Market Integrity Update - Issue 122 - December 2020

Issue 122, December 2020

Update on our review of November’s ASX Trade outage

We continue to assess the impact of the ASX Trade outage and subsequent issues with the Centre Point dark-pool, order cancellations and a delay to clearing and settlement that occurred during the week of 16 November 2020.

The immediate impact was the deterioration of liquidity and widening bid-offer spreads as many participants and their clients were unable (or chose not) to trade through alternative trading mechanisms.

We’re particularly focused on why more trading did not occur on other venues such as Chi-X, especially new client orders that were received after trading on ASX was suspended at 10.24 am on 16 November.

We’re concerned that some participants did not appear to have business continuity arrangements to trade when ASX Centre Point was unavailable—even when the main ASX ‘lit’ order book and Chi-X were available.

In 2021, ASIC will review how market participants have adapted their systems and processes in response to the outage and will work with the industry to identify what, if any, broader market adjustments might be necessary to reduce the impact of any future incidents.

We’ve also commenced an investigation into whether ASX met its obligations under its Australian Market Licence, including whether it has sufficient financial, technological and human resources to operate its markets. We view incidents of this nature with significant concern and, in conjunction with the Reserve Bank of Australia (RBA) as a co-supervisor of the ASX Group, have informed ASX of their expectation that an independent review be conducted in the first half of 2021.

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Former Murray Goulburn executives disqualified for involvement in continuous disclosure breaches

Former Murray Goulburn managing director Gary Helou and former chief financial officer Bradley Hingle have been disqualified from managing corporations by the Federal Court (the Court), following our investigation.

The Court ordered the disqualification of Mr Helou and Mr Hingle for three years and two years respectively following their involvement in Murray Goulburn Co-operative Co. Ltd (MG) and MG Responsible Entity Ltd’s (MGRE) continuous disclosure contraventions in 2016.

The Court found that Mr Helou and Mr Hingle contravened sections 674(2A) and 675(2A) of the Corporations Act 2001 (the Act) on various occasions, on and from 8 March 2016 until 27 April 2016, by being knowingly concerned in the failure of MGRE and MG to disclose that:

  • there was likely to be a material decrease in MG’s earnings guidance for FY16 published on 29 February 2016
  • the earnings guidance for FY16 was unlikely to be achieved from 8 March 2016 until 27 April 2016.

In an Agreed Statement of Facts and Admissions, Mr Helou and Mr Hingle admitted to contravening sections 674(2A) and 675(2A) of the Act.

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Managing conduct risk during LIBOR transition

We’ve published practical guidance for Australian entities to manage their conduct risk during the London Interbank Offered Rate (LIBOR) transition.

Information Sheet 252 Managing conduct risk during LIBOR transition sets out regulatory expectations and clarifications on key transition issues. It aims to assist entities in establishing necessary arrangements to mitigate conduct risk associated with the discontinuation of LIBOR.

INFO 252 sets out:

  • frameworks, practices, and recommendations on fair treatment of clients, representation of product performance, and client communication strategies
  • our expectations of the industry, including what we consider to be best practices
  • buy-side entity specific guidance and recommendations.

LIBOR is expected to cease after the end of 2021, although there is currently consultation by ICE Benchmarks to extend the use of some USD LIBOR tenors in some limited circumstances. Australian institutions should continue with their LIBOR transition plans and ensure that they are keeping pace with the timelines and milestones provided by each of the RFR global working groups.

All entities with LIBOR exposures are strongly encouraged to review INFO 252 and take reasonable steps to implement the relevant recommendations.

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Operational resilience of market intermediaries during COVID-19

We’ve published our key observations of market intermediaries’ business continuity and supervision arrangements during the COVID-19 pandemic, following the publication of our expectations earlier this year.

Australian financial markets have remained resilient, with market intermediaries generally adapting well to the changed work environment.

We encourage market intermediaries to: 

  • back-test tactical solutions and changes that were risk accepted under pressure. This is to ensure they are robust enough to avoid any inadvertent exposure to undue risk of misconduct or breach of the law
  • assess the ‘new normal’ and enduring impacts of the pandemic on flexible working practices and implications for the control environment
  • review risk appetites and risk limits, including for offshored and outsourced functions, and adjust them where appropriate
  • use stress testing and scenario analysis as effective risk management tools
  • update business continuity plans to incorporate key changes, including the possibility of longer periods of remote working
  • reflect on technological challenges encountered during COVID-19, strengthen technological resilience, and plan for any changes or improvements to existing systems and infrastructure
  • assess the adequacy of measures that were implemented to address cyber security risk during COVID-19 and prepare for the risk of more attacks.

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Retail OTC derivative issuers offering financial services overseas

We’ve reviewed a sample of retail over-the-counter (OTC) derivative licensees’ practices for onboarding overseas-based clients.

Our focus was on licensees’ controls to ensure they did not onboard clients from jurisdictions where the issuer may not be authorised to provide these products. Some of the better controls we observed include:

  • blocking IP addresses
  • limiting the range of jurisdictions available through onboarding systems
  • requiring a proof-of-residence check for each application
  • closing deposit and payment gateways for residents of certain jurisdictions.

Some licensees rely on website disclaimers and manual checks, which we consider to be less effective.

As previously noted, we’ll consider whether the provision of retail OTC derivatives in breach of overseas laws is consistent with obligations under Australian law to provide services ‘efficiently, honestly and fairly’.

We commenced civil proceedings against Union Standard International Group Pty Ltd (Union Standard) (in liquidation), alleging that Union Standard’s provision of margin FX products to Chinese-based clients put these clients at risk of contravening Chinese law in breach of Union Standard’s obligations under section 912A of the Corporations Act 2001.

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Simplifying OTC derivative transaction reporting

We’ve released the first of two consultation papers outlining changes to the ASIC Derivative Transaction Rules (Reporting) 2013 (the Rules).

Consultation Paper 334 Proposed changes to simplify the ASIC Derivative Transaction Rules (Reporting): First consultation (CP 334) outlines changes which are focused on implementing internationally standard reporting requirements (e.g. UTI, UPI, CDE and LEI elements). Other considerations in CP 334 aim to ensure the Rules are current, consolidated and fit for purpose.

Our proposed timeline to implement changes to the Rules is:

  • Consultation round one (CP 334) – 27 November 2020 to 1 March 2021
  • Consultation round two – May 2021 to June 2021
  • Rules made – Q3–Q4 2021
  • Rules in force – Q3–Q4 2022.

We’ve updated the derivative transaction reporting upcoming rules and exemptions changes webpage to include CP 334.

We welcome your feedback by 1 March 2021. We encourage direct engagement with interested stakeholders, which may be on a one-on-one or association basis, or as otherwise proposed. Email otcd@asic.gov.au if you wish to make such arrangements or a submission in relation to CP 334.

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Maintaining orderly markets when DTRs manage orders

We’ve recently seen an increase in the number of erroneous trades executed by market participants in exchange traded funds (ETFs). We remind all market participants to be mindful of their obligations when managing orders in any exchange products.

If orders for an ETF (or any other instrument) are redirected to a designated trading representative (DTR) for execution, we expect the DTR to properly assess the order before submitting it to market. A market participant is responsible for all orders submitted to market under its participant ID. It’s unacceptable for a DTR to erroneously execute an order without proper consideration, and then seek to cancel or cash settle with the client afterwards.

Under Rule 5.9.1 of the ASIC Market Integrity Rules (Securities Markets) 2017, market participants must not do anything which results in a market for a financial product not being both fair and orderly. The Markets Disciplinary Panel has previously taken action against market participants in relation to this Rule.

Contact Market Surveillance at markets@asic.gov.au for any inquiries.

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Proceedings commence against iSignthis and its managing director

We’ve commenced civil penalty proceedings against iSignthis Ltd (iSignthis) and its managing director and chief executive officer Nickolas John Karantzis.

We allege iSignthis breached its continuous disclosure obligations and made false and misleading representations under the Corporations Act 2001. Additionally, the proceedings also relate to Mr Karantzis’ involvement in those alleged breaches by iSignthis, as well as breaches of directors’ duties and his failure to take reasonable steps to ensure information that he gave to ASX was not false or misleading.

We’re seeking declarations and pecuniary penalties against iSignthis and Mr Karantzis, as well as orders that Mr Karantzis be disqualified from managing corporations.

The date for the first case management hearing is yet to be scheduled.

For full details of our allegations against iSignthis and Mr Karantzis, refer to the media release below.

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Former cryptocurrency promoter charged

Former BitConnect Australian national promoter, John Bigatton, has been charged following our investigation.

Mr Bigatton promoted the online cryptocurrency platform, BitConnect, before its collapse in early 2018. It is estimated that BitConnect had a market capitalisation of over US$2.5 billion in December 2017.

Mr Bigatton has been charged with:

  • one count of operating an unregistered managed investment scheme (maximum penalty of five years’ imprisonment and/or a fine of $42,000)
  • one count of providing unlicensed financial services on behalf of another person (maximum penalty of two years’ imprisonment and/or a fine of $42,000)
  • four counts of making a false or misleading statement affecting market participation (a maximum penalty for each charge of 10 years’ imprisonment and/or a fine of $945,000, or a fine of three times the proceeds derived from the commission of the offence).

We allege that Mr Bigatton:

  • was the Australian national promoter of BitConnect from around 14 August 2017 to 18 January 2018
  • operated an unregistered managed investment scheme known as the BitConnect Lending Platform in Australia and that he provided unlicensed financial advice on behalf of another person in, among other things, seminars he conducted at various locations around Australia
  • made false or misleading statements during four seminars he conducted, which were likely to induce investors to apply for, or acquire, interests in the BitConnect Lending Platform.

The matter has been adjourned for further mention in the Downing Centre Local Court on 2 February 2021.

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Last updated: 17/02/2021 09:23