Market Integrity Update - Issue 127 - June 2021
- Forex CT ordered to pay $20 million penalty and sole director disqualified and fined
- Expectations for activist short selling campaigns
- Ceasing LIBOR in new contracts before the end of 2021
- IBOR transition and OTC derivatives transaction reporting
- Union Standard director and former responsible manager banned from providing financial services and disqualified from managing corporations
- REX pays $66,000 penalty for alleged continuous disclosure breach
- Former Healthe Care Australia executive pleads guilty to insider trading
- Retail OTC derivative issuers’ compliance with NTA
The Federal Court has ordered Forex Capital Trading Pty Ltd (Forex CT) to pay a $20 million penalty for engaging in systemic unconscionable conduct, paying conflicted remuneration to its team leaders and account managers and failing to act in the best interests of its clients.
The company’s sole director, Shlomo Yoshai, has been ordered to pay a $400,000 penalty and has been disqualified from managing corporations for eight years for breaching his duties as a director and aiding Forex CT’s unconscionable conduct.
Forex CT offered clients opportunities to trade in contracts for difference (CFDs) and margin foreign exchange contracts issued by the firm.
Forex CT engaged in a system of unconscionable conduct by:
- offering incentives to encourage clients to transfer more money to their Forex CT trading account, even after the client had told the account manager that they could not afford to invest more money, or were reluctant to do so
- employing high-pressure sales tactics
- recommending inappropriate trading strategies to clients
- making misleading or deceptive representations to clients
- implementing and encouraging a trading floor culture that was directed towards maximising trading volume and client deposits rather than promoting a culture of compliance with applicable legal requirements
- implementing an employee remuneration scheme and key performance indicators where account managers were rewarded and paid commissions based on net deposits (gross deposits less withdrawals) made by their clients
- failing to ensure compliance with financial services laws.
The court also found Forex CT failed to act in the best interests of its clients when providing personal advice and failed to do all things necessary to ensure that the financial services covered by the licence were provided efficiently, honestly and fairly.
- Read the media release
We’ve published Information Sheet 255 Activist short selling campaigns in Australia (INFO 255), considering the practice of ‘activist short selling’ in Australia and outlining our expectations to promote market integrity during these campaigns.
Activist short selling involves a person taking a short position in a financial product and then publicly disseminating information directly or through an agent that might negatively affect the price of the product (short report). A short report may, for example, call into question or directly criticise an entity’s finances, management, public disclosures or future prospects.
- describes the impact of activist short selling on markets
- provides an overview of the Australian regulatory framework relevant to these campaigns
- recommends better practices for activist short sellers and authors of short reports, market operators, target entities and market participants
- lists some of the actions that ASIC may take in response to these campaigns.
Short reports can provide new research and analysis and test the veracity of information released by a target entity. Some activist short sellers have exposed flawed business models, questionable business or accounting practices, insolvency and fraud in targeted entities.
However, activist short sellers can also unduly distort the price of a target entity’s securities.
To protect the integrity of Australia’s securities markets and address any information asymmetry, activist short sellers, target entities, market operators and market participants should apply the better practices outlined in INFO 255. These include, for activist short sellers, releasing short reports outside normal trading hours, drawing on reliable information and avoiding overly emotive language. Target entities should seek a temporary trading halt to provide time to digest and comprehensively respond to the claims of activist short sellers.
We also remind market participants of their obligations to report suspicious short selling activity under the market integrity rules, and for market operators to maintain a fair, orderly and transparent market.
- Read the media release
As we prepare for a timely transition away from the London Interbank Offered Rate (LIBOR), we (together with Australian Prudential Regulation Authority (APRA) and the Reserve Bank of Australia (RBA)) remind firms to cease using LIBOR in new contracts before the end of 2021.
On 2 June 2021, the Financial Stability Board (FSB) announced that all new use of LIBOR benchmarks should cease as soon as practicable and no later than the timelines set out by home authorities and/or national working groups in the relevant currencies. In particular, even though some USD LIBORs will continue until mid-2023, the US Banking Supervisors have stated that firms should cease entering into new contracts that use USD LIBOR as a reference rate as soon as practicable and in any event by no later than 31 December 2021.
The FSB also released:
- an updated Global Transition Roadmap for LIBOR incorporating the confirmed LIBOR cessation dates and transition milestones set across the different LIBOR jurisdictions
- a statement encouraging the adoption of overnight risk-free rates (RFR) where appropriate, while recognising the role for use of forward-looking RFR term rates in some limited cases
- a statement supporting the use of the ISDA spread adjustments in cash products.
Together with APRA and the RBA, we support the guidance and expectations set by the FSB and the US Banking Supervisors and expect firms to adhere to the deadline at the end of 2021 for the issuance of new LIBOR contracts. They should also accelerate the active conversion of legacy LIBOR contracts.
Continued reliance on LIBOR poses significant risks and disruptions to the stability and integrity of the financial system. Firms themselves may also face financial, conduct, litigation and operational risks associated with inadequate preparation.
- Read the media release
We recently published guidance on over-the-counter derivatives transaction reporting under the ASIC Derivative Transaction Rules (Reporting) 2013 (the Rules) regarding Interbank Offered Rate (IBOR) transition.
This is part of our commitment to help the industry enhance the overall preparedness of benchmark transition in Australia.
Our view is that amending existing IBOR-referenced contracts to include reference to fallback rates or adhering to the ISDA 2020 IBOR Fallbacks Protocol does not, of itself, trigger any reporting requirement under the Rules. However, the replacement of an IBOR with a fallback rate or alternative reference rate as a reference rate in a contract will trigger a requirement to report the changed information.
- Read the guidance
Union Standard director and former responsible manager banned from providing financial services and disqualified from managing corporations
We’ve banned John Carlton Martin, a director and former responsible manager of Union Standard International Group Pty Ltd (Union Standard) (in liquidation), from providing financial services for 10 years and from managing corporations for five years.
Union Standard was a retail over-the-counter (OTC) derivatives issuer offering clients opportunities to trade in contracts for difference (CFDs). Union Standard and its former corporate authorised representatives, Maxi EFX Global AU Pty Ltd (also known as EuropeFX) and BrightAU Capital Pty Ltd (also known as TradeFred) (in liquidation) operated under Union Standard’s Australian financial services (AFS) licence.
We found that Mr Martin was involved in Union Standard’s failures to:
- do all things necessary to ensure that the financial services covered by its licence were provided efficiently, honestly and fairly
- take reasonable steps to ensure that its representatives, TradeFred and EuropeFX, complied with financial services laws.
We also found Mr Martin failed to implement and enforce compliance policies and procedures. Mr Martin failed to address misconduct by EuropeFX and TradeFred representatives when alerted to instances including:
- representatives providing personal advice to clients when not licensed to do so
- representatives making representations to clients that were likely to mislead, including about the level of risk clients’ funds were exposed to and expected profits.
Mr Martin was also disqualified from managing corporations for five years following the appointment of liquidators to three companies of which Mr Martin was a director:
- Union Standard
- Direct FX Trading Pty Ltd.
Mr Martin has a right to apply to the Administrative Appeals Tribunal for review of our decision.
- Read the media release
Regional Express Holdings Limited (REX) has paid a penalty of $66,000 after we issued an infringement notice alleging it had not complied with its continuous disclosure obligations.
We found reasonable grounds to believe that REX was in breach of its continuous disclosure obligations from 11 May 2020 to 12 May 2020, by failing to inform the Australian Securities Exchange (ASX) that it was considering the feasibility of commencing domestic operations in addition to its regional operations.
REX scheduled an interview with the Australian Financial Review (AFR) and prior to the interview, considered what could be discussed with the AFR about the proposal to expand into domestic operations. The interview took place on 11 May 2020, during which details of REX’s proposal were discussed.
Following the release of the article on 12 May 2020, ASX contacted REX about the article and REX was placed in a trading halt. Later that day, REX disclosed to ASX that it was considering the feasibility of commencing domestic operations.
Listed entities are required to immediately disclose material information in certain circumstances. This includes when that information loses confidentiality, for example when a journalist becomes aware of it. Continuous disclosure of information protects the integrity of the market by ensuring investors are provided with equal and timely access to information about an entity.
On 16 December 2020, we restricted REX from issuing a reduced-content prospectus and using exemptions for reduced disclosure in fundraising documents until 14 December 2021.
REX is not, by reason of its compliance with the notice, regarded as having contravened section 674(2) of the Corporations Act 2001.
- Read the media release
Mr Gregory Campbell, former National Development and Construction Manager at Healthe Care Australia Pty Limited (Healthe Care) and a member of the company’s executive team in 2016, has pleaded guilty to one count of insider trading.
On 19 October 2016, Mr Campbell acquired 392,257 shares in Pulse Health Limited (Pulse) for a total value of approximately $127,384 while in possession of inside information relating to Pulse. On 21 October 2016, Mr Campbell sold the shares for a profit of over $30,000.
The sentencing hearing for Mr Campbell is listed for 12 October 2021 in the County Court of Victoria.
We remind Australian financial services licensees (licensees) of their obligations when demonstrating compliance with their net tangible asset (NTA) requirements.
Our recent review of a sample of retail over-the-counter (OTC) derivatives issuers (issuers) highlighted that some incorrectly calculated their NTA position, which is made up of cash/cash equivalents and liquid assets (as outlined in Regulatory Guide 166 Licencing: Financial requirements).
When calculating the overall NTA position, licensees should exclude the following assets:
- deferred tax assets
- client money held in trust accounts
- receivables from associates.
Licensees should also be aware of recent changes to the treatment of lease assets as part of NTA calculations. Assets which do not meet the definition of cash and/or cash equivalents include:
- monies in an account held by the licensee for the purposes of section 981B
- monies held in margin accounts with a licensee’s hedging counterparty
- term deposits which are defined as short term (generally less than three months) – simply placing the term deposit with an authorised deposit taking institution does not satisfy the requirement.
Licensees are reminded that funds used to demonstrate compliance for the cash and cash equivalent component of NTA cannot also be used to demonstrate compliance with the liquid asset component of NTA.