ASIC Market Supervision Update Issue 47

Other issues

Market supervision cost recovery – refunds

Since the transfer of market supervision to ASIC on 1 August 2010, ASIC's new responsibilities have been funded by the Government subject to cost recovery from industry. ASIC's cost recovery budget for market supervision over the previous 18 month Cost Recovery Impact Statement (2012-2013 CRIS) period 1 January 2012 to 30 June 2013 was $29.77 million. The actual amount collected was $29.71 million. However, our expenditure was lower and these savings will be refunded to market operators and participants.

These cost savings are due to:

  • lower than anticipated costs for disciplinary action for alleged breaches of the market integrity rules in part due to a low rate of contested matters. ASIC acknowledges the generally positive and co-operative approach that industry has demonstrated in its dealings with us on disciplinary matters
  • other supplier cost savings, and
  • lower than expected overheads incurred for market supervision cost recovery.

ASIC estimated the cost of supervising the market over the 2012-2013 CRIS period several months in advance of the period commencing. Over the 2012-2013 CRIS period, ASIC did not expend the full cost recovery budget and therefore refunds are due to a majority of entities who paid market supervision fees during this period.

Based on incurred cost savings to revenue collected over the 2012-2013 CRIS period, a total of $2.72 million is being refunded to 84 market participants. Refund amounts have been determined using the same method that ASIC used when charging the fees, i.e. according to participants' share of trade and message count. The average of all refunds is approximately $33,900 and the median is just under $3,350.

ASIC recently sent electronic copies of Refund Statements to all firms due to receive a refund. These statements show the amount of the firm's refund and how the refund was calculated. Hard copy Refund Statements and refund cheques will be posted to market participants on or before 30 June 2014.

If you have any questions about this topic please call Helene Fogarty (ASIC Market Supervision Cost Recovery) on (02) 9911 2190.

Suspicious activity reporting

Under Rule 5.11.1 of the ASIC Market Integrity Rules (ASX Market) 2010 (ASX) and ASIC Market Integrity Rules (Chi-X Australia Market) 2011 (Chi-X), 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 107 SAR reports from 25 market participants. Of these reports, one market participant was responsible for almost 19% of the total. Five 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. Approximately 14% 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 1 January 2014 to 15 June 2014. ASIC would like to remind all market participants of their obligations under Rule 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.

Real time short sale tagging rule

In the May MSU, ASIC announced its intention to grant a class waiver to relieve market participants from the obligation to comply with Rule 5.12.1 (ASX and Chi-X) relating to real time short sale tagging. ASIC has continued to discuss the proposed waiver with participants, market operators and industry bodies.

Following consideration of further issues raised during those discussions, ASIC has decided to seek the Minister's consent to repeal Rule 5.12.1. If the Minister grants consent, the current short sale transaction reporting regime will remain unchanged and will continue to satisfy the relevant obligations under the Corporations Act 2001.

Since Rule 5.12.1 was made on 12 July 2012, current and forthcoming developments have and will continue to enhance ASIC's ability to monitor the level of selling activity in the market, including in times of market volatility. These developments include the introduction of a new market surveillance system (MAI) and the commencement, on 28 July 2014, of Chapter 5A of the ASIC Market Integrity Rules (Competition in Exchange Markets) 2011 which require market participants to provide regulatory data, including the origin of an order or transaction.

As a result, we consider that ASIC is in a substantially better position to monitor selling activity, even without the obligation to provide real time short sale tagging. However, we may consider re-introducing Rule 5.12.1 in the future after further appropriate consultation.

If the Minister consents to ASIC's proposal, no changes to existing market practice are required. Any real time short sale tagging would continue to be optional but cannot be relied upon instead of the current short sale transaction reporting regime. If you have any queries, please contact your relationship manager or market.participants@asic.gov .au.

Regulatory data

ASIC would like to remind market participants that the regulatory data obligations under Rule 5A.2.3 of the ASIC Market Integrity Rules (Competition in Exchange Markets) 2011 become effective on 28 July 2014. Further information is available from on the ASIC website, see:

  • Regulatory data FAQs and
  • Regulatory Guide 223 Guidance on ASIC market integrity rules for competition in exchange markets (RG 223)

Continuing education and compliance self-assessment for Responsible Executives

Market participants are reminded that by 31 July, they must provide written notification to ASIC that contains the information prescribed in Rule 2.3.5 (ASX and Chi-X) and Rule 2.3.5 of the ASIC Market Integrity Rules (APX Market) 2013 (APX), as part of the annual continuing education and compliance self-assessment for Responsible Executives.

Market participants should ensure that by 10 July 2014, each of their Responsible Executives conduct an annual review (as at 30 June 2014) and provide a representation to the market participant that their obligations under Rule 2.3.3 (ASX, Chi-X and APX), (as applicable), have been met.

To assist with the notification process, ASIC has provided a form which participants may access: Notification - Annual continuing education and compliance self-assessment.

Notifications should be provided to market.participants@asic.gov.au.

Erroneous entries which affect the market

We are concerned about the ongoing incidence of erroneous entries of orders which affect the market. Inadvertent human error by a designated trade representative (DTR) is often blamed for these 'fat finger' errors. We wish to advise market participants that we have little tolerance for this excuse.

Rule 5.9.1 (ASX and Chi-X) provides 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. Rule 5.9.1 is aimed at promoting confidence in the integrity of the market.

The maximum penalty that a Court could order for contravening Rule 5.9.1 is $1,000,000. The maximum penalty payable under an infringement notice issued by the Markets Disciplinary Panel (MDP) for an alleged contravention of Rule 5.9.1 is $600,000.

Rule 5.9.1 (ASX) alleged breaches represent 41% of all matters referred to the MDP for determination. Not all of these relate to the erroneous entry of orders, however, these errors continue to be over-represented, including in matters currently being investigated by ASIC's Enforcement team. These errors have the potential to damage the integrity and reputation of the market.

An important aspect of the role of a DTR is to pay proper attention and diligence to prevent the entry of orders into the trading platform that could result in a market that is not both fair and orderly. It is incumbent on market participants to ensure their DTRs are suitably qualified and experienced to deal in the relevant financial products and have demonstrated knowledge of the relevant dealing rules and practices. ASIC expects market participants to consider implementing systems limits and privileges if they consider this necessary to meet their obligations under Rule 5.9.1.

Cost savings for relief applications

ASIC would like to request that individuals who submit relief applications to us include an estimate of the cost savings that the grant of relief will provide your business.

As part of our objective of facilitating business transactions, ASIC is collecting information on cost savings for all applications that ASIC receives. This information will assist ASIC to substantiate, by way of a tangible figure, the extent to which it assists the business community to do business in Australia.

The information that we require is the estimated costs savings (in dollar values) that you believe will be saved in obtaining relief from complying with the various provisions of the Corporations Act. The estimate should be based on the assumption that your application is successful and relief is granted. We do not require any explanation of the cost savings or what other action you would have to take if the relief is not forthcoming.

The estimated costs that you provide us will not be released externally or attributed to a particular matter or source. We look forward to receiving this data from you to assist us to finalise your application.

Recent orders obtained by ASIC

Sino Australia Oil & Gas

In June 2014, the Federal Court of Australia, upon an application by ASIC, made orders under section 1323 of the Corporations Act 2001 extending an injunction restraining Sino Australia Oil & Gas Ltd (SAO), an ASX-listed entity, from transferring company funds from two accounts it holds with HSBC Bank Australia Limited (HSBC). SAO is the Australian holding company of a Chinese operating company providing specialised drilling services to the oil and gas industry.

ASIC initially obtained an injunction on an urgent basis on 13 March 2014 following concerns that SAO was about to transfer $7.5 million – representing almost the entire cash held by SAO in Australia – to bank accounts in China for purposes that were not disclosed, or not properly disclosed, in SAO’s prospectus documentation during an initial public offering that occurred in late 2013. That injunction was extended by further orders made by consent on 18 March 2014, 8 April 2014 and 23 May 2014 against SAO, HSBC, Mr Tianpeng Shao (SAO chairman and executive director) and Mr Ruiyu He (SAO non-executive director).

In May 2014, ASIC’s investigation expanded into other concerns, including a concern that SAO’s recorded net profit for the period to 31 December 2013 was approximately 40% less than that forecast in its prospectus documentation (including a third supplementary prospectus that had been issued by SAO on 25 October 2013).

Following a contested hearing on 29 May 2014, Justice Davies ordered the extension of the injunction until 4 pm on 28 August 2014 with a further hearing set down at 9.30 am on 25 August 2014. In making the orders Justice Davies said that it was necessary or desirable to extend the injunction in order to protect the interests of the investors and for the preservation of SAO’s assets in Australia.

For further details read 14-121MR.

Markets Disciplinary Panel

On 10 June 2014, ASIC announced the payment of the following penalty by a market participant for an infringement notice issued by the Markets Disciplinary Panel (MDP).

Merrill Lynch Equities (Australia) Limited (Merrill Lynch)

Merrill Lynch has paid a penalty of $65,000 to comply with an infringement notice given to it by the MDP. The penalty was for failing to prevent the entry into the ASX Trading Platform of an erroneous order which resulted in a market for RIO Tinto Limited ordinary shares not being both fair and orderly.

Merrill Lynch is alleged to have contravened section 798H(1) of the Corporations Act 2001 (Corporations Act) by reason of contravening Rule 5.9.1 (ASX). Rule 5.9.1 provides 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.'

By reason of its conduct, the MDP had reasonable grounds to believe that Merrill Lynch contravened Rule 5.9.1 and thereby contravened section 798H(1) of the Corporations Act which requires compliance with the market integrity rules.

In determining this matter and the appropriate pecuniary penalty to be applied, the MDP took into account all relevant guidance and noted in particular the following:

  • Rule 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 cause widespread detriment, impact public confidence, and damage the reputation and integrity of the market, as the entry of the Relevant Order into the ASX Trading Platform caused the price of RIO to decrease from the last traded price of $71.42 to $1.43, being a $69.99 or 98% decrease in the price of RIO. In this regard, the MDP noted the market prominence of RIO, not only within the ASX Market, but also other secondary markets;
  • The misconduct was inadvertent on the part of Merrill Lynch as the Merrill Lynch DTR failed to properly exercise his functions to the requisite high standard when he incorrectly transposed price and volume, before submitting the Relevant Order into the ASX Trading Platform;
  • In this matter the Merrill Lynch DTR, after keying the Relevant Order into an ASX Trader Workstation did not receive any price variation warning messages or alerts prior to the Relevant Order being submitted into the ASX Trading Platform. Notwithstanding this, the MDP reiterated that an important aspect of the role of the DTR is to pay proper attention and diligence to prevent the entry of Orders into the Trading Platform that could result in a market that is not both fair and orderly. This is a critical measure in maintaining the integrity of a market;
  • Merrill Lynch did not derive any actual or potential benefit from the breach, although the breach had the potential to cause detriment to counterparties whose transactions were cancelled;
  • The breach was isolated;
  • Merrill Lynch promptly identified the error and took action to remedy the breach, including following ASX Operating Rules Procedures to cancel the Relevant Transactions. As a result, the 162 Relevant Transactions were cancelled pursuant to ASX direction;
  • Merrill Lynch took the following remedial measures to prevent recurrence of the breach:
    • stopped trading in stock/option TMCs until a review of the controls in place was undertaken;
    • undertook a review of the controls available on the ASX Trading Platform and other possible controls in relation to TMCs;
    • following the above review, an enhanced procedure for the placement of stock/option TMCs was implemented, requiring an additional level of oversight and approval;
    • provided training on the general market integrity rule obligations and specifically on the newly implemented procedure to all staff involved in the placement of TMCs; and
    • actively engaged with ASX in relation to enhancements to filter capabilities in relation to the placement of TMCs;
  • Merrill Lynch had one prior contravention found against it by the MDP for non-compliance with the market integrity rules;
  • Merrill Lynch had 10 disciplinary sanctions recorded against it by the ASX Disciplinary Tribunal since 2005. This included Merrill Lynch having previously been sanctioned by the ASX Disciplinary Tribunal regarding the predecessor rule to MIR 5.9.1 in ASX Circulars 446/10 – dated 9 December 2010 and 117/10 – dated 6 April 2010;
  • The MDP had regard to Merrill Lynch’s compliance history and noted that notwithstanding the inadvertent human error in this matter, it could not overlook that this followed a series of compliance failures. The MDP also noted its previous comments in MDP Infringement Notice No. MDP07/13 – dated 22 October 2013, ‘... that, repeat contraventions in similar or comparable matters will not be viewed favourably’;
  • Merrill Lynch co-operated with ASIC throughout its investigation and did not dispute any material facts; and
  • Merrill Lynch 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, the above-named party has complied with the respective infringement notice. Such compliance is not an admission of guilt or liability, and the party is 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 on ourMDP Infringement Notices Register.

View the MDP Infringement Notices Register

Contact ASIC

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 market.participants@asic.gov.au, or through your relationship manager.

For more information

Please see www.asic.gov.au/market-supervision.

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Last updated: 30/03/2021 09:35