Market Integrity Update - Issue 126 - May 2021

Issue 126, May 2021

Civil proceedings against Westpac for insider trading

We’ve commenced Federal Court proceedings against Westpac Banking Corporation (Westpac) for insider trading, unconscionable conduct and breaches of its Australian financial services licensee obligations.

The allegations relate to Westpac’s role in executing a $12 billion interest rate swap transaction with a consortium of AustralianSuper and a group of IFM entities (the Consortium). The transaction occurred on 20 October 2016 and was associated with the privatisation of a majority stake in the electricity provider Ausgrid by the NSW Government. The transaction remains the largest interest rate swap transaction executed in one tranche in Australian financial market history.

On the morning of 20 October 2016, the Consortium signed an agreement with the NSW Government for the acquisition of Ausgrid.

We allege that:

• Westpac knew, or believed, it would be selected by the Consortium to execute the interest rate swap transaction on that morning (inside information)
• while in possession of the alleged inside information, Westpac’s traders acquired and disposed of interest rate derivative products in order to pre-position Westpac in anticipation of the execution of the swap transaction
• Westpac’s trading occurred while it was in possession of information that was not generally available to other market participants including those that traded with Westpac that morning
• the circumstances surrounding Westpac’s trading on the morning of 20 October 2016, including its failure to provide to the Consortium full and informed disclosure about its intention to pre-position its trading books prior to and with notice of the execution of the swap transaction, amounted to unconscionable conduct.

• Read the full details of our allegations in the media release

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Binary options product intervention order takes effect

Our product intervention order banning the issue and distribution of binary options to retail clients took effect on 3 May 2021.

We found that binary options have resulted in, and are likely to result in, significant detriment to retail clients. Our reviews in 2017 and 2019 indicated that approximately 80% of retail clients lost money trading binary options.

We also found that binary options are likely to result in cumulative losses to retail clients over time because of the following product characteristics:

• the ‘all or nothing’ payoff structure, where one of the two possible outcomes for a binary option contract is that the retail client will lose their entire investment amount
• short contract duration (the average contract duration of binary options traded with one provider was less than six minutes)
• negative expected returns (that is, the present value of the expected payoff for a binary option contract is lower than the initial investment).

Our binary options ban brings Australian requirements into line with prohibitions in force in comparable markets and follows the commencement on 29 March 2021 of our product intervention order imposing conditions on contracts for difference offered to retail clients.

The order will remain in force for 18 months, after which it may be extended or made permanent. Civil and criminal penalties apply to contraventions of the product intervention order.

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Proposed changes to the capital requirements for market participants

We intend to make changes to the capital requirements for market participants, following feedback received in response to our proposals outlined in Consultation Paper 302 Proposed changes to ASIC’s capital requirements for market participants (CP 302).

We anticipate that the new capital requirements for market participants (excluding clearing participants, authorised deposit taking institutions and principal traders), in the form of new market integrity rules, will be made by 30 June 2021.

As a result of the feedback we intend to:

• provide a 12-month transition period from the time the rules are made
• modify the liquidity requirements by replacing the proposed 12-month cash flow requirement with a three-month cash flow requirement, including the requirement to maintain a 12-month liquidity plan
• include the ability to offset a right-of-use asset against a corresponding lease liability, with the net amount (if positive) to be treated as an excluded asset
• adjust various components of the commodity position risk requirements and FX position risk (including gold).

CP 302 proposed several changes to the ASIC market integrity rules to simplify and strengthen the current capital regime. The proposals followed our review of the adequacy of our current capital regime, the first since we commenced the supervision of capital and reporting requirements in 2011. Prior to the transfer of supervision, ASX had not made substantive changes for non-clearing market participants since 2000.

We’ll issue a feedback report containing further detail about the changes once the new rules have been made.

• Read CP 302

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Former CFO sentenced for market manipulation and fraud offences

Mr Zhonghan Wu (also known as John Wu), former chief financial officer of Traditional Therapy Clinics Limited (TTC), has been sentenced in the District Court of New South Wales to one year and 10 months imprisonment after pleading guilty to market manipulation.

Mr Wu is on bail and has been ordered to attend Community Corrections for an Intensive Correction Order assessment, the outcome of which will be considered on 2 July 2021, in the District Court.

Mr Wu was also sentenced to a Community Corrections Order for a period of two years and six months after pleading guilty to fraud offences.

Our investigation found that between 8 September 2015 and 30 November 2015, Mr Wu carried out and attempted to carry out, multiple share transactions in TTC shares using four different trading accounts. The trading had the effect of creating an artificial price for TTC shares on the Australian Securities Exchange (ASX). When trades in one trading account were rejected for suspicious trading, Mr Wu would use another trading account to continue trading in TTC shares.

Mr Wu’s trading occurred immediately after TTC’s listing on the ASX, following an initial public offering (IPO) in August 2015 that raised approximately $15m through the issuance of 30 million TTC shares at $0.50 per share. Mr Wu carried out the transactions in order to maintain the TTC share price above the IPO issue price of $0.50 per share.

In addition to the market manipulation offence, Mr Wu has also been found guilty of fraud. In 2012 and 2015, Mr Wu obtained loans from the Commonwealth Bank of Australia (CBA) for mortgages to purchase various properties. In support of his loan applications, Mr Wu provided false and misleading documents to CBA. The loan applications resulted in Mr Wu receiving funds totalling $390,000 in 2012 and $260,000 in 2015.

• Read the media release

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Macquarie Securities pays $126,000 infringement notice

Macquarie Securities (Australia) Limited (MSAL) has paid a penalty of $126,000 to comply with an infringement notice given by the Markets Disciplinary Panel (MDP).

The MDP had reasonable grounds to believe that MSAL contravened the ASIC Market Integrity Rules (Securities Markets) 2017 by entering into a transaction that was not in accordance with a buy-back client’s instructions. This was because an on-market buy-back trade on ASX Centre Point (ASXC), a common ‘dark’ market, was not entered into in the ordinary course of trading.  

The MDP considers orders that are matched otherwise than in price/time priority are not in the ordinary course of trading. The MDP considers the use by MSAL of participant preferencing on ASXC to execute buy-back orders without intervening measures was very likely to lead to the execution of orders other than in the ordinary course of trading.

The MDP was satisfied that the purchase of 1.2 million shares at $2.465 on 6 May 2019 on ASXC was not in the ordinary course of trading. MSAL’s sell order, which traded with MSAL’s buy order, was preferenced ahead of two existing sell orders that were submitted by another participant and which had time priority.

The compliance with the infringement notice is not an admission of guilt or liability, and MSAL is not taken to have contravened section 798H(1) of the Corporations Act 2001.

• Read the media release

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On-market buy-backs to be carried out in the ordinary course of trading

We expect market participants to conduct on-market buy-backs on behalf of their clients in:

• accordance with their clients’ instructions
• a manner that is ‘in the ordinary course of trading’
• compliance with their clients’ obligations under the Corporations Act 2001 (the Act).

As reinforced by the above Markets Disciplinary Panel outcome, in the ‘ordinary course of trading’ means trading in strict order of price/time priority, with indifference as to the identity of counterparties and no pre-agreements or selection of counterparties. This means that market participants should conduct buy-backs using orders that do not have participant preferencing enabled (whether through ASX Centre Point orders or Chi-X orders) to avoid the risk of non-compliance with both the Act and the market integrity rules.

As previously noted in Report 612 ASIC regulation of corporate finance: July to December 2018, we again remind companies and the market participants acting for them that when undertaking a buy-back, companies must ensure that on-market buy-backs are truly ‘on-market’ and carried out ‘in the ordinary course of trading’. Otherwise, the buy-back may be a selective buy-back that requires special shareholder approval.

Companies are ultimately responsible for ensuring their on-market buy-backs are conducted lawfully. Companies that fail to adhere to the buy-back procedures in the Act run the risk of contravening the prohibition against self-acquisition of shares.

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Markets Enforcement outcomes podcast

ASIC Senior Executive Leader, Molly Choucair, discusses some of the Markets Enforcement team’s recent work, including court action against AGM Markets and Antares Energy, as well as our Immunity Policy.

• Listen to the podcast (Google Chrome recommended)

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