ASIC Market Supervision Update Issue 62

 

Issue 62, July 2015

ASIC reports on financial benchmarks

ASIC has released a report on financial benchmarks, highlighting the importance of key indices to Australia’s markets and broader economy.

The release of Report 440 Financial benchmarks (REP 440) comes as ASIC’s investigation into possible manipulation of the bank bill swap rate (BBSW) and possible misconduct in the foreign exchange market continues. Our investigations are ongoing and no conclusions have been drawn as yet.

In addition to highlighting the importance of financial benchmarks in the Australian economy, ASIC's report outlines the consequences if benchmarks are not robust and reliable. These consequences may involve detriment to clients and decreased market confidence.

Concerns about the reliability and robustness of financial benchmarks have led to a number of regulatory reforms and other responses, both internationally and in Australia. ASIC's report sets out these responses in detail.

ASIC’s report makes a number of forward-looking recommendations that market participants should adopt to avoid conduct issues in relation to financial benchmarks. For example:

  • dealers are encouraged to review their internal arrangements (including oversight, conduct risk management, incentives and training) as well as past conduct to ensure full compliance with the law, and to report any breaches to ASIC where required;
  • administrators of systemically-important benchmarks administered in Australia are encouraged to adopt and implement the IOSCO Principles; and
  • wealth managers and other clients should engage with their dealers to ensure they understand how their dealers have handled (and are handling) their orders and confidential information.

Feedback on the issues raised in the report is welcome and can be sent to: benchmarks-report@asic.gov.au

Read media release 15-177MR

Read REP 440

Identity theft – warning

ASIC has been alerted to another instance of identity theft on a client account. We previously warned market participants of this risk following a number of incidents (MSU Issue 49 and Issue 55).

The most recent incident involved a large parcel of issuer sponsored securities. The fraudster impersonated an individual by mimicking their identity and then establishing a new client account with a participant. Instructions were issued to the participant to sell the securities and transfer the proceeds to a bank account, from which the funds were subsequently removed. A significant amount of money was stolen as a result. The theft has been reported to the police.

This was a highly sophisticated crime which involved substantial planning and organisation over an extended period of time. ASIC urges participants to be extremely vigilant to the possibility of identity theft. Participants must have robust due diligence procedures for on-boarding new clients which are rigorously applied.

For existing clients, ASIC urges participants to be on the lookout for:

  • IP addresses that are not reflective of the original client documentation, and
  • changes of bank accounts, email accounts, contact details.

Participants should encourage their clients to:

  • change their passwords regularly
  • avoid using public domain email addresses when communicating with their broker
  • check what rules have been set up on their email accounts (hackers may divert genuine emails from a participant to the client's 'trash' to avoid detection).

Read MSU Issue 49

Read MSU Issue 55

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 214 SARs from 34 market participants. Of these reports, one participant was responsible for almost 11% of the total. Six other participants each submitted 10 or more SARs.

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 15% of SARs received to date have been referred to Enforcement for further investigation.

The number of SAR submitted to ASIC has been increasing each year since this rule was submitted. We would like to thank all those participants who took the initiative to report these incidents to us.

Year

SARs

Market Participants

Non-Market Participants

2013

75

18

2

2014

84

23

5

2015 YTD

55

21

3

Total (20/1/13-22/6/15)

214

34

7

ASIC reminds all participants of their obligations under Rule 5.11.1. To ensure compliance with this market integrity rule, ASIC will inspect breach registers of 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.

ASIC releases hedge funds report

On 1 July 2015, ASIC published a snapshot of the Australian hedge funds sector. Report 439 Snapshot of the Australian hedge funds sector (REP 439) includes results of ASIC's 2014 survey of hedge fund managers operating in Australia who have more than US$500 million under management.  The 27 hedge funds we surveyed represented approximately 44% of the assets held by single-manager hedge funds in Australia.

This survey adds to a survey conducted in 2012, which found that there was not any strong evidence that hedge funds pose significant systemic risk. While that remains the case, there have been some interesting developments in the hedge funds sector.

Key observations include:

  • Hedge funds manage only a small share of Australia’s $2,407 billion managed funds industry. Single-manager hedge funds and funds of hedge funds managed 3.5% and 0.5% of all Australian managed fund assets respectively
  • The gross leverage ratio (gross notional exposure to NAV) for hedge funds has increased since 2012. The median gross leverage ratio in 2014 was two times NAV, compared to 1.7 times NAV in 2012. The level of leverage for surveyed hedge funds is relatively low compared to other jurisdictions
  • Retail direct investors accounted for 17% of the investors by NAV in the surveyed hedge funds.  Nearly 49% of investors by NAV accessed hedge funds through an IDPS
  • Large exposures to interest rate derivatives were reported, with gross notional exposure of more than $64 billion as at 30 September 2014, and
  • The largest geographic exposure was to North America with 29% of NAV invested there.  Australia and Asia (ex-Australia) were also significant regions for the funds' investments with each receiving 26% of the total NAV.

Read media release 15-167MR

Read REP 439

Continuing education and compliance self-assessment for Responsible Executives

Participants are reminded of their upcoming annual requirements for Responsible Executives.  These include:

  • By 10 July 2015, Participants should ensure that each of their Responsible Executives conducts an annual review (as at 30 June 2015) and provides a representation to the Participant that they have met their obligations under Rule 2.3.3 of the ASIC Market Integrity Rules (ASX, Chi-X Australia and APX) (as applicable).
    • By 31 July 2015, Participants must provide written notification to ASIC that contains the information prescribed in Rule 2.3.5 of the ASIC Market Integrity Rules (ASX, Chi-X Australia and APX), as part of the annual continuing education and compliance self-assessment for Responsible Executives.

These obligations apply even if the individual was a Responsible Executive for only part of the year.

Completing and submitting the notification:

Please contact your Relationship Manager if you have any questions.

Delay to new portfolio holdings regime

The start date for the portfolio holdings disclosure regime introduced as part of the Stronger Super reforms has been delayed until 1 July 2016. The deferral is intended to provide superannuation trustees with additional time to prepare for the new requirements. It will also provide further time for the necessary regulations to be made.

The portfolio holdings regime is aimed at increasing the transparency of investments being made by superannuation funds. This will enable members and analysts to better assess the level of diversification and risk in particular superannuation products.

At present, the legislation anticipates that funds will disclose all of their holdings, including assets invested in entities not directly owned by the fund, such as collective investment vehicles. This was intended to allow investor members to compare assets across products and is known as the 'look-through' requirement. In 2013, draft regulations outlining how look-through information would be disclosed were criticised by industry for the level of complexity involved.

The Government's consultation paper on Governance and Systemic Transparency, which closed for comment on 12 February 2014, subsequently considered aspects of the new regime, including the timing for the commencement of the requirements, requirements to disclose commercial-in-confidence material, materiality thresholds and the degree of look-through required.

ASIC's position with regard to portfolio holdings has not changed. While the detail of the portfolio holdings disclosure regime is a matter for Government, ASIC remains strongly supportive of the need for a portfolio holdings disclosure regime in Australia. We think that applying portfolio holdings disclosure requirements more broadly than super (for example, to managed investment schemes) will mean that there may be no need for the complex look-through requirements proposed in the original model. However, we remain concerned about the use of a materiality threshold as this may undermine the integrity of the disclosure regime.

Read media release 15-092MR

Enforcement outcomes

Rhinomed Ltd pays penalty for alleged continuous disclosure breach

Following an ASIC investigation, Rhinomed Limited (Rhinomed) has paid a penalty of $33,000 for allegedly failing to comply with its continuous disclosure obligations.

Rhinomed, a respiratory technology company, made an announcement to the Australian Securities Exchange (ASX) on 9 July 2014 that it will partner with the Fitness First health clubs to promote its Turbine® technology throughout July. The deal was described in the announcement as an "outstanding commercial opportunity" and "a real coup" for the company.

ASIC alleged on 6 June 2014 Rhinomed and Fitness First had entered into an agreement concerning a promotional campaign in which Fitness First was to promote the Turbine Product in some of its gyms and health clubs in Australia. ASIC alleged that by failing to inform the ASX of the agreement on 6 June 2014, Rhinomed was in breach of its continuous disclosure obligations.

ASIC issued the company with an infringement notice and Rhinomed has complied with the infringement notice and paid the penalty on 9 June 2015. Rhinomed is not, by reason of its compliance with the notice, regarded as having contravened the Corporations Act.

Read media release 15-144MR

Leap second change – update

Something remarkable happened on 1 July 2015. At precisely 9:59:59am AEST, time literally moved forward. This occurred when the world agency that regulates time, the International Earth Rotation and Reference Systems Service, introduced an extra second, known as a 'leap second'. Because of the potential impact on Australia's financial markets, ASIC was watching closely.

The change occurred when Australian exchange markets were about to open or in a continuous trading state (depending on the product type). A possible consequence for exchanges and participants was that time could appear to go backwards in some systems, potentially affecting system stability.

A big issue for ASIC - and the markets - was ensuring time stamps for pricing data and trades remained sequential and were not duplicated. In other words, that 'time' was always moving forward. This is especially important given trading technology means thousands of transactions can happen in a single second.

ASIC's priority is ensuring markets are fair, orderly and transparent. This is so investors can have confidence and trust in our financial system. So we worked closely with exchange markets to ensure market integrity was not affected. This involved exchanges having a 'time smear', where the 'leap second' is 'smeared' across an extended time period before it is introduced.

We are pleased to say that the time change appears to have gone smoothly and markets are functioning normally.

Read the full story: FYI about the leap second

New look newsletter

From next month, the Market Supervision Update will be relaunched as the Market Integrity Update. The name change reflects the newsletter's focus on all areas of market regulation, not just market supervision. We are planning to include a broader range of content in future, which will be relevant to a wider range of market stakeholders, including participants, market operators, investment banks, public companies and their officers and investment managers.

The relaunch will be accompanied by a new look and reader-friendly features, such as hyperlinks to articles (to make it easier for you to navigate to specific articles), images and infographics.

We would keen to hear from you ahead of the change about any new content or features you would like to see included in the Market Integrity Update. Likewise, after the relaunch, please email any feedback to feedback@asic.gov.au.

 

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

If your issue relates to a trading or surveillance matter, please email markets@asic.gov.au.

For more information

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

Last updated: 30/03/2021 09:38