Market Integrity Update - Issue 120 - October 2020

Issue 120, October 2020

OTC derivatives issuers ordered to pay $75 million penalty

OTC derivatives issuer AGM Markets Pty Ltd (AGM) and its former authorised representatives, OT Markets Pty Ltd (OTM) and Ozifin Tech Pty Ltd (Ozifin) (the companies), have been ordered to pay a total of $75 million in pecuniary penalties.

AGM has been ordered to pay $35 million, while OTM and Ozifin have each been ordered to pay $20 million.

In February 2020, the companies were found to have engaged in systemic unconscionable conduct while providing over-the-counter (OTC) derivatives products to retail investors in Australia. Clients of the companies lost significant amounts of money, with total trading losses equating to approximately $32 million.

The companies have also been ordered to pay refunds to approximately 10,000 former clients. The exact refund amount will depend on each client’s individual circumstances, and the amount of money available, as each of the defendants are now in liquidation.

Former clients of OTM and Ozifin should receive a Refund Notice from the relevant liquidator with further information and a pre-populated ‘proof of debt’ form estimating the amount of their net deposits. If clients do not receive a notice by 16 November 2020, they should contact the relevant liquidator (see contact details in the media release below).

The companies were also ordered to pay our costs.

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Insider trader sentenced to three years’ imprisonment

Former investment analyst, Mr Michael Ming Jinn Ho, has been sentenced to three years’ imprisonment for trading in Big Un Limited (Big Un) shares with inside information.

Mr Ho pleaded guilty to five counts of insider trading and one count of communicating inside information in respect of Big Un shares and options between 18 July 2016 and 10 February 2018.

Mr Ho invested approximately $1.6 million in Big Un securities over this period while in possession of inside information communicated to him by Big Un’s CEO Richard Evertz.

In sentencing, Mr Ho’s cooperation with our investigation and early guilty plea was considered and he was ordered to serve a discounted sentence via an intensive correction order.

Our investigation into Big Un and its officers and executives continues.

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Licence of retail OTC derivatives issuer cancelled

We’ve cancelled the Australian financial services (AFS) licence of retail over-the-counter (OTC) derivatives issuer Union Standard International Group Pty Ltd (Union Standard).

Union Standard operated under the brand USGFX and held AFS licence 302792. Following the appointment of court ordered liquidators on 3 September 2020, the licence was cancelled on 14 September 2020 under section 915B of the Corporations Act 2001 (Cth) (Corporations Act).

Although the licence is cancelled, we’ve used our power under section 915H of the Corporations Act to allow the liquidators to conduct certain necessary activities under the licence until 18 December 2020, including to:

  • put in place a dispute resolution scheme and arrangement for compensating retail clients
  • hold professional indemnity insurance
  • allow the termination of existing arrangements with current clients of Union Standard.

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Former fixed income broker banned for 10 years

We’ve banned former BGC Securities (Australia) Pty Ltd (BGC) broker, David Moore, from providing financial services for 10 years.

Mr Moore was an executive manager at BGC, trading as BGC Fixed Income Solutions (formerly MINT Partners Australia), from approximately June 2016 to February 2020.

We found that Mr Moore breached a contractual agreement between BGC and a referring broker by:

  • charging unpermitted spreads on transactions entered on behalf of a number of accounts of clients referred to BGC by the referring broker
  • trading at prices other than the agreed independent valuation on transactions entered on behalf of a number of accounts.

We also found that Mr Moore engaged in conduct in relation to his transactions in corporate bonds on behalf of his clients’ accounts that was misleading or deceptive, or likely to mislead or deceive, and that he attempted to take steps to conceal this conduct. Further, Mr Moore caused BGC’s records to be altered improperly, causing investment statements to contain false information that deceived clients and the referring broker as to whether Mr Moore had adhered to the contractual agreement.

Mr Moore’s banning is recorded on our banned and disqualified register.

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Joint expectations with RBA for CHESS replacement

Following the release of the Reserve Bank of Australia’s (RBA) Assessment of ASX Clearing and Settlement Facilities, we’ve jointly announced our expectations of ASX as it replaces the Clearing House Electronic Sub-register System (CHESS).

We jointly expect ASX to replace CHESS, which is a critical clearing and settlement facility for the Australian cash equity market, as soon as this can be safely achieved by ASX and users of CHESS.

The importance of replacing CHESS in a safe and timely manner was particularly highlighted in recent record trading volumes and the associated CHESS processing delays observed in March. In implementing the replacement, ASX should consider CHESS user feedback from its recent consultation on a revised implementation timeline.

ASX is expected to demonstrate the readiness of the CHESS replacement system and will be required to provide supporting independent assurances before migrating to the new system.

ASX is also expected to achieve a significant uplift in intraday trade processing capacity and end-of-day processing performance in the new system.

Together with the RBA, we’ll continue to closely supervise ASX’s CHESS replacement program.

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Maintaining equity market resilience and upcoming geopolitical events

We remind all market participants to act appropriately and take reasonable steps to ensure Australia’s equity markets remain resilient.

On 13 March 2020, the equity market exceeded the number of trades that could be reliably processed within normal processing timeframes. To manage the risk to the financial markets’ clearing and settlement systems, we issued directions (which have since been revoked) to nine large equity market participants requiring them to limit their number of trades executed each day.

We’ve since observed a significant increase in average trade sizes which has contributed to a reduction in the number of trades executed. ASX has also upgraded its infrastructure, with CHESS now having the capacity to cater for seven million trades per day, over multiple consecutive days. ASX Clear and ASX Settlement will closely monitor the number of trades and take any necessary action to ensure a fair and effective market.

We’re aware that elevated levels of market volatility and trading activity could occur around the upcoming US Presidential election on 3 November 2020, which may lead to substantial increases in the number of trades executed.

In a letter published in May we outlined our expectations for all equity market participants 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.

We’ll continue to closely monitor Australia’s equity markets and take further action where necessary to ensure they remain resilient.

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Financial institutions urged to adhere to the ISDA IBOR Fallbacks Protocol and Supplement

Together with the support of the Australian Prudential Regulation Authority (APRA) and the Reserve Bank of Australia (RBA) (the regulators), we urge Australian financial institutions to adhere to the International Swaps and Derivatives Association (ISDA) IBOR Fallbacks Protocol and Supplement.

ISDA announced it will launch the 2020 IBOR Fallbacks Protocol and associated Supplement to the 2006 ISDA Definitions on 23 October 2020. Informed by extensive industry consultation, including in Australia, these are needed to implement robust fall-back provisions for derivatives contracts referencing key interbank offered rates (IBORs), including the London Interbank Offered Rate (LIBOR).

While the regulators welcome the progress of LIBOR transition in Australia to date, continued focus and effort is necessary.

Adherence is an important step towards the orderly transition of LIBOR-referenced derivatives contracts. It’s critical to the mitigation of both individual entity risks and systemic risks associated with the discontinuation of LIBOR.

All financial and corporate institutions that use derivatives contracts referencing LIBOR are strongly encouraged to review and adhere to the protocol by its effective date of 25 January 2021.

The Financial Stability Board has also released a statement encouraging broad and timely adherence to the protocol.

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OTC derivative transaction reporting relief changes

We’ve extended conditional relief from some elements of the ASIC Derivative Transaction Rules (Reporting) 2013 (the Rules) until 30 September 2022.

The instrument extends conditional relief in relation to the reporting of:

  • exchange-traded derivatives – the instrument has been modified to remove references to ‘relevant financial markets’. Relevant financial markets prior to 1 October 2020 have been assessed and (where appropriate) included as regulated foreign markets within ASIC Regulated Foreign Markets Determination (Amendment) Instrument 2020/828
  • Name Information for a relevant entity where a standard identifier is reported
  • FX Securities Conversion Transactions limited to certain circumstances.

The instrument also removes expired relief in relation to:

  • reporting identifying information for historical reportable positions without express consent from relevant entities (Privacy – Consent for historical counterparties)
  • reporting identifying information for Chinese and Saudi Arabian relevant entities (Privacy – Foreign privacy restrictions)
  • historical relief elements that ceased in 2016 and 2015
  • other elements of relief in relation to Privacy – Consent for historical counterparties and Privacy – Foreign privacy restrictions ended on 30 September 2020. These updates have been made following industry consultation and analysis of reported transaction information.

We’ll further consider elements of relief and plan to consolidate permanent requirements within our upcoming rules and exemptions changes consultation.

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AOP annual notification reminder

If you operate an automated order processing (AOP) system, you’re reminded of your obligation to notify us of certain information within 10 business days of the annual review date.

The AOP annual review date is 1 November each calendar year. This means that your notification must be submitted by COB Friday 13 November 2020. For more information see Rule 5.6.8B of the Market Integrity Rules (Securities Markets) 2017 and Regulatory Guide 241 Electronic trading.

We encourage you to provide this notification using Form M62, which is available on the MECS portal. The form includes instructions on how to complete and lodge the notification using MECS. Submitting the form through MECS will allow you to manage and retain a record of your interactions with us.

If you’ve decommissioned an AOP and won’t be providing an annual notification for this system, please advise your Intermediary Supervisor or email us at Market.Participants@asic.gov.au with the following information:

  • name of system
  • version
  • trading platform(s)
  • date of initial certification
  • date of decommission.

Contact your Intermediary Supervisor or email us if you have any questions.

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Proposed market integrity rules for technological and operational resilience

We’ve recommenced work on finalising our position for the proposals outlined in Consultation Paper 314 Market integrity rules for technological and operational resilience (CP 314).

Earlier this year, we deferred work on CP 314 and refocused our regulatory work and priorities to respond to the impact of the COVID-19 pandemic.

The proposed market integrity rules will apply to securities and futures market operators and participants to promote the technological and operational resilience of their critical systems. This includes requiring that market operators and participants have arrangements in place for dealing with major events, such as a pandemic. This is important to ensure the continuity of their business and operations, and to minimise disruption to other market users who are dependent on the operator or participant for their critical systems.

The COVID-19 pandemic has reinforced to market operators and participants the importance of having robust business continuity, information security, and backup and recovery arrangements that have been adequately tested to ensure the resilience and continued operation of critical business services and operations.

In finalising our position, we’ll consider responses to the COVID-19 pandemic by market operators and participants, as well as feedback from industry and other regulators. If you wish to make further comments, including sharing your observations of the COVID-19 experience, contact us at Market.Participants@asic.gov.au.

Due to our refocused regulatory work and priorities during the COVID-19 pandemic, the proposed new market integrity rules will no longer be implemented in 2020. A revised target implementation date is yet to be determined.

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Last updated: 23/11/2020 09:34