Market Integrity Update - Issue 107 - August 2019

Issue 107, August 2019

Consulting on our use of product intervention power

We’re consulting on using our product intervention power to address significant detriment to retail clients from trading over-the-counter (OTC) binary options and contracts for difference (CFDs).

Consultation Paper 322 Product intervention: OTC binary options and CFDs (CP 322) proposes to:

  • ban OTC binary options
  • impose conditions on OTC CFDs.

Accompanying CP 322 is Report 626 Consumer harm from OTC binary options and CFDs (REP 626), which provides a snapshot of the OTC binary options and CFD market, describes the significant consumer detriment and sets out our proposed intervention.

The Australian market for binary options and CFDs is growing rapidly, with the number of clients more than doubling in the past two years to 1 million clients (99% are retail clients and the majority are based offshore). Licensed issuers of these products conducted 675 million trades with clients last year and earlier this year held $2.9 billion of client money for trading.

In our view binary options provide no meaningful investment or economic utility, and their product characteristics are like gambling. We believe a complete ban is necessary to prevent retail clients from losing money trading binary options.

High leverage ratios for CFDs amplify losses and costs. Many clients lose more than their initial investment. Our proposed conditions for CFDs aim to reduce harm to consumers by:

  • imposing leverage limits, which are set out in Section F of CP 322
  • implementing a standardised approach to automatic close-outs of clients’ CFD positions in margin call
  • protecting retail clients against negative CFD trading account balances
  • prohibiting certain trading inducements
  • enhancing transparency of CFD pricing, execution, costs and risks.

Our proposals are broadly consistent with measures implemented in many overseas markets.

We welcome your feedback on CP 322 at by 1 October 2019.

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Pause on admission of managed funds with internal market makers

We’ve requested exchange market operators not to admit any managed funds that do not disclose their portfolio holdings daily and have internal market makers while we undertake a review during the remainder of this calendar year.

Internal market making occurs when a managed fund’s responsible entity acts as the market maker for its own fund on the fund’s behalf, either by submitting bids and offers itself or by engaging a transaction agent that executes its instructions. Funds using this model generally do not disclose their portfolio holdings daily – they are usually actively managed funds. Internal market making funds represent approximately 6% of exchange traded products by funds under management.

The market for exchange traded managed funds has changed materially as follows:

  • substantial recent market growth in actively managed funds
  • continued innovation in fund structures and investment strategies among actively managed fund proposals, particularly those with internal market making
  • changes to the composition of market makers for exchange traded managed funds and the nature of the pricing models they use
  • recent international developments, including regulatory approval in the United States and Hong Kong of alternative frameworks.

On that basis, we intend to review the regulatory settings for exchange traded managed funds that use internal market makers. The findings from the review will inform our next steps.

The pause on new admissions of these products by market operators (including funds whose admission applications are currently being considered) will remain in place until further notice. This will allow us to consider the appropriate regulatory settings and will involve further consultation with the relevant sections of the industry during the second half of this year.

Existing actively managed exchange traded managed funds are not impacted. There is also no impact on other investment products that do not use internal market makers or on warrant products.

  • Read Report 583, which discusses some of the risks and benefits of using internal market making

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Review upholds Australian equity market’s record for cleanliness

Our recent review has found that Australian equity markets continue to operate with a high degree of integrity. 

Report 623 Review of Australian equity market cleanliness: 1 November 2015 to 31 October 2018 examines market cleanliness for the period, with a focus on insider trading and information leaks ahead of material market announcements. It extends our work in Report 487 Review of Australian equity market cleanliness, which found an overall improvement in market cleanliness in the 10 years to 31 October 2015.

In a clean market, prices react immediately after new information is released through the proper channels. Abnormal price movements and unusual trading patterns ahead of announcements may indicate an ‘unclean market’.

The review found:

  • the overall cleanliness of the market fluctuated between 2015 and 2018 – despite a deterioration in 2016, market cleanliness improved in 2017 and 2018 to settle around 2015 levels
  • on average, 0.6% of accounts that traded before material price-sensitive announcements were deemed suspicious
  • while the percentage of suspicious trading accounts remained stable, the volume traded by these accounts increased
  • there was more suspicious trading before merger and acquisition announcements than other announcements
  • there was more suspicious trading and abnormal price movements before unscheduled announcements than scheduled announcements
  • announcements by smaller companies were more likely to be unclean. Many of these smaller companies were in the materials sector.

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Market Liaison Meeting

Market stakeholders are invited to attend the next Market Liaison Meeting on 27 August 2019 in Sydney and Melbourne. These free quarterly meetings provide insights into the ASIC Markets Group’s strategic priorities and how we’re tracking against them.

The meeting will include updates on:

  • our priorities for market intermediaries and market infrastructure providers
  • market cleanliness
  • market integrity rules for technological and operational resilience
  • product intervention powers
  • review of listed investment companies/trusts

A live broadcast of the event will be held across our Sydney and Melbourne locations. Please indicate your location when registering.

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Former financial adviser and consultant charged with dishonest conduct

Mark Damion Kawecki has been charged with five counts of dishonest conduct, following an investigation into his conduct when applying for shares in companies that were undertaking initial public offerings (IPOs) or in the process of relisting on ASX.

We allege that on five occasions between 19 January 2015 and 23 December 2016, Mr Kawecki, while running a financial services business, submitted applications for shares which contained false or misleading information about:

  • the beneficial holder of those shares and/or
  • the applicant’s address.

A company must meet the ‘minimum spread requirement’ (a minimum number of unrelated shareholders in the company) under the ASX Listing Rules before its shares can be quoted and traded on ASX. The investigation found that Mr Kawecki had provided false addresses and misrepresented beneficial holders in relation to applications he submitted.

Each offence carries a maximum penalty of 10 years imprisonment and/or a fine of up to 4,500 penalty units.

The matter has been listed for committal mention before the Melbourne Magistrates Court on 23 September 2019.

On 27 June 2018 Mr Kawecki was banned by ASIC from providing financial services for a period of seven years.

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Finclear Execution pays $70,000 infringement notice

Finclear Execution Limited (Finclear) has paid a $70,000 penalty to comply with an infringement notice given by the Markets Disciplinary Panel (MDP).

The MDP had reasonable grounds to believe that Finclear contravened the market integrity rules in relation to a pre-arranged crossing in April 2018 for an on-market buy-back by a company listed on ASX. The crossing of 4.1 million shares represented approximately 87% of the remaining shares that the listed company was offering to buy back, and approximately 8% of that company’s issued capital.

Finclear originally executed and reported the trade as a special crossing to the market operator, Chi-X. A special crossing is not permitted for on-market buy-backs because it is not carried out in the ordinary course of trading. Finclear realised their error after the close of trading that day, informing us and cancelling the special crossing. The shares were trading on a cum-dividend basis at that time.

The next day, the shares commenced trading on an ex-dividend basis. At Finclear’s request, ASX established a special cum-dividend market for the shares. We’d indicated to Finclear that, to allow other participants an equal opportunity to sell into the buy-back, any proposed bid might need to be placed in the market for a prolonged period. In that cum-dividend market, Finclear entered a bid for the same number of shares at the same price and, seven seconds later, entered an ask at the same volume and price. The orders matched on the trading platform.

The MDP considered Finclear’s actions resulted in the market for the shares not being both fair and orderly, in contravention of the market integrity rules.

The compliance with the infringement notice is not an admission of guilt or liability, and Finclear is not taken to have contravened subsection 798H(1) of the Corporations Act.

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Updated guidance on MDP’s policies and procedures

We’ve updated Regulatory Guide 216 Markets Disciplinary Panel (RG 216) to simplify and streamline its policies and procedures.  

The Markets Disciplinary Panel (MDP), which acts through a Division of ASIC, is a peer review panel that makes decisions about whether infringement notices should be given for alleged contraventions of the market integrity rules.

The changes follow a public consultation late in 2018 and are aimed at achieving fair and efficient regulatory outcomes and to help market participants better understand the expectations of the MDP.

The key changes include:

  • the consolidation of RG 216 and Regulatory Guide 225 Markets Disciplinary Panel practices and procedures into a single, shorter guide
  • using any published infringement notice as the main communication vehicle by which the MDP’s reasons are explained to the market participant, as well as for the benefit of market participants generally
  • removing the tables of factors going to penalty and replacing them with four key factors: (1) the character of the conduct, (2) the consequences of the conduct, (3) compliance culture and (4) remediation
  • excluding market operators from the MDP’s remit.

The guide has also been updated to reflect the amendments to penalties made by the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2019. For conduct wholly occurring on or after 13 March 2019, the penalty that can be specified in an infringement notice can be as high as $3.15 million for each alleged contravention of any market integrity rule.

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Former CEO’s appeal dismissed

Peter David Roach, former Executive Chairman and CEO of Healthzone Limited, will remain in jail after his conviction and prison sentence appeal was dismissed by the NSW Court of Criminal Appeal on 19 July 2019.

Following our investigation, Mr Roach was convicted in October 2017 for conspiring to dishonestly obtain a $1 million director’s loan, as well as two counts of providing false and misleading information to ASX and six counts of falsifying company documents. He was sentenced to four years and three months imprisonment, with a minimum term of two years and three months to serve.

In dismissing the appeal, the Court found that the sentence imposed was not excessive and lay comfortably within the reasonable exercise of sentencing discretion in the circumstances of the case.

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Last updated: 30/03/2021 09:22