fair and orderly.

By reason of its conduct, the MDP had reasonable grounds to believe that Instinet had contravened MIR 5.9.1(1)(b) of the ASIC Market Integrity Rules (ASX) 2010, and thereby contravened subsection 798H(1) of the Act which requires compliance with the market integrity rules.

The MDP issued Instinet with an infringement notice specifying a penalty of $50,000. Consistent with guidance provided in RG 216, the MDP took various factors into consideration, including that:

  • MIR 5.9.1 is aimed at promoting confidence in the integrity of the market. Imposing a strict obligation on Market Participants not to do anything which results in a market for a Product not being both fair and orderly, is critical in maintaining the integrity of the market
  • The misconduct had the potential to damage the reputation and integrity of the market, as the entry of the Relevant Order into the ASX Trading Platform at an 'at-market' price, caused the price of the security to decrease from the last traded price of $0.10 to $0.02, being an 80% decrease
  • The misconduct was inadvertent on the part of Instinet as the Instinet DTR failed to properly exercise his functions to the requisite high standard when he entered the Relevant Order back into the ASX Trading Platform (incorrectly keying in the price as 'at-market' instead of at $0.10), instead of moving the Relevant Order to the Client as intended;
  • Instinet did not derive any actual or potential benefit from the breach
  • Instinet took remedial measures to prevent recurrence of the breach
  • Instinet had recently been sanctioned by the MDP regarding a contravention of Rule 5.6.1(a) of the ASIC Market Integrity Rules (ASX Market) 2010 (MDP Infringement Notice No. MDP06/13, dated 8 August 2013). The MDP confirmed its position that repeat contraventions in similar or comparable matters would not be viewed favourably
  • Instinet co-operated with ASIC throughout its investigation and did not dispute any material facts; and
  • Instinet agreed not to contest the matter, thereby saving time and costs that would otherwise have been expended.

For further details of the background of this matter see MDP Circular 2014/04.

 

Hartleys Limited

On March 19, ASIC announced that Hartleys Limited (Hartleys) had paid a penalty of $35,000 to comply with an infringement notice given to it by the MDP. The penalty was for conduct which resulted in a market for a security not being both fair and orderly.

By reason of its conduct, the MDP had reasonable grounds to believe that Hartleys had contravened MIR 5.9.1 of the ASIC Market Integrity Rules (ASX) 2010, and thereby contravened subsection 798H(1) of the Act which requires compliance with the market integrity rules.

The MDP issued Hartleys with an infringement notice specifying a penalty of $35,000. Consistent with guidance provided in RG 216, the MDP took various factors into consideration, including that:

  • MIR 5.9.1 is aimed at promoting confidence in the integrity of the market. Imposing a strict obligation on Market Participants not to do anything which results in a market for a Product not being both fair and orderly, is critical in maintaining the integrity of the market
  • The misconduct had the potential to damage the reputation and integrity of the market, as the entry of the Relevant Order into the ASX Trading Platform caused the price of the security to fall from the last traded price of $0.795 to $0.50, being a 37% decrease
  • The misconduct was inadvertent on the part of Hartleys as the Hartleys DTR failed to properly exercise his functions to the requisite high standard when he did not pay attention and incorrectly keyed in the ASX code as TAM instead of the intended ABU, before submitting the Relevant Order into the ASX Trading Platform
  • Upon becoming aware of the breach following the execution of the Relevant Transactions, Hartleys immediately requested the ASX cancel the Relevant Transactions, however the ASX advised that it would not cancel the Relevant Transactions because they either fell within the No Cancellation Range or did not fall within the Extreme Cancellation Range, as set out in procedure 3200 of the ASX Operating Rules Procedures at the relevant time
  • Hartleys did not derive any actual or potential benefit from the breach
  • Hartleys had no contraventions found against it by the MDP regarding non-compliance with the market integrity rules and only two previous contraventions found against it by the ASX Disciplinary Tribunal since 2010 regarding non-compliance with the ASX Market Rules
  • Hartleys co-operated with ASIC throughout its investigation and did not dispute any material facts; and
  • Hartleys agreed not to contest the matter, thereby saving time and costs that would otherwise have been expended.

For further details of the background of this matter see MDP Circular 2014/05.

 

Important regulatory information

Pursuant to subparagraph 7.2A.15(4)(b)(i) and (ii) of the Corporations Regulations 2001, each of the parties named above have complied with the respective infringement notice.

Such compliance is not an admission of guilt or liability, and none of the parties are 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 at the MDP Infringement Notices Register.

 

Update on review of ASIC’s guidance for managed discretionary accounts

ASIC recently informed industry that it had decided to defer the implementation of the proposed changes to ASIC’s regulatory policy on managed discretionary accounts (MDAs). This is pending the outcome of the Government’s Financial System Inquiry (FSI), and further amendments to the Future of Financial Advice (FoFA) reforms.

In March 2013, ASIC released Consultation Paper 200 Managed discretionary accounts: Update to RG 179 (CP 200) setting out our proposed requirements for MDA operators. Late last year, we announced that we would release our updated guidance and class orders for MDA operators in April 2014, taking into account submissions we received on CP 200.

We now think it is appropriate to assess the implications of the FSI and FOFA amendments on MDA operators, and the financial system more broadly, before we amend the existing regulatory arrangements for MDA operators. In reaching this decision, we are also mindful of the Government’s deregulatory agenda and the current moratorium on any significant financial services regulation.

In principle, we remain committed to considering proposed changes to our policy on MDAs. ASIC’s review of this industry identified areas where we think our guidance and relief should be modified, including in response to concerns raised by industry.

The sunset provisions of the Legislative Instruments Act 2003 (LIA) provide additional impetus for a review of ASIC’s regulatory policy on MDAs. In 2016, in the absence of any intervention by ASIC, the relief in ASIC Class Order [CO 04/194] Managed discretionary accounts will cease to have effect under the Legislative Instruments Act 2003. This would have a substantial impact on industry because MDAs would then be regulated on the same terms as other registered managed investment schemes.

We think it is important to continue to provide regulatory relief for MDAs to make compliance with the regulatory framework in which they operate easier. However, in remaking this class order, it is incumbent on us to review the operation of the class order and address aspects which are not working well or could be improved.

Before updating our regulatory guidance, due consideration will be given to setting appropriate transition periods in order to provide industry with sufficient time to adjust to the changes. We will provide a further update to industry on the status of our review of MDAs in due course. In the meantime, if you have any questions, please contact us at mdareview@asic.gov.au.

The non-confidential submissions to CP 200 can be accessed on the ASIC website at CP 200 submissions.

Last updated: 30/03/2021 09:35