Market Integrity Update - Issue 115 - May 2020

Issue 115, May 2020

Pershing pleads guilty to mishandling client money

Pershing Securities Australia Pty Ltd (PSAPL) has pleaded guilty to mishandling client money.

PSAPL is the first company in Australia to face criminal prosecution for breaching client money provisions, which are designed to protect the interests of Australian financial services (AFS) licensee clients by ensuring that client money is kept separate from licensee money.

PSAPL pleaded guilty to:

  • breaching section 993B(1) between 25 January 2016 and 31 December 2018 by receiving money in connection with financial services, and then failing to pay that money into an account that satisfied the client money requirements within section 981B of the Corporations Act 2001.
  • breaching section 993C(1) between 30 June 2016 and 16 December 2017 through making payments out of a client money account that were not permitted by regulation 7.8.02 of the Corporations Regulations 2001.

Each offence carries a maximum penalty of 250 penalty units (approximately $45,000).

PSAPL also admitted guilt to a third section 993B(1) breach that took place on 21 August 2017. As part of the plea, PSAPL will not be sentenced on this breach but it will be taken into account during sentencing for the above charges.

Client money is money paid to a financial services licensee in connection with a financial service that has been provided, or will or may be provided, or in connection with a financial product. Client money must be paid into a client money account and AFS licence holders can only make payments out of a client money account as specified by the Corporations Regulations.

The matter has been listed for sentence on 27 July 2020.

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Expectations for maintaining equity market resilience

We’ve published a letter outlining our expectations for all market participants to act appropriately to ensure Australia’s equity markets remain resilient.

All equity market participants are requested to take reasonable steps to ensure the number of trades matched from their orders:

  • are capable of being handled by their internal processing and risk management systems and, if applicable, their clearing and settlement operations
  • support the fair and orderly operation of Australian equity markets.

Directions issued to nine large equity market participants to limit the number of trades executed each day have also been revoked. This is due to:

  • enhancements to trade processing made by market operators and the clearing and settlement facilities
  • the positive actions taken by these participants to reduce their number of executed trades, which has contributed to more efficient settlement preparation and reduced failure rates
  • the stabilisation in overall trading activity.

We’ll closely monitor the behaviour of participants and take further action where necessary. We’ll also undertake a review of the broader trends in trading activity and, where appropriate, consult with industry on any proposed regulatory changes.

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Retail investors at risk in volatile markets

Our analysis of markets during the COVID-19 pandemic has revealed a substantial increase in retail activity across the securities market, as well as greater exposure to risk.

The Retail investor trading during COVID-19 volatility paper highlights our early observations on trading in securities and contracts for difference (CFDs) during the volatility caused by the COVID-19 pandemic.

Trading frequency has increased rapidly, as has the number of different securities traded per day, and the duration for holding the securities has significantly decreased. This indicates a concerning increase in short-term and ‘day-trading’ activity. 

The analysis suggested that few of those who pursued quick windfalls were successful. During the focus period, on more than two-thirds of the days on which retail investors were net buyers, their share prices declined the following day. On days where retail investors were net sellers, their share prices more likely increased the next day.

In addition to the increased trading, there was a sharp increase in the number of new retail investors to the market – up by a factor of 3.4 times – as well as a marked increase in the number of reactivated dormant accounts.

Trading activity in CFDs increased significantly during this period of heightened volatility. Leverage inherent in CFDs magnifies investment exposure and sensitivity to market volatility, so retail clients should be particularly cautious about investing in leveraged products at this time. In the week of 16–22 March 2020, for example, retail clients’ net losses from trading CFDs were $234 million for a sample of 12 CFD providers.

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Research analysts and exposure to inside information

Research analysts regularly interact with and obtain information from companies – for example, information about the impact of the COVID-19 pandemic on an entity’s business or financial performance. There is a risk that the information may be inside information. Poor practices in handling inside information can threaten market integrity and risk contravention of the Corporations Act 2001.

There can be competitive advantages for a research analyst to use and release information they obtain quickly. The speed at which information is released increases the risk that insufficient care is taken to determine if the information is inside information.

If the information is inside information, the research analyst needs to manage it appropriately and have robust compliance and control functions in place so it’s not passed on to clients or other parts of the licensee’s business (such as sales or corporate finance).

Licensees should ensure that research analysts have a clear understanding of what constitutes inside information, as well as the requisite skills and experience to determine if information contains inside information.

Regulatory Guide 264 Sell-side research provides further information, including guidance on research analyst declarations in published research and monitoring and reviewing material changes to research.

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Supporting increased transparency in capital raisings

We note the Australian Securities Exchange’s (ASX) class waiver decision – Temporary Extra Placement Capacity dated 31 March 2020 – and the further amendments to the class waiver dated 22 April 2020, as well as the recent publication of the Compliance Update no. 04/20.

The amendments reflect our expectation that directors must provide transparent disclosure to the market about the capital raising decisions they are making which are required to be in the best interests of the company.

Issuers and licensees should also consider the findings of Report 605 Allocations in equity raising transactions (REP 605) which outlines a number of better practices for directors of listed companies to consider when raising capital and for licensees who are involved in transactions.

Surveillance of placements and share purchase plans made in reliance on ASX’s waiver

As described in the amendments to the class waiver dated 22 April 2020 and in the Compliance Update no. 04/20, issuers are required to give to ASX and ASIC the detailed allocation spreadsheets for capital raisings completed in reliance on the class waiver.

We’ll review the allocation spreadsheets and monitor the disclosures made by companies about placements, rights offers and share purchase plans (SPPs) to ensure they are accurate, sufficiently detailed and provide meaningful, rather than ‘boiler plate,’ disclosure.

Capital raisings that do not rely on ASX’s waiver

We’ll also continue surveillance work following the findings of REP 605. This will examine the conduct of licensees and directors in capital raising activities beyond those using the temporary emergency capital raising relief. 

We consider the enhanced disclosure required under ASX’s temporary waiver is also appropriate for other capital raisings that do not need to rely on the waiver. We encourage companies to make these types of disclosures for all placements and SPPs.

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Foreign AFS licence regime and reminder of regulatory data and industry funding obligations

The foreign Australian financial services (AFS) licensing regime commenced on 1 April 2020. This replaced the licensing relief for foreign financial services providers (FFSPs) providing financial services to Australian wholesale clients, where those FFSPs are authorised under a sufficiently equivalent overseas regulatory regime.

The new framework is outlined in our updated Regulatory Guide 176 Foreign financial services providers. FFSPs currently relying on pre-existing relief will have until 31 March 2022 to make arrangements to continue their operations in Australia, which may include applying for a foreign AFS licence.

Impacts on a market participant’s regulatory data obligations

If you’re a market participant with overseas-based clients who are transitioning to the foreign AFS licensing regime, you’ll need to consider how their change in licensing status impacts your regulatory data. Where clients are overseas-based intermediaries transmitting orders from their own underlying clients through a participant’s trading system, participants should ensure that the entity’s foreign AFS licence number, once issued, is provided in the Intermediary ID data field on relevant orders and trade reports.

Impacts on a foreign AFS licensee’s industry funding arrangements

If you’re an overseas-based intermediary that has been granted a foreign AFS licence, and deals in securities on behalf of clients but you are not a market participant, you may be considered a ‘securities dealer’ under industry funding legislation. A securities dealer is a leviable entity for the purposes of ASIC’s industry funding arrangements and will be required to submit business activity metrics. The industry funding levy will apply in the first financial year (1 July to 30 June) that the securities dealer is granted a foreign AFS licence and transacts for clients in the Australian market.

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Last updated: 30/03/2021 09:22