ASIC Market Supervision Update Issue 49
Warning about identity fraud on client accounts
ASIC would like to remind market participants of the need to remain vigilant regarding instructions received from clients.
It has come to our attention that there have been instances of identity fraud on client accounts. The conduct in question often involves the impersonation of a client by mimicking the client's email address or establishing an email address which is markedly similar to that of an existing client. After establishing email contact with a broker, the fraudster then issues instructions to liquidate the client's positions and distribute the proceeds to alternative bank accounts (including third party accounts).
In one recent incident, we became aware of potentially fraudulent conduct when a number of alerts were generated by ASIC's Market Intelligence and Analysis surveillance system, in response to price and volume anomalies. This prompted our market surveillance analyst to examine the share trading more closely, which revealed a pattern of unprofitable trading. We contacted the participant involved and were advised that an account intrusion had in fact occurred.
Participants should pay particular attention to client accounts which appear to be trading unprofitably and should take action to verify the origin of such orders. Likewise, they should examine the source of failed log-in attempts. Complaints from clients about unusual trading on their accounts may also be indicative of an account intrusion and should be investigated.
We are also aware of further instances where brokers are being targeted as part of a fraud syndicate involving individuals in South Africa. It appears that mail has been intercepted by fraudsters in South Africa and details such as the client's full name, address, date of birth and share trade account information is stolen. The fraudsters then supply relevant information to Australian brokers, including certified copies of passports and drivers' licences, to effect share sales. The legitimate clients' securities have then been sold without their approval or knowledge.
Brokers should be careful when dealing with requests for share sales involving clients based in South Africa. Precautions which may reduce the likelihood of this type of fraud occurring with South African-based clients include:
- ceasing SRN trades for international clients
- calling the client once a request is received to verify certain details such as the client's middle name and date of birth (a fraudster may not necessarily have these details in front of them and may not be able to respond to these questions straight away), and
- for international clients that require an account to be opened, requesting the documents for the account opening process be certified at an embassy.
Participants should encourage all clients to change their account passwords regularly. Any participant who believes they have been affected by this issue should notify their ASIC relationship manager or firstname.lastname@example.org.
ASIC is closely monitoring this situation and communicating with affected participants.
Reporting cyber-security issues to CERT
The computer emergency response team (CERT) is a government agency which provides a single point of contact for cyber security issues affecting major Australian businesses. CERT provides free advice and support on cyber threats and cyber vulnerabilities to owners and operators of Australia's critical infrastructure and other systems of interest.
Major market participants are encouraged to partner with CERT before an incident occurs. We also recommend that they report cyber security incidents to CERT. CERT is part of the Federal Attorney-General’s Department. All information provided to CERT is held in the strictest confidence.
CERT can be contacted via email (email@example.com) or on a hotline: 1300 172 499.
Capital restructures and recapitalisations
In light of a number of recent capital restructures which have impacted individual share price volatility, ASIC would like to remind market participants to be vigilant about capital restructures and recapitalisations, and to satisfy themselves that client holdings are accurate and up to date.
Market participants should be aware of their settlement obligations, in order to safeguard against the sale of securities no longer owned by their clients resulting from restructured security holdings.
ASIC will continue to liaise with market participants and the ASX, and monitor the market when capital restructures and recapitalisations occur, to ensure relevant obligations under the Corporations Act and ASIC market integrity rules are complied with.
Suspicious activity reporting
ASIC has conducted proactive surveillance reviews across a number of participants regarding the monitoring of trades and suspicious activity reporting (SAR).
The reviews included consideration of the participant's obligations under the ASIC Market Integrity Rules (ASX Market) 2010 (ASX) and ASIC Market Integrity Rules (Chi-X Australia Market) 2011 (Chi-X) regarding fair and orderly markets, manipulative trading and SAR.
Our reviews of trade monitoring revealed that some participants retained only limited documentary evidence of monitoring activity, did not have detailed policies and procedures in place and had limited involvement by a Responsible Executive. In response to these reviews, some participants have implemented automated post-trade monitoring systems, increased compliance and risk resourcing, conducted client educational activities and made amendments to their policies and procedures.
Our reviews of SAR identified that some participants did not have detailed policies and procedures regarding suspicious activity reporting. A participant should have a clear, well-understood and documented process for complying with its obligations under Rule 5.11.1 of the ASIC Market Integrity Rules (ASX and Chi-X), including:
- identifying potential reportable matters
- escalating matters to appropriate compliance staff
- determining that there is in fact a reportable matter, and
- notifying ASIC in writing.
Further information is available from the ASIC website; see Regulatory Guide 238 Suspicious activity reporting (RG 238).
ASIC will continue to review the monitoring of trades and suspicious activity reporting as part of its business as usual surveillance of participants.
Benefits of enhanced regulatory data
As part of ASIC's market surveillance activity, we conducted a review into the trading activity of a stock recently listed on the ASX. The review focused on trading activities carried out by the lead managers and co-lead managers in the stock in its first few days of trading. In particular, we considered the mix of principal versus agency trading and whether this raised any regulatory concerns. In this instance, we were able to conduct the review without requesting information from participants, which would not have been possible prior to the introduction of enhanced regulatory data (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 a market operator with the regulatory data set out in Rule 5A.2.3. Among other things, the enhanced regulatory data ASIC receives from the ASX and Chi-X has a flag to differentiate whether a participant was acted as a principal or an agent in trade.
This example demonstrates how enhanced regulatory data has increased ASIC's ability to monitor the markets, while at the same time relieving ASIC and participants from the work associated with issuing and responding to statutory notices for information in similar cases. Although this process assisted in dealing with the enquiry in this instance, ASIC will may still need to obtain detailed records from participants under notice in some cases.
In summary, additional information contained in enhanced regulatory data includes:
- execution venue
- capacity of participant
- origin of order or transactions
- intermediary ID, and
- directed wholesale indicator.
Additional guidance is available in our Market Integrity Rules FAQ about regulatory data requirements.
Market supervision report
ASIC has published its eighth report on the supervision and surveillance of Australian financial markets and market participants. Report 405 ASIC supervision of markets and participants: January to June 2014 (REP 405) outlines some of the work ASIC does to ensure the integrity of our markets, including:
- 15 significant enforcement outcomes
- 8 infringement notices issued by the Markets Disciplinary Panel
- 21 matters referred for further investigation
- 17,091 trading alerts
- 122 market enquiries
- 35 risk-based assessment visits
- 55 participant compliance reviews, and
- 17 industry presentations.
The report describes ASIC's efforts to achieve positive behavioural change to prevent potential breaches of the Corporations Act or ASIC market integrity rules and the techniques it uses to pursue this objective.
The report also highlights the $1.2 million penalty imposed by the Federal Court on Newcrest Mining Limited for contravening its continuous disclosure obligations. This is the highest civil penalty ever awarded in Australia for a continuous disclosure matter. This outcome serves as a reminder to all listed entities of the importance of appropriate handling of market-sensitive information.
ASIC consults on red tape reduction proposals
ASIC has identified three categories of obligations under the ASIC market integrity rules which could be repealed or refined to reduce the compliance burden on market participants.
Consultation paper 222 Reducing red tape: Proposed amendments to the market integrity rules (CP 222) sets out ASIC's proposals to remove or refine market integrity rules that:
- require certain market participants to notify ASIC of the details of their professional indemnity insurance cover (the obligation to retain professional indemnity insurance cover will remain)
- require certain market participants to obtain ASIC’s consent before sharing business connections, and
- prohibit certain transactions during takeovers, schemes of arrangement and buy-backs.
These rules apply (variously) across the ASX, Chi-X, APX, NSXA and SIM VSE markets.
The deadline for submission to CP 222 is 2 October 2014.
ASIC consults on revisions to OTC rules
ASIC recently published a consultation paper seeking feedback on proposed revisions to the rules that require the mandatory trade reporting of over-the-counter (OTC) derivatives such as interest rate swaps.
Consultation Paper 221 OTC derivatives reform: Proposed amendments to the ASIC Derivative Transaction Rules (Reporting) 2013 (CP 221) proposes changes governing the reporting of OTC derivative transactions to derivative trade repositories. The changes proposed are:
- a number of technical changes to the rules, designed to make the reporting regime more effective and easier to comply with
- clarifying the rules around delegated reporting to provide a 'safe harbour' from liability if certain conditions are met, and
- requiring certain larger overseas subsidiaries of Australian financial entities to report transactions.
CP 221 was published on 25 July 2014 and submissions are due by 29 August 2014.
Additional information about OTC transaction reporting and trade repositories is available on the ASIC website.
ASX Assessment report
In July, ASIC released its most recent assessment report of the ASX Group (ASX) licensees: Report 401 Market assessment report: ASX Group (REP 401). The report sets out a number of agreed actions that focus on the ongoing improvement of the operation of ASX Group’s facilities. While important, these issues did not cause ASIC to qualify the conclusion that ASX adequately met its obligations for the assessment period.
ASIC may conduct assessments of market licensees, including ASX, under s794C of the Corporations Act. The scope of our assessment can include any or all of the statutory obligations of a market licensee, for example, the obligation under s792A(c), which requires the market licensee to have adequate arrangements for operating the market, including arrangements to manage conflicts of interest and monitor and enforce compliance with the operating rules.
Equity markets data
ASIC has published equity market data for the quarter ending 31 March 2014.
Over the June quarter 2014, the ASX accounted for 83.7% of the total dollar turnover in equity market products. Chi-X accounted for the remaining 16.3% of total dollar turnover. These figures include all trades executed on order book, as well as trades matched off order book and reported to either market operator.
Overall daily turnover in the equity market averaged $4.6 billion over the quarter. The average trade size remained at $5,300. The weighted average quoted bid-ask spread for securities in the ASX200 index increased marginally to 14.5 basis points of the midpoint price. The weighted average quoted bid-ask spread for all securities remained around 21.0 basis points of the midpoint price. Quarterly average intraday and interday volatility was lower in the quarter.
The overall order-to-trade ratio declined to 7.7:1 in the quarter. Decreasing order activity on Chi-X contributed to a fall in its order-to-trade ratio, while ASX’s ratio was down slightly as the number of orders fell more than trades.
Below block size dark liquidity represented 12% of total value traded in the June quarter, up slightly from the previous quarter, and slightly below its share of the market a year prior (13%). Turnover in block size dark liquidity was just below 16% of total value traded, slightly up from the previous quarter (15%).
Sydney man charged with insider trading
On 12 August 2014, a 31-year old Sydney man appeared before court charged with eight counts of insider trading, following an ASIC investigation.
ASIC alleged that Mr Fei Yu procured the acquisition of securities and aided and abetted the acquisition of contracts for difference in Veda Advantage Limited (Veda) in January 2007, while he possessed inside information about a proposed takeover of Veda by Pacific Equity Partners.
Mr Yu allegedly received the information from close friend, Mr Bo Shi Zhu, who was an executive in the corporate finance advisory division of Caliburn Partnership Pty Ltd (now Greenhill & Co, Inc) who were advising Veda regarding the proposed takeover. Mr Yu allegedly made more than $20,000 from the trades.
Appearing before Sydney’s Downing Centre Local Court, Mr Yu was not required to enter a plea and the matter was adjourned to 7 October 2014.
[Content withdrawn in accordance with ASIC policy - see INFO 152 Public comment on ASIC's regulatory activities]
Markets Disciplinary Panel
Credit Suisse AG (Credit Suisse) has paid a penalty of $88,400 to comply with an infringement notice given to it by the Markets Disciplinary Panel (MDP). The penalty was for:
- offering and allocating an Error Trade to a Client in circumstances where that Trade had not been obtained under instructions previously obtained from that Client;
- acting in a manner which had a detrimental effect on that Client's best interests, and
- failing to maintain a separate record of the Error Trade.
Credit Suisse is alleged to have contravened section 798H(1) of the Corporations Act 2001 (Corporations Act) by reason of contravening Rules 3.1.17(1), 3.1.13(1)(b) and 2.2.4(3) of the ASIC Market Integrity Rules (ASX 24 Market) 2010.
In determining this matter and the appropriate pecuniary penalty to be applied, the MDP noted (among other factors):
- Rule 3.1.17(1) imposes a mandatory obligation and is directed at ensuring that Market Participants treat Clients fairly, by not seeking to use Client Accounts to avoid a financial detriment or gain a financial benefit
- Rule 3.1.13(1)(b) also imposes a mandatory obligation and is similarly directed at ensuring that Market Participants treat Clients fairly, by acting in a manner not detrimental to the Client's best interests
- These two rules are fundamental to ensuring the fairness of the market and to promoting confidence in the integrity of the Market. The failure to comply with either of these rules risks undermining market integrity because it poses a risk to public confidence in the Market, and
- Rule 2.2.4(3) imposes a mandatory obligation and is directed at ensuring that Market Participants maintain audit trails, allowing Error Trades to be tracked and action to be taken with respect to those Trades in the maintenance of market integrity.
Important regulatory information
Pursuant to subparagraph 7.2A.15(4)(b)(i) and (ii) of the Corporations Regulations 2001, Credit Suisse 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 the 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 (MPS) team on 1300 029 454 and you will have these voice menu options:
- Option 1 for real-time live market trading issues
- Option 2 for other types of market trading issues or complaints
- Option 3 for participant enquiries, notifications or exemptions.
Or you can reach the MPS team by email firstname.lastname@example.org, or through your relationship manager. If your issue relates to a trading or surveillance matter, please email email@example.com.
For more information
Please see www.asic.gov.au/market-supervision.