ASIC Market Supervision Update Issue 9
Regulatory package for market competition published
The ASIC Market Integrity Rules (Competition in Exchange Markets) 2011 (Competition MIRs) have been made with the bulk of the rules set to commence on Monday 31 October 2011. This follows ASIC announcing on 29 April 2011 a package of regulatory reforms around market integrity rules which provide the framework for the introduction of competition in equity exchange markets.
A small number of rules took effect from the beginning of May. They include:
- Best execution: a requirement for market participants to disclose to existing clients details about their best execution arrangements prior to 31 October 2011 (see Part 3.3 of the Competition MIRs); and
- Crossing systems: an obligation on market participant operators of crossing systems to register with ASIC and to provide monthly reports on the activity on their system (see Part 4.3 of the Competition MIRs). We expect reporting from end of May 2011. We note that many market participants have commenced providing these reports voluntarily.
The Competition MIRs provide a 12 month transitional period where market participants can meet their best execution obligations solely on ASX. By the end of the time period, participants will need to consider whether they could deliver a better outcome to their clients by accessing other markets.
ASIC has also made rules specifically for the Chi-X market - ASIC Market Integrity Rules (Chi-X Australia Market) 2011 (Chi-X MIRs). Monday 31 October 2011 is the earliest that any competitor market operator can commence operation.
Some of the steps industry will need to take prior to Chi-X's commencement include the ASX and Chi-X putting in place procedures for simultaneously halting trading, for use of common stock and broker identifiers and for the sharing of certain data, and linking to the nominated clock for synchronisation. Market participants will need to prepare to comply with the best execution obligation and the other obligations in the Competition MIRs. Those intending to connect to Chi-X will need to amend their order routing and back office systems and prepare to comply with Chi-X operating rules and the Chi-X MIRs.
Chi-X will also need to connect to market participants, CHESS, data vendors and ASIC for the provision of real-time order and trade data for surveillance purposes.
The Competition MIRs are the result of extensive consultation with the industry and follows the release of Consultation Paper 145 Australian equity market structure: Proposals.
On 4 May ASIC published on its website the licence granted to Chi-X Australia Pty Ltd (Chi-X) to operate an Australian financial market. This followed the announcement on the same day by the Government granting Chi-X the licence under s795B(1) of the Corporations Act and the announcement by ASIC last week of market integrity rules for market competition and Chi-X specifically.
ASIC will continue to work closely with market operators and market participants during the coming months, including on industry testing and related issues to ensure a smooth transition.
The relevant documents are available on ASIC's website:
- Competition MIRs
- Competition market integrity rules regulatory guide (RG 223)
- Feedback report to ASIC consultation paper 145 (CP 145) (REP 237)
- Non-confidential submissions to CP 145
- Chi-X MIRs
- Chi-X regulatory guide (RG 224)
- Feedback report to ASIC consultation paper 148 (CP 148) (REP 238)
A background paper including FAQ and summary of the package is also available.
We will consult further on broader market development, such as the need for additional market operator and participant risk controls and to complete the review of pre-trade transparency exceptions, in the third quarter of 2011. We aim to settle these additional rules in early 2012.
Class Order [CO 09/774]
ASIC has made a minor amendment to ASIC Class Order [CO 09/774], which allows licensed market makers to short sell securities in the S&P/ASX300 index, in order to hedge risk. Previously, this was only allowed for securities that appeared in the S&P/ASX200 index. While section 1020B of the Corporations Act 2001 prohibits naked short selling, licensed market makers have been afforded relief to enable them to mitigate the risks involved in their market making activities.
The remaining conditions in the amended class order, which commenced on 19 April 2011, remain unchanged.
Use of ‘default’ Client Identifier
Recent surveillances have identified that for several Market Participants it has become standard practice to use a 'default' Client Identifier to ensure maximum speed when entering orders onto the ASX Trade 24 platform.
ASIC/ASX 24 MIR 2.2.4(1)(b) states "A Market Participant, other than a Principal Trader, must maintain internal records of instructions received from Clients and Trades executed for Clients for a period of not less than five (5) years from the date of the Trade, containing the following information: the Client name/account number and Client ID".
To meet the order record requirements, Market Participants must ensure that they update the Client ID within the trading system and/or order audit trail to accurately reflect the relevant Client.
In addition, ASIC notes that the use of the default Client Identifier has resulted in an increased number of surveillance enquiries, some of which could have been avoided had an accurate Client Identifier been utilised.
Furthermore, if the correct Client identifier cannot be entered immediately, then it is recommended that the Client Identifier is not defaulted to "HOUSE" if the order is entered on behalf of a Client.
Market participants should contact ASIC for market integrity issues and ASX 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 firstname.lastname@example.org, or through your relationship manager.
For more information
Please see www.asic.gov.au/market-supervision.