ASIC Market Supervision Update Issue 51
Self-reporting – section 912D
Market participants and operators are required under section 912D of the Corporations Act 2001 (Corporations Act) to report certain significant breaches or likely significant breaches of obligations under the financial services laws (including the ASIC market integrity rules) to ASIC.
The Corporations Act requires that written notification of a breach must be made to ASIC as soon as practicable and in any case within 10 days of becoming aware of the significant breach or likely significant breach.
Regulatory Guide 78 Breach reporting by AFS licensees (RG 78) contains guidance on what is meant by 'significant breach' or 'likely to breach', when and how a breach should be reported and what ASIC will do with the information contained in a breach report.
Failure to self-report a significant breach is a criminal offence and can have serious repercussions (including possible imprisonment): see RG 78.32. Participants and operators that fail to self-report can expect greater scrutiny and possible enforcement action from ASIC.
If a participant or operator determines that a breach or likely breach is not significant, they must still address the breach. In practice, we consider that a breach register should be maintained to ensure that action is taken to identify and deal with all likely or certain breaches (significant or not), and to report likely and certain significant breaches.
RG 78.23 provides that there is no prescribed form for reporting a breach. However, operators and participants can:
- use Form FS80 on the ASIC website, or
- provide a written report.
ASIC will work constructively with participants and operators who act promptly and appropriately in reporting significant breaches, to ensure that compliance issues are resolved. The benefits of cooperating with ASIC are explained in Information Sheet 172 Cooperating with ASIC (INFO 172).
- Download RG 78
- Download Form FS80
- Read INFO 172
- Read 'Why breach reporting is important' (A speech by Peter Kell, Deputy Chairman, ASIC)
Self-reporting – ASIC market integrity rules
In addition to self-reporting under section 912D of the Corporations Act, participants and operators are encouraged to self-report possible breaches of the ASIC market integrity rules to ASIC, even if they are not significant.
Alleged breaches of the ASIC market integrity rules may be referred by ASIC to the Markets Disciplinary Panel (MDP) for determination, as an alternative to civil proceedings. If the alleged breach or breaches are established, the MDP may consider the conduct of the participant or operator after a breach occurred, among other things, in determining any appropriate pecuniary penalty or other remedy: see Regulatory Guide 216 Markets Disciplinary Panel (RG 216).
RG 216.123 provides that 'The MDP's consideration of whether a breach was self-reported to ASIC is not limited by any breach reporting obligations that may apply to the recipient under the Corporations Act. The MDP may consider it relevant that a recipient self-reported a breach that they were not obliged to report.'
This means that whether the breach was self-reported or not may be considered either a mitigating or aggravating factor. Infringement notices issued by the MDP will often state whether the alleged breach or breaches were self-reported.
Where a participant or operator self-reports a possible breach to ASIC that is not required to be reported under the Corporations Act, the self-report must be still be timely and provided as soon as is practicable in order to be considered by the MDP as a mitigating factor.
Self-reported breaches of the ASIC market integrity rules must be reported to ASIC. A self-report is not compliant with section 912D or consistent with RG 216 where a participant self-reports to a market operator, but does not also provide a written self- report to ASIC.
Confirmations - clients other than retail clients: Rule 3.4.3(1)(b)
ASIC has granted a class waiver of these obligations for Derivatives Market Contracts: ASIC Class Waiver 14/1091. The waiver will give ASIC sufficient time to conduct further consultation on the application of the obligations to Derivatives Market Contracts. Please note that the waiver applies to Derivatives Market Contracts only. The obligation will apply to Cash Market Products from 28 October 2014, as scheduled.
The obligation to comply with Rule 3.4.3(1)(b) of the ASIC Market Integrity Rules (ASX market) 2010 (ASX) commenced on 28 October 2014. The obligation applies to 'Market Transactions'. A 'Market Transaction' is defined as 'a transaction for one or more Products, entered into on a Trading Platform or reported to the Market Operator under the Market Operating Rules'. A 'Product' is defined as a 'Cash Market Product or a Derivatives Market Contract, as applicable'. Accordingly, Rule 3.4.3(1)(b) applies to both Cash Market Products and Derivatives Market Contracts.
ASIC recognises that the application of 3.4.3(1)(b) to Derivatives Market Contracts is an issue which may warrant further consideration. Accordingly, ASIC proposes to consult with industry and assess the impact of applying the obligation to Derivatives Market Contracts in greater detail. In the interim, ASIC has granted the class waiver which applies only to Derivatives Market Contracts. The waiver will expire on 30 April 2016. ASIC will advise participants of the results of the consultation in reasonable time for any necessary system changes to be made prior to the expiry of the waiver.
In the meantime, ASIC reminds market participants that rule 3.4.3(1)(b) imposes two distinct disclosure requirements. If a participant entered into a client's transaction as principal, the participant must notify the client as soon as practicable that the participant entered into the transaction as principal: Rule 3.4.3(1)(b)(i). If a client's market transaction was executed as a crossing, the participant must notify the client as soon as practicable of the execution code for the execution venue: Rule3.4.3(1)(b)(ii). In some cases, both obligations will apply in which case both disclosures will be required.
It has come to our attention that one or two firms may be attempting to unilaterally enforce some form of blanket agreement with their clients to not receive the information required by Rule 3.4.3. In our view, trying to implement some sort of passive consent to waive these obligations is not appropriate. At the very least, it is not in the spirit of the rule and certainly undermines the intention of the rule. Rule 4.3.4 arose following the work of the Dark Liquidity Taskforce, which determined that better information for clients was necessary in order to improve transparency around both dark liquidity and principal trading. ASIC considers this rule to be an important initiative and we expect participants to provide their clients with the information in most cases.
AOP Annual Notification
Market participants have 10 business days from 1 November 2014 to lodge their first Automated Order Processing (AOP) Annual Notification, in order to comply with Rule 5.6.8B of the ASIC Market Integrity Rules (ASX) and ASIC Market Integrity Rules (Chi-X Australia Market) 2011 (Chi-X).
Rule 5.6.8A (ASX and Chi-X) requires a participant to perform an annual review of the AOP system, the participant’s policies, procedures, system design documentation (including the participant’s procedures for implementation of changes to AOP software, filters and filter parameters), and other relevant documentation concerning the participant’s compliance with Part 5.6. The AOP Annual Review is only required if an AOP Material Change Review has not been undertaken on the AOP in the 12 months before the AOP Annual Review Date.
The AOP Annual Review Date is 1 November each calendar year. This means that the annual notification will relate to the 12 month period from 1 November in the previous calendar year to 31 October in the current calendar year.
Within 10 days of the AOP Annual Review Date, the participant must confirm to ASIC that nothing has come to its attention during the 12 months before the annual review date, which would indicate that the participant was unable to comply with Part 5.6 of the ASIC market integrity rules (ASX and Chi-X): Rule 5.6.8B (ASX and Chi-X).
The AOP Annual Notification must include:
- the name of the market participant
- the name and version number of the AOP system, or systems if the notification covers more than one system
- a confirmation by the participant that nothing came to their attention during the 12 months before the annual review date that would indicate the market participant is unable to comply with Part 5.6, and
- the name of the directors of the market participant signing the annual notification.
Market participants may provide a single notification, which includes all AOPs for which an AOP Material Change Review has not been undertaken in the 12 months before the AOP Annual Review Date.
Further information can be found in Regulatory Guide 241 Electronic Trading (RG 241). Participants are encouraged to provide the notification in accordance with the sample annual notification in Appendix 2 of RG 241.
Crossing system operators
ASIC wishes to remind market participants who operate a crossing system that Rule 4A.2.2 of the ASIC Market Integrity Rules (Competition in Exchange Markets) Amendment 2013 (No. 2) commenced on Tuesday 28 October 2014.
This amendment means that from 28 October 2014, crossing system operators are no longer required to provide monthly reports on orders, transactions and cancellations to ASIC. We are instead receiving most of this information through the reporting obligations in Chapter 5A of the ASIC Market Integrity Rules (Competition in Exchange Markets). Crossing system operators will still need to notify ASIC of any changes to the information provided to ASIC in the initial report, or in the information last provided to ASIC. This notification must be provided to ASIC within 20 business days of the end of the calendar month.
Rule 4A.2.2 states that:
'A Participant that operates a Crossing System during a calendar month must, if there have been any changes during that calendar month to the information last provided to ASIC in the Participant’s Crossing System Initial Report or Crossing System Monthly Report:
(a) prepare, within 20 business days of the end of the calendar month, a report (the Crossing System Monthly Report) setting out the changes to the information provided in the Participant’s Crossing System Initial Report or Crossing System Monthly Report last provided to ASIC; and
(b) provide the Crossing System Monthly Report prepared under paragraph (a) to ASIC as soon as practicable after it has been prepared.'
ASIC website design update
ASIC's updated website design (asic.gov.au) is now live! The big advantage of the new website is that it has been designed from a user's perspective. We hope you will find it more accessible and easier to use.
Part of the update has involved the migration of all current content to the new site and some changes in navigation. Many people who use our website regularly have direct links to the information they need. We have put in place redirects for links to the highest traffic areas on the website, and you can be confident that in the majority of cases your old links will still work.
There may be some links to information that is deeper within the site and attracts less traffic. These 'deeper links' will default to the ASIC home page and you will need to re- establish the link. If you have materials with numerous links to the ASIC website, we recommended that you check that your links still work.
To re-establish a link, you can follow these simple steps:
- On the ASIC homepage, go to the search box in the top right corner; enter the key words for the information you are looking for
- When you have found the desired information you can mark it as Favourite or copy the URL and use it as you need.
It is also possible that some internal links on the website (for example, a link from an old media release to a Regulatory Guide or Information Sheet) may need to be re- established. We are working as quickly as possible to fix these links.
If you have any queries or concerns about the updated website, please email us at firstname.lastname@example.org.
Short position reports
In the September 2014 edition of the Market Supervision Update, we advised readers that existing links to the short position reports page (http://www.asic.gov.au/asic/asic.nsf/byheadline/Short+position+reports+table? openDocument), 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 regime, which is currently valid and will remain live once the new website is in operation: www.asic.gov.au/shortselling.
Short sellers with reportable short positions, and entities submitting reports on behalf of short sellers, will continue to submit short position reports through a FIX connection – there will be no change to these arrangements or the guidance provided in Regulatory Guide 196.
NSW man pleads guilty to market manipulation
Mr Nigel Derek Heath, a day trader from Wahroonga, NSW, has pleaded guilty to two market manipulation charges following an ASIC investigation. The charges related to his trading in shares and contracts for difference (CFDs) in four resource companies between 16 February 2012 and 11 October 2013.
ASIC alleged that between 16 February 2012 and 19 August 2013, Mr Heath carried out 138 transactions involving financial products relating to Petsec Energy Limited (PSA). Each of these transactions artificially increased PSA's share price by between 4% and 11.5%, and increased the value of Mr Heath's shareholding in PSA by between $15,878 and $46,928.
ASIC also alleges that between 2 July 2012 and 11 October 2013, Mr Heath caused a simultaneous buy and sell in 30 transactions involving financial products relating to PSA, Leyshon Resources Limited, Malagasy Minerals Limited and Orca Energy Ltd. Each of these transactions – commonly referred to as 'matched trades' – artificially increased the price of shares traded on the ASX by between 3.1% and 6.9%.
Mr Heath will appear before the New South Wales District Court for sentencing on 31 October 2014. The market manipulation offences under sections 1041A and 1041B of the Corporations Act 2001 each carry a maximum penalty of $765,000, imprisonment for 10 years, or both.
Sino Australia Oil & Gas Limited
The June 2014 edition of the MSU reported on orders obtained by ASIC in the Federal Court of Australia under section 1323 of the Corporations Act 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 has obtained a number of further extensions of the orders, both by consent and after contested hearings, with the freeze currently in place until 26 November 2014 to enable ASIC to continue to investigate SAO.
Markets Disciplinary Panel (MDP)
ETrade Australia Securities Limited (Etrade)
Etrade has paid a penalty of $55,000 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 SPDR MSCI Australia Select High Dividend Yield Fund units not being both fair and orderly.
Etrade is 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). 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.'
In determining this matter and the appropriate pecuniary penalty to be applied, the MDP noted (among other factors) 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, and
- an important aspect of the role of the DTR, as an internal control, is to take proper care and pay proper attention and diligence in the consideration of pre-trade alerts or warnings especially in circumstances where the alert triggered is in relation to an order received through an automated order processing system via direct market access. Taking care and paying 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, 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.