Market Integrity Update - Issue 104 - May 2019
- Fixed income reviews underway
- Changes to reporting for several derivatives products
With the support of the Australian Prudential Regulation Authority (APRA) and the Reserve Bank of Australia (RBA), we’ve written to the CEOs of several major Australian financial institutions about their preparations for the end of LIBOR (London Interbank Offered Rate).
LIBOR is a globally accepted, key benchmark interest rate that is embedded within many Australian financial contracts and business processes. The UK Financial Conduct Authority (FCA) has stated that it will not sustain LIBOR beyond 2021.
We’re seeking to better understand how major financial institutions are preparing to transition away from LIBOR towards alternative benchmarks. We’d also like assurance that senior management in these institutions fully appreciate the impact and risks, and will take appropriate action in advance of 2021.
More broadly, the regulators expect institutions to consider the impact of LIBOR transition on their business. All users of LIBOR should:
- be aware of the size and nature of their exposures to LIBOR
- put in place robust fallback provisions in contracts referencing LIBOR
- act to transition to alternative rates.
We’ve commenced reviews into the risk controls, handling of conflict management and governance of several fixed income businesses in Australia. The key components of the reviews that are underway include:
- onsite reviews of fixed income businesses
- a review of selected large OTC transactions
- a review of allocations in debt capital market (DCM) transactions.
The onsite reviews of fixed income businesses involve meetings, interviews, reviewing books and records, and a focus on live demonstrations and ‘walk-throughs’ of the sales and trading activities of selected entities. The onsite reviews compare and benchmark practices in relation to:
- capital raising or primary bond issuance
- governance and controls
- market conduct in secondary market trading.
The review of large OTC transactions examines a sample of large corporate infrastructure deals, and bank and semi-government debt issuances. Our focus is on compliance with financial services general obligations, misleading or deceptive conduct, insider trading, conflicts of interest and market manipulation.
The DCM allocation review focuses on allocation practices and the conduct of bookbuilds for DCM transactions in the Australian market. The review will examine if licensees are meeting their regulatory obligations and if current regulatory settings are appropriate. This will include meeting with a range of stakeholders and review of a selection of DCM transactions.
We’ll undertake these reviews in stages throughout 2019.
From 1 July 2019, futures market participants and retail over-the-counter (OTC) derivatives providers will be able to meet many of their client money reconciliation reporting requirements using the ASIC Regulatory Portal (portal).
We expect entities will be able to use the portal to submit:
- monthly reconciliations of clients’ funds and annual declarations for clients’ funds under Part 2.3 of the ASIC Market Integrity Rules (Futures Markets) 2017
- monthly reconciliations of client money and annual declarations under Part 2.2 of the ASIC Client Money Reporting Rules 2017.
The portal will offer a simpler and more efficient way for entities to meet their obligations, including the ability to:
- pre-populate forms using information that has been previously supplied
- track the status of forms
- search previously submitted forms in the one place.
Guidance on accessing and using the portal will be provided to market intermediaries over the coming month.
From 1 July 2019, transactions in contracts for difference (CFDs), margin FX and equity derivatives must be reported to derivative trade repositories on a ‘lifecycle’ method, rather than an end-of-day ‘snapshot’ method.
This follows our excluded derivative determination made on 30 November 2018, allowing for better reporting to help us monitor market misconduct.
Firms with OTC derivative transaction reporting obligations are urged to ensure that necessary changes to reporting arrangements and systems are in place by that time.
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