ASIC Market Supervision Update Issue 50
Retail client adviser accreditation renewals
Rule 2.4.13 of the ASIC Market Integrity Rules (ASX Market) 2010 (ASX) requires market participants to ensure their representatives who provide advice to retail clients in relation to options, futures or warrants hold the relevant accreditation. Existing retail client adviser accreditations are due to expire on 28 November 2014, unless accreditation is renewed.
If this rule applies to your firm, you should submit an application to renew the accreditation of your advisers within the renewal period. The renewal period commences on 29 September 2014 and ends on 21 November 2014. Any accredited adviser you do not list in the application for renewal during this period will cease to be an accredited adviser as of 28 November 2014.
If we are satisfied that your application meets the requirements in Rule 2.4.13, we will renew the accreditation for the nominated advisers and send you a ‘Notice of Renewal of Accreditation’ for each accredited adviser.
Accredited advisers will not be required to sit examinations as part of the renewal process. However, we would like to remind you of your obligation to ensure that your representatives are adequately trained and competent under section 912A(1)(f) of the Corporations Act 2001 (Corporations Act). Chapter F of Regulatory Guide 146 Licensing: Training of financial product advisers (RG 146) provides guidance in relation to the ongoing training of advisers.
Over the course of the next week, your relationship manager will send you an email with guidance on how the renewal process will work, including documents you will be required to complete. If you have any questions, please contact your relationship manager.
Confirmations - clients other than retail clients: Rule 3.4.3(1)(b)
The obligation to comply with Rule 3.4.3(1)(b) of the ASIC Market Integrity Rules (ASX) and ASIC Market Integrity Rules (Chi-X Australia Market) 2011 commences on 28 October 2014.
Rule 3.4.3 provides an exception to the general obligation in Rule 3.4.1(1) to provide confirmations to clients. The exception applies to transactions entered into on behalf of non-retail clients. Under the amendments to Rule 3.4.3, in order to qualify for the exception, a market participant of the ASX or Chi-X market must notify a non-retail client if the market participant enters into that client’s market transaction as principal and (if the client’s market transaction was entered into as a crossing), the execution venue for the crossing.
This obligation was first introduced by an amendment to the ASIC Market Integrity Rules on 5 August 2013. Participants were initially given 9 months to make the necessary changes to their systems. This period was subsequently extended.
ASIC is committed to the introduction of this important disclosure requirement. It does not intend to further delay the commencement of this obligation.
We will consider applications for relief from Rule 3.4.3 on a case by case basis. As part of our determination of any relief application, ASIC will consider the efforts made by the applicant since 5 August 2013 to comply with this obligation. Relief is likely to be conditional and in particular may include a condition to facilitate the provision of information to clients during the relief period. Any relief granted is likely to apply for a limited period only.
Following the consideration of further questions from participants, ASIC’s ‘Frequently Asked Question’ on the operation of this obligation has been supplemented. The revisions to the FAQ are not substantive.
Are you ready to start reporting on OTC equity derivatives in 2015?
The OTC derivatives trade reporting requirement
A key part of ASIC’s OTC derivatives reform program is the requirement that OTC derivative transactions be reported to trade repositories. This information will be accessed by regulators such as ASIC, RBA and APRA for the purposes of their various regulatory mandates. In the case of ASIC, the information will support our market oversight function.
The requirement to report OTC derivatives transactions applies to authorised deposit-taking institutions, AFSL holders, and also foreign financial services providers that are exempt from holding an AFSL, and clearing and settlement facilities. Products required to be reported include OTC equity derivatives, OTC interest rate derivatives and a number of other OTC product classes.
The requirement to report started on 1 October 2013 for the largest reporting entities (Phase 1 Reporting Entities) and on 1 April 2014 for reporting entities holding $50 billion or more in gross notional outstanding across all OTC asset classes as at end 2013 (Phase 2 Reporting Entities).
Start dates for smaller entities and licensing of Australia’s first trade repository
On 15 September 2014, ASIC granted an Australian derivative trade repository licence to DTCC Data Repository (Singapore) Pte Ltd (DDRS). The licensing of DDRS as the first licensed trade repository means the start dates of trade reporting for so-called ‘Phase 3 reporting entities’ under the ASIC reporting framework has now been finalised.
The trade reporting obligation will commence for large Phase 3 reporting entities (Phase 3A) from 13 April 2015, and for the remaining Phase 3 reporting entities (Phase 3B) from 12 October 2015. Phase 3A Reporting Entities are those that, as at 30 June 2014, held $5 billion or more in gross notional outstanding across all OTC derivatives
MOU with Monetary Authority of Singapore
ASIC has also signed a Memorandum of Understanding with the Monetary Authority of Singapore to provide ASIC with direct access under Singapore law to data held in the DDRS, including data reported pursuant to ASIC trade reporting requirements.
Wholesale and retail investors and SMSFs
ASIC has clarified how it will apply the wholesale investor test to self-managed superannuation funds (SMSFs). ASIC encourages participants to consider the classification of their clients given the clarification provided. There are various tests for wholesale versus retail investors under the Corporations Act.
In 2004, ASIC issued QFS 150 When financial services are provided to a trustee of a superannuation fund, are they provided to a retail client? (QFS 150). QFS 150 provided guidance that a financial service would generally relate to a superannuation product in a situation where financial services were provided to the trustee of a SMSF (meaning the $10 million net asset test would apply and the trustee would be classified as a retail client if it did not satisfy this test).
Given ongoing legal uncertainty about when a financial service relates to a superannuation product, ASIC has reviewed its interpretation of when the trustee of a superannuation fund will be classified as a retail client or a wholesale client and withdrawn QFS 150.
ASIC's revised approach means that, for example, where the trustee of an existing superannuation fund receives advice about how to invest the fund’s assets, ASIC will not take action if the person providing the advice determines whether the trustee is a wholesale client based on the general test under the Corporations Act (e.g. if the trustee has net assets of at least $2.5 million), rather than applying the higher $10 million net asset test. ASIC will adopt a similar approach to a trustee who subscribes for financial products on behalf of an existing fund.
Although ASIC will not take action where such financial services are provided on a wholesale basis to trustees of existing superannuation funds with less than $10 million in net assets (provided that the trustee is a wholesale client under the general test), this will not affect any private rights of action that may be available to third parties. Persons providing financial services to trustees of SMSFs need to make their own commercial decisions after considering the legal risks.
ASIC acknowledges that legal uncertainty – particularly in relation to an issue as important as whether clients should receive the benefit of the retail client consumer protections – is undesirable and supports a review of the test to ensure that it is both clear and appropriate.
Given the importance of the retail client consumer protections, ASIC will take regulatory action where financial service providers mis-categorise their clients and, for example, treat investors as wholesale clients based on net assets of $2.5 million without a certificate from a qualified accountant.
ASX 24 trading participants are reminded of their obligations under Rule 3.3.2 of the ASIC Market Integrity Rules (ASX 24 Market) 2010 (ASX 24) regarding client authorisation.
Rule 3.3.2 provides that ‘Before entering a pre-negotiated business Order on behalf of a Client under Rule 3.3.1, a Market Participant must be authorised In Writing by the Client to do so either specifically or generally. The authorisation must state that the Client authorises Orders to be pre-negotiated on the Client's behalf.’
ASIC notes that there is no prescribed format for this authorisation, other than it must be in writing, but ASIC does expect trading participants to maintain the original authorisation on file, either as a specific or general authorisation.
Red tape reduction – submissions closing soon
The deadline for submissions to Consultation paper 222 Reducing red tape: Proposed amendments to the market integrity rules (CP 222) is 2 October 2014. CP 222 sets out ASIC’s proposals to repeal or refine three categories of obligations under the ASIC market integrity rules to reduce the compliance burden on participants.
ASIC values the views of participants and other stakeholders. These views will provide important assistance in ASIC’s final evaluation of these proposals in accordance with regulatory best practice. ASIC encourages participants and all stakeholders to provide as much information as possible in response to the proposals and specific questions in CP 222. If participants have any questions in relation to any of the proposals, they should contact ASIC using the contact details set out in CP 222.
New block tier thresholds
New block tier thresholds were published on the ASIC website on 5 September 2014. The thresholds will be effective on 3 October 2014.
ASIC website update coming
ASIC is making some changes to its website (www.asic.gov.au) to make the site more accessible and easy to use. The changes include:
- a responsive design that makes it easier to view on mobile devices
- a redesigned homepage with direct links to high-traffic tasks and content
- an improved internal search function, and
- clearer paths and signposts to existing content
The updated website will not be a completely new website. Most of the content will be the same as it is on the current site. A significant advantage of the new website is that it has been designed from a user’s perspective. As such, it will be easier to navigate and we hope a much better experience for users. We plan to go live with the updated website in late 2014 and will provide additional details of the change-over in due course.
Short sellers and entities submitting reports on behalf of short sellers will continue to submit short selling reports through ASIC Connect once the website is updated. However, existing links to the short selling reporting page which have been ‘bookmarked’ by users may be lost when the new website goes live. If this applies to you, you may wish to bookmark the following link to ASIC’s information about short selling and the short position reporting register, which is currently valid and will remain live once the new website is in operation: www.asic.gov.au\shortselling.
ASIC recently cancelled the Australian financial services (AFS) licence of Global Derivative Services Pty Ltd (GDS) after an investigation found it failed to comply with a number of its AFS licence obligations.
According to its website, GDS holds itself out as a leader in the field of forex, binary options and contracts for difference. The company’s only director, Brenton Ganesh Nair, lives in South Africa.
ASIC’s investigation found GDS failed to comply with conditions of its AFS licence concerning:
- the appointment and ongoing competency of the key person on the AFS licence
- notification of changes to the responsible person
- lodgement of accounts
- payment of debts
- adequacy of financial and human resources, by failing to maintain an Australian resident director and registered office, and
- failing to provide up-to-date details with the Financial Ombudsman Service and on its website.
ASIC’s action in cancelling the AFS licence of GDS continues its focus on retail over-the-counter (OTC) derivative providers, including margin foreign exchange.
Markets Disciplinary Panel (MDP)
Merrill Lynch Equities (Australia) Limited (Merrill Lynch)
Merrill Lynch has paid a total penalty of $96,000 to comply with an infringement notice given to it by the MDP. The penalty was for:
- failing to have in place an appropriate automated price filter in relation to automated order processing (AOP) for one client account, which interfered with the efficiency and integrity of the ASX market, and
- failing to prevent the entry into the ASX trading platform of an erroneous order which resulted in a market for Class A non-voting common stock in News Corporation Inc., not being both fair and orderly.
Merrill Lynch was alleged to have contravened subsection 798H(1) of the Corporations Act by reason of contravening Rules 5.6.1 and 5.9.1 of the ASIC Market Integrity Rules (ASX).
In determining this matter and the appropriate pecuniary penalty to be applied, the MDP noted (among other factors) that:
- Rule 5.6.1 is aimed at promoting confidence in the integrity of the market. Imposing a strict obligation on trading participants which use their systems for AOP to at all times have appropriate automated filters and ensure that such use does not interfere with the efficiency and integrity of the market or the proper functioning of the trading platform, is critical in maintaining the integrity of the market.
- Appropriate automated filters are essential components of AOP systems used by direct market access (DMA) clients of trading participants. Appropriate automated filters are in place to ensure orders are submitted into the trading platform without interfering with the efficiency and integrity of the market or the proper functioning of the trading platform. And
- 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 also critical in maintaining the integrity of the market.
BBY Limited (BBY)
BBY has paid a penalty of $90,000 to comply with an infringement notice given to it by the MDP. The penalty was for failing to ensure that its AOP system had in place organisational and technical resources, including having appropriate automated filters for 30 client accounts and processes to record any changes to the automated filters, without interfering with the efficiency and integrity of the ASX market or the proper functioning of its trading platform.
BBY was alleged to have contravened subsection 798H(1) of the Corporations Act by reason of contravening Rule 5.6.3(a) of the ASIC Market Integrity Rules (ASX).
In determining this matter and the appropriate pecuniary penalty to be applied, the MDP noted (among other factors) that:
- Rule 5.6.3(a) is aimed at promoting confidence in the integrity of the market. Ensuring that trading participants with AOP systems have in place adequate organisational and technical resources to operate without interfering with the efficiency and integrity of the market or the proper functioning of the trading platform is critical in maintaining the integrity of the market. This includes having appropriate:
- filter parameters, and
- processes to identify any changes made to filters or filter parameters, processes to record those changes and processes to test changes made.
- Appropriate AOP filters or automated filters are essential components of DMA AOP systems used by clients of trading participants. Appropriate automated filters are in place to ensure orders are submitted into the trading platform without interfering with the efficiency and integrity of the market or the proper functioning of the trading platform. Processes to identify, record and test any changes made to automated filters serve an important AOP system risk mitigation function.
Taylor Collision Limited (Taylor Collision)
Taylor Collison has paid a penalty of $30,000 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 BC Iron Limited ordinary shares not being both fair and orderly. Taylor Collison was alleged to have contravened subsection 798H(1) of the Corporations Act by reason of contravening Rule 5.9.1 of the ASIC Market Integrity Rules (ASX).
In determining this matter and the appropriate pecuniary penalty to be applied, the MDP noted (among other factors) that Rule 5.9.1 is aimed at promoting confidence in the integrity of the market. Imposing a strict obligation on 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.
Goldman Sachs Australia Pty Ltd (Goldman Sachs)
Goldman Sachs has paid a penalty of $35,000 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 AP Eagers Limited ordinary shares not being both fair and orderly.
Goldman Sachs was alleged to have contravened subsection 798H(1) of the Corporations Act by reason of contravening Rule 5.9.1 of the ASIC Market Integrity Rules (ASX).
In determining this matter and the appropriate pecuniary penalty to be applied, the MDP noted (among other factors) that an important aspect of the role of the designated trading representative, as an internal control, is to pay proper attention and diligence (including proper attention and diligence in the review of alerts or warnings) to prevent the submission of orders into the trading platform that could result in a market that is not both fair and orderly. The MDP said that this is a critical measure in maintaining the integrity of a market.
Important regulatory information
Pursuant to subparagraph 7.2A.15(4)(b)(i) and (ii) of the Corporations Regulations 2001, the above-named parties have 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. MDP Circulars and infringement notices for these 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 email@example.com, or through your relationship manager.
If your issue relates to a trading or surveillance matter, please email firstname.lastname@example.org.
For more information
Please see www.asic.gov.au/market-supervision.