Market Integrity Update - Issue 114 - April 2020

Issue 114, April 2020

• Refocusing our regulatory work and priorities due to COVID-19

• Heightened cyber security vigilance advised due to COVID-19

• Close monitoring of market volatility and short selling

• Research reports during market volatility

• COVID-19 market updates webpage

• Internal market making guidance updated

• Conditional OTC derivatives reporting relief extended

• AMP Life and AMP Capital pay penalties in relation to trade reporting rules

• Feedback on financial institutions preparation for LIBOR transition released

Refocusing our regulatory work and priorities due to COVID-19

To allow us to focus on the impact of the COVID-19 pandemic, we’re temporarily changing our regulatory work and priorities. This will include deferring some activities and redeploying staff to activities focused on maintaining the integrity of markets and protecting consumers.

Some of the affected activities include:

• Onsite reviews of market intermediaries under enhanced supervision program and FICC program – we’re deferring onsite supervision programs but are continuing to monitor market intermediaries and focusing on conduct and resilience. We’ve published guidance on business continuity and supervision arrangements to help intermediaries comply with their regulatory obligations in the current environment.
• Onsite reviews of exchanges and wholesale trading platforms – we’re continuing to monitor and retain ongoing dialogue to understand the risks of the current environment, particularly where there is a risk of consumer detriment or to market resilience. However, at present, we’ve deferred onsite reviews.
• Allocation practices in debt capital market (DCM) transactions – we undertook a thematic surveillance of allocation practices in DCM transactions and have made observations to firms about better and poorer practices. We’ve deferred the publication of the report.
• Consultation Paper 314 on new market integrity rules for technology and operational risk for market operators and participants – we’re continuing to assess feedback from the industry and other regulators, and responses to COVID-19 by market operators and participants to inform our final policy position. We’re deferring settling the rules and the publication of the final report.
• Miscellaneous market integrity rule amendments (securities and futures markets) – we’re deferring the publication of the consultation papers until industry has the capacity to consider and respond to the proposals. However, we’re exploring options to reduce the 2020 accreditation burden for market intermediaries and their derivative advisers.
• Listed market structure: Dark liquidity report, market making, market data access and fees – we’re continuing to assess current market conditions and ensure market resilience; however we’re deferring the release of our report and our internal market structure analysis on market making and market data access and fees.

Enforcement action will continue. However, there may be changes to the timing and process of investigations. There will also be changes because of variations to usual court procedures.

We’re committed to working constructively and pragmatically with the firms we regulate, mindful that they may encounter difficulties in undertaking their regulatory work because of COVID-19.

• Read the media release

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Heightened cyber security vigilance advised due to COVID-19

We advise organisations, consumers and investors to heighten their cyber security vigilance due to the COVID-19 pandemic.

As increasingly more organisations require their employees to work from remote locations, the likelihood of a cyber breach increases. Regulators have witnessed an increase in ‘phishing’ activity and several COVID-19 related scams and encourage all people to be critical before opening or responding to suspicious messages.

The Australian Cyber Security Centre (ACSC) has published several proactive strategies that we encourage all entities to consider:

• Review your business continuity plans and procedures.
• Ensure your systems, including Virtual Private Networks and firewalls, are up to date with the most recent security patches (see guidance for Windows and Apple products).
• Increase your cyber security measures in anticipation of the higher demand on remote access technologies, and test them ahead of time.
• If you use a remote desktop client, ensure it is secure.
• Ensure your work devices, such as laptops and mobile phones, are secure.
• Implement multi-factor authentication for remote access systems and resources (including cloud services).
• Ensure you are protected against Denial of Service (DoS) threats.
• Ensure your staff and stakeholders are informed and educated in cyber security practices, such as detecting socially-engineered messages.
• Ensure staff working from home have physical security measures in place. This minimises the risk of information being accessed, used, modified or removed from the premises without authorisation.

The ACSC has also published a threat update, designed to raise awareness of increasing COVID-19 themed malicious cyber activity, and provide practical cyber security advice that organisations and individuals can follow to reduce the risk of being impacted.

Similarly, we’ve published good practice guidance and other resources to help organisations improve their cyber resilience.

Do you need to report a cyber incident?

From individuals to large companies and government organisations, visit ReportCyber to report your cyber incident.

For urgent government or critical infrastructure incidents, call 1300 CYBER1 (1300 292 371).

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Close monitoring of market volatility and short selling

We’re taking all necessary actions to maintain open markets that operate in a fair, orderly and efficient manner. While there’s been significant price volatility in recent weeks, markets have remained orderly.

We continue to monitor developments here and in other jurisdictions, including actions in some jurisdictions to further restrict short selling.

In Australia, short selling is trending at around 2019 levels and we’re not seeing evidence that it has exacerbated price volatility. We’ll continue to closely monitor short selling levels and compliance with the existing ban on naked short selling.

We remind all clients, executing brokers and swap counterparties of their obligations under the Corporations Act, including:

• the prohibition on naked short sales (section 1020B)
• executing brokers’ obligation to ask a seller if it is short selling (section 102AE)
• to report short sale transactions and short positions (sections 1020AB and 1020AC)
• compliance with conditions imposed on any exemptions from the prohibition. For example, the requirement for the seller to notify us if they have failed to meet their settlement obligations (e.g. section 6 of ASIC Corporations (Short Selling) Instrument 2018/745). We expect strict and timely compliance with all conditions.

Covered short selling is permitted in Australia, subject to certain reporting and disclosure obligations, where the seller has a ‘presently exercisable and unconditional right to vest the products in the buyer’ at the time of sale (through a securities lending arrangement). This differs from the ‘locate’ rule in many other jurisdictions, which allows the seller time to borrow stock after the transaction is entered into.

Naked short selling is the practice of selling certain financial products without ’cover’. It’s prohibited in Australia unless an exemption applies. This is an important safeguard against settlement failures, disorderly markets and any knock-on impacts to the financial system.

We remind you that short selling obligations also apply to ‘give-up’ trading arrangements, for which we’ve previously set our expectations.

A breach of the short selling provisions is generally a criminal offence. We have no tolerance for breaches of these provisions, especially in the current environment.

For more information regarding short selling obligations and exemptions, see Regulatory Guide 196 Short selling.

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Research reports during market volatility

Given the recent market volatility, Australian financial services licensees (licensees) are reminded that where research reports and their recommendations are no longer current, they should be flagged as historical and indicate that the original recommendation no longer applies.

Failure to do so affects the reliability of the research report and risks misleading users relying on that research. Licensees should also consider the appropriateness of providing outdated research to clients. 

Research reports are prepared based on information available at the time of preparation and should be dated.

Licensees should refer to Regulatory Guide 79 Research report providers: Improving the quality of research and Regulatory Guide 264 Sell-side research, which provide guidance for licensees who are research report providers.

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COVID-19 market updates webpage

Stay up-to-date with all our COVID-19 markets-related developments with our newly created webpage.

The COVID-19 market updates webpage has been created as a collective ‘single source of truth’ for all COVID-19 markets-related content.

The page lists, in chronological order, all published COVID-19 markets-related content, including media releases and MIU articles.

We’re working closely with exchanges and market participants to make sure the financial system is able to operate effectively and markets remain open.

We’ll continue to actively monitor market developments domestically and overseas and take action as appropriate.

You can also stay up-to-date by subscribing to receive ASIC’s media releases as they’re published, and following us on Twitter and LinkedIn.

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Internal market making guidance updated

We’ve updated Information Sheet 230 Exchange traded products: Admission guidelines (INFO 230). INFO 230 provides additional guidance to firms, including licensed Australian exchanges, product issuers and market making execution agents, on better practices for internal market making in non-transparent, actively managed funds that are traded on exchange markets.

The update outlines measures firms should take to manage market integrity risks associated with internal market making. Firms should:

• only use a reference price or other information that is publicly available as the input for market making quotes
• establish information barriers so that bids and offers are not submitted to the market by persons or systems with knowledge of the current portfolio holdings
• have adequate arrangements for identifying and responding to instances of substantial information asymmetry in the market, and
• have appropriate compliance and supervision arrangements to support these measures.

The update also provides guidance on improving internal marking making practices. This includes:

• the indicative net asset value (iNAV) being as accurate and frequently disseminated as practicably possible
• full portfolio holdings disclosure being delayed only to the extent necessary to protect the fund’s intellectual property, and
• internal market making arrangements supporting incoming and exiting investors to transact at fair and orderly prices.

Peripheral updates have also been made to reflect recent changes in the market.

• Read INFO 230

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Conditional OTC derivatives reporting relief extended

We’ve granted conditional relief until 30 September 2022 from two elements of the ASIC Derivative Transaction Rules (Reporting) 2013 (the Rules), relating to trade identifiers and New Zealand banks reporting entity information.

The instrument extends conditional relief to reporting entities:

• from the requirement to report a ‘universal transaction identifier’ or a ‘single transaction identifier’ (trade identifier relief) where an alternative trade identifier is reported
• that are New Zealand registered banks from the requirement to report entity information (entity identifier relief) for transactions with smaller NZ companies in certain circumstances where an internal identifier is reported.

The trade identifier relief introduces a new condition in response to the CFTC’s recent proposals to require use of a unique transaction identifier (UTI) from 31 December 2020, and to switch to T+1 reporting at a date yet to be determined. The condition requires that a UTI determined under future provisions of the CFTC Rules must also be reported as a UTI under the ASIC Rules. The condition also resolves CFTC/ASIC cross-jurisdictional UTIs by requiring that the CFTC Rules for UTI generation prevail. As the proposed CFTC Rules have not come into force, the condition applies where a reporting entity reasonably believes that a UTI must be reported under the CFTC rules.

We have granted the relief in order to:

• provide time to propose and implement a package of rule amendments to address these and other reporting elements on a more permanent basis
• facilitate harmonisation to the greatest extent possible across key jurisdictions when implementing the CPMI IOSCO UTI Technical Guidance
• not require smaller NZ companies to obtain entity information in order to enter into derivatives transactions with NZ registered banks.

• Read the explanatory statement

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AMP Life and AMP Capital pay penalties in relation to trade reporting rules

AMP Life Limited (AMP Life) has paid a penalty of $275,500 and AMP Capital Investors Limited (AMP Capital) has paid a penalty of $250,500 to comply with ASIC infringement notices.

We issued the infringement notices because we considered there were reasonable grounds to believe there were breaches of the ASIC Derivative Transactions (Reporting) Rules 2013 (Rules) by AMP Life between August 2015 and February 2018 and by AMP Capital between March 2016 and September 2018.

The Rules require counterparties to report derivative transaction and position information to derivative trade repositories. This reporting is necessary to enhance the transparency of transaction information available to regulators, promote financial stability and support the detection and prevention of market abuse.

Specifically, we had reasonable grounds to believe that between 31 August 2015 and 26 February 2018, AMP Life failed to:

• report information about 940 transactions on 113 separate business days
• correctly report collateral information about 9,224 transactions on 388 separate business days
• take all reasonable steps to ensure that BNP Paribas Fund Services Australasia Pty Ltd (BNP), on behalf of AMP Life, was reporting information that was complete, accurate and current.

We also had reasonable grounds to believe that between 31 March 2016 and 28 September 2018, AMP Capital failed to:

• report information about 140 transactions on 34 separate business days
• correctly report collateral information about 9,999 transactions on 417 separate business days
• take all reasonable steps to ensure that BNP, on behalf of AMP Capital, was reporting information that was complete, accurate and current.

We consider the breaches arose out of administrative failings. However, the duration of each of the reporting failures was significant and the time taken to identify them shows serious inadequacies in AMP Life's and AMP Capital's processes and procedures for monitoring the accuracy of their reporting.

AMP Life and AMP Capital have taken, and are continuing to take, actions to remedy their reporting failures and are implementing systems and processes aimed at preventing future failures of this kind.

Compliance with the infringement notices is not an admission of guilt or liability and AMP Life and AMP Capital are not thereby taken to have contravened the Rules.

• Read the media release

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Feedback on financial institutions preparation for LIBOR transition released

We’ve released feedback on responses to the ‘Dear CEO’ letter (from selected major Australian financial institutions) detailing their preparation for the end of LIBOR (London Interbank Offered Rate) – an initiative supported by the Australian Prudential Regulation Authority (APRA), and the Reserve Bank of Australia (RBA).

The feedback highlights the:

• need for all stakeholders to plan for LIBOR transition
• aspects to consider in transition
• importance of starting the transition early.

The regulators encourage all financial and corporate institutions in Australia to read the feedback, consider the implications of transition for their own situation, and plan accordingly for the end of LIBOR.

Institutions are also encouraged to communicate and highlight the potential impacts of LIBOR transition to their stakeholders, including end consumers, to raise awareness of issues more broadly.

We recognise that disruptions from the COVID-19 pandemic may affect some institutions’ transition plans, however they should continue under the assumption that the end of 2021 remains the target date.

Specific individual feedback from ASIC and APRA was provided to institutions that responded to the letter.

• Read the feedback

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