ASIC Market Supervision Update Issue 48

Other issues

Real time short sale tagging rule repealed

ASIC has repealed the short sale tagging obligation in Part 5.12 of the ASIC Market Integrity Rules (ASX Market) 2010 (ASX), ASIC Market Integrity Rules (Chi-X Australia Market) Amendment 2011 (Chi-X) and ASIC Market Integrity Rules (APX Market) 2013.

Consequently, Part 5.12 did not commence on Monday 28th July and market participants are not required to comply with the short sale tagging obligation.

The regulatory landscape has changed markedly since this rule was introduced in 2012. ASIC's FAST programme has resulted in much more sophisticated surveillance capabilities. The commencement, on 28 July 2014, of Chapter 5A of the ASIC Market Integrity Rules (Competition in Exchange Markets) 2011 which requires market participants to provide regulatory data (including the origin of an order or transaction) is also a significant development. As a result of these changes, the additional data provided by short sale tagging is less significant to ASIC and ASIC has considered very carefully the feedback from participants about the complexities of tagging short sales.

Market participants will still be required to provide end of day reporting to a market operator to ensure they comply with the short sale transaction reporting requirements under the Corporations Act and Corporations Regulations without any changes to existing market practice see ASIC Regulatory Guide 196 Short selling.

Financial System Inquiry – Interim Report

On Tuesday 15 July 2014, the Financial System Inquiry (FSI) issued its Interim Report. The Interim Report covers a wide range of issues and raises a number of policy options on which it seeks additional feedback.

The Interim Report includes a brief discussion of securities dealers and technology service providers. ASIC discussed these two issues in its submission to the FSI.

Feedback is invited on the following policy options relating to securities dealers and technology service providers:

  • no change to current arrangements
  • impose AFSL requirements for providers of fund administration and technology service of sufficient scale
  • apply market integrity rules for licensed securities dealers that provide investor services substantially similar to market participants of a licensed financial market, and
  • introduce a mechanism to allow a heightened level of regulatory intensity to be applied where risk arises outside the conduct perimeter.

Submissions to the FSI are requested by Tuesday 26 August 2014.

Crossing system operators

ASIC wishes to remind market participants who operate a crossing system that due to the commencement of regulatory data being delayed until 28 July, the obligation to provide information about the orders received or transactions matched on a crossing system continues until 28 October 2014.

The requirement to provide this information in the Crossing System Monthly Report ceases three months after the regulatory data obligations commence, as described in Regulatory Guide 223 Guidance on ASIC market integrity rules for competition in exchange markets (RG 223) at RG 223.434, with the revised requirement for the Crossing System Monthly Report found under Rule 4A.2.2 of the ASIC Market Integrity Rules (Competition in Exchange Markets) Amendment 2013 (No. 2). Paragraph RG 223.434 has not been updated since the commencement of Regulatory Data was delayed, and incorrectly states that 10 June 2014 is the final date this information is required in the Crossing System Monthly Report. This relevant date will be changed in the next update of RG 223.

Global regulatory scrutiny of dark pools increases

On 25 June 2014, the New York Attorney-General issued a summons to Barclays Capital Inc and Barclays PLC (Barclays) alleging fraud in connection with the marketing and operation of its dark pool. The complaint makes stark reading. In an attempt to become the largest dark pool in the United States, Barclays is alleged to have:

  • falsely represented the liquidity profile of counterparties within the dark pool
  • falsified analysis showing the extent of high frequency trading in its dark pool
  • falsely represented to clients that its dark pool offered protection from aggressive or predatory high frequency traders, and
  • falsely represented the manner in which it routes client orders.

Similar conduct is not expected in the Australian market owing partly to the existing regulatory framework, which has been enhanced to address potential issues with dark liquidity. For example, in Australia, clients using crossing systems (including dark pools) must be provided with price improvement as well as best execution.

During 2013, ASIC undertook a proactive and detailed review of dark liquidity and high-frequency trading in Australia. The outcomes from the dark liquidity and high-frequency trading taskforces are explained in detail on the ASIC website.

ASIC also introduced new market integrity rules that require a market participant operating a crossing system to:

  • make certain notifications to ASIC and users of the crossing system, and make information about the operation of the crossing system publicly available on a website
  • provide fair treatment to all users of a crossing system
  • monitor activity on the crossing system, report significant breaches of its user obligations and operating procedures to ASIC, and report suspicious activity to ASIC
  • use standard tick sizes for trading in equity market products, and
  • have controls to ensure the efficiency and integrity of the crossing system.

Over the next year ASIC will be reviewing some broker dark pools with a focus on the implementation of the new rules.

Capital reporting obligations

ASX market participants and ASX 24 trading participants (participants) must comply with their capital requirements at all times. Among other things, this means that when considering engaging in trading transactions, they must ensure that the transactions do not affect their ability to comply with their ongoing capital obligations.

Participants are reminded of their annual reporting obligations under Rule 9.2.4 of the ASIC Market Integrity Rules (ASX Market - Capital) 2014 and Rule 6.2.1(2)(a) of the ASIC Market Integrity Rules (ASX 24 Market - Capital) 2014. The time frame for reporting to ASIC for both ASX and ASX 24 participants is within three months following the end of the participant's financial year. However if an ASX participant is a partnership, it is required to report within two months following end of its financial year.

Non-clearing participants have no capital reporting obligations to ASX and their use of ASX’s Return Lodgement Monitoring system is purely to facilitate the lodgement of their returns to ASIC.

Rule 2.3.5 of the ASIC Market Integrity Rules (ASX 24 Market) 2010 (ASX 24) provides that where a participant holds client monies on the ASX 24 market, it must give ASIC an annual declaration for clients' funds within 3 months of the end of the financial year of the participant. This can be done using our dedicated market participant email address: market.participants@asic.gov.au.

Background

Although the ASX Market – Capital and ASX 24 Market – Capital rules commenced on 26 May 2013, the substance of the capital requirements is the same as was previously included in the ASIC Market Integrity Rules (ASX ) and ASIC Market Integrity Rules (ASX 24).

Rules for Responsible Executives

Responsible Entities (REs) play an important role in the supervision and monitoring of financial services businesses. ASIC encourages participants to be mindful of the contribution made by REs, as well as their obligations under the relevant ASIC Market Integrity Rules.

Part 2.3 of the ASIC Market Integrity Rules (ASX) and ASIC Market Integrity Rules (Chi-X Australia Market) 2011 (Chi-X) sets out participants' obligations regarding the appointment and competency of REs. Breaches of Part 2.3 can be referred to the Markets Disciplinary Panel for consideration. The maximum penalty for a breach of Part 2.3 is $20,000. In addition, a breach of Part 2.3 may also breach section 798H of the Corporations Act 2001, which requires participants to comply with the ASIC Market Integrity Rules.

ASIC has observed a growing tendency among financial services business to outsource certain functions to external parties, for example IT systems and support, education and training and recruitment. While participants and REs are permitted to delegate some tasks, they are not able to delegate responsibility for the obligations in Part 2.3. This means that REs and participants are ultimately responsible for any deficiencies in monitoring and supervision.

ASIC encourages all participants to familiarise themselves with the rules relating to REs and how these apply to their businesses. Additional resources, such as the regulatory guides, are also available on the ASIC website to help participants understand and meet their obligations.

  • Regulatory Guide 214 Guidance on ASIC market integrity rules for ASX and ASX 24 market - Paragraphs RG 214.76 and RG 214.4–RG 214.114.
  • Read RG 214
  • Regulatory Guide 224 Guidance on ASIC market integrity rules for Chi-X and APX markets - Paragraphs RG 224.31 and RG 224.47–RG 224.53.
  • Read RG 224
  • Regulatory Guide 216 Markets Disciplinary Panel and Regulatory Guide 225 Markets Disciplinary Panel practices and procedures.
  • Read RG 216
  • Read RG 225
  • Regulatory guide 78 Breach reporting by AFS licensees
  • Read RG 78

Further resources are also provided by the ASX under Guidance Note No. 27.

Newcrest ordered to pay $1.2 million

Earlier this month, the Federal Court imposed a $1.2 million penalty on Newcrest Mining Limited (Newcrest) for contravening its continuous disclosure obligations.

ASIC issued proceedings against Newcrest on 18 June 2014 alleging that, in a series of briefings to analysts, Newcrest disclosed information regarding Newcrest's expected gold production and capital expenditure for the 2013–14 financial year. Newcrest admitted the contraventions and the parties filed a joint application for the imposition of civil penalties.

In handing down his judgment, the Hon Justice Middleton said, ‘the penalties are such to send a strong message to market participants to be mindful of the care and caution needed when interacting with analysts. These penalties also reinforce the message that equal access to market sensitive information is paramount in ensuring that markets operate on an informed, and equally informed, basis.’

Background

ASIC has been undertaking an ongoing program of work aimed and identifying and correcting deficiencies in the treatment of confidential information by listed companies. This work aligns with ASIC's strategic priority of promoting fair and efficient markets.

In May 2014, ASIC released a report on the handling of confidential information: see 14-114MR. We are currently monitoring analyst rating changes to identify whether selective briefings are occurring ahead of market-sensitive announcements by listed companies and will be looking at how research analysts are supervised. Where we identify inappropriate disclosures, we will take enforcement action.

Retail FOREX trading

Over the past two years, ASIC has seen an increase in the number of entities applying for an Australian financial services (AFS) licence authorising the applicant to operate a retail foreign exchange (FOREX) trading business. ASIC has and continues to conduct surveillance of this industry and currently has several investigations into FOREX trading businesses underway.

In June 2014, ASIC refused to grant an AFS licence to a company which sought to deal in retail FOREX contracts and derivatives because ASIC was concerned that the applicant had provided ASIC with false or misleading information and did not have adequate risk management, compliance and supervision arrangements in place.

In July 2014, in a separate matter, ASIC commenced action in the NSW Supreme Court to stop Vault Market Pty Ltd and its sole director, Mr MD Anamul Amin, from carrying on a financial services business without an AFS licence and to close down a website with the domain name www.kiwifxbank.com (KiwiFx Bank). ASIC had received complaints that users of the FOREX trading service had not received profits which they generated from trading with KiwiFX Bank. This matter will return to the NSW Supreme Court on Monday 25 August 2014.

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