Market Integrity Update - Issue 128 - July 2021

Issue 128, July 2021

Consulting on crypto-asset ETPs and other investment products

We’re seeking feedback on proposals about exchange traded products (ETPs) that provide retail investors with exposure to crypto-assets, as outlined in Consultation Paper 343 Crypto-assets as underlying assets for ETPs and other investment products (CP 343).

Other investment products covered by CP 343 are listed investment companies, listed investment trusts and unlisted registered managed investment schemes.

We consider that these products have unique features and risks that need to be recognised by market operators and product issuers in performing their functions and meeting existing regulatory obligations.

Key areas of focus for market operators and product issuers in CP 343 include:

• identifying crypto-assets that are appropriate underlying assets
• establishing good practice with respect to pricing, custody, risk management and disclosure.

While considerable discussions with stakeholders have already occurred, CP 343 is designed to assist in finalising our position on good practices for market operators and product issuers.

In particular, we’d like to hear if you would be willing to trade or clear interests in crypto-asset ETPs: see Section B of CP 343.

Submissions on CP 343 from all interested parties are welcomed by Tuesday, 27 July 2021. After receiving submissions, we’ll consider stakeholder feedback and issue a feedback report. We intend to publish final information on good practices shortly afterwards.

• Read the media release

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Consulting on amendments to the ASIC market integrity rules

We’re seeking feedback on proposed amendments to the market integrity rules, designed to reduce the regulatory burden on participants, streamline rules across rule books and remove ambiguity in existing drafting. Some changes have been made necessary by recent changes to the Corporations Act 2001.

Consultation Paper 342 Proposed amendments to the ASIC market integrity rules and other ASIC-made rules (CP 342) includes amendments to:

• the ASIC Market Integrity Rules (Securities Markets) 2017, covering accredited derivatives advisers, trades with price improvement, trade confirmations for non-retail clients and regulatory data reporting
• the ASIC Market Integrity Rules (Futures Markets) 2017, covering prohibited employment, suspicious activity reporting and client authorisations
• ASIC-made rules generally, covering merits review, waivers and penalty amounts for breaches of the rules.

The consultation will help us form our final position on the various rules sought to be amended. Participants and interested parties are encouraged to make a submission by Friday, 6 August 2021.

After receiving submissions on CP 342, we’ll consider the feedback, publish a feedback report and submit the amended rules for Ministerial consent.

• Read the media release

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New ASIC market integrity rules for capital

We’ve made new ASIC market integrity rules for capital, providing important protections for investors and the integrity of the market, while simplifying the capital framework for market participants.

The ASIC Market Integrity Rules (Capital) 2021 (Capital Rules) will replace the existing separate rule books for securities market participants and futures market participants to create a common set of rules for capital.

Consistent with our proposals in Consultation Paper 302 Proposed changes to ASIC’s capital requirements for market participants (CP 302), the Capital Rules will:

• move futures market participants from the existing net tangible asset regime to a risk-based regime, subject to a minimum core capital requirement of $1 million
• increase the minimum core capital requirement for securities market participants to $500,000
• include a requirement to calculate an underwriting and sub-underwriting risk amount
• simplify the capital requirements by removing redundant rules and forms.

As a result of feedback received from industry, we’ve:

• introduced an extension of the proposed transition period from six to 12 months
• modified the proposed liquidity requirements by replacing the proposed 12-month cash flow requirement with a three-month cash flow requirement, together with a requirement to maintain a 12-month liquidity plan
• included 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
• adjusted various components of the commodity position risk requirements and FX position risk as they apply to principal positions.

Further detail on our consultation has been published in Report 692 Response to submissions on CP 302 Proposed changes to ASIC’s capital requirements for market participants.

Following a 12-month transition period, market participants will be required to comply with the Capital Rules from 17 June 2022. Market participants may wish to opt into the Capital Rules before 17 June 2022, by providing written notice. Upon opting in, market participants will be required to lodge monthly risk-based returns through the ASIC Regulatory Portal.

Exemptions to requirements in the Capital Rules apply to clearing participants of an approved clearing facility, authorised deposit-taking institutions and principal traders only.

• Read the media release

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Simplifying how market participants submit capital forms

From 1 July 2021, market participants who have opted into the ASIC Market Integrity Rules (Capital) 2021 (Capital Rules) before the commencement date can use the ASIC Regulatory Portal to submit their monthly, annual, summary and ad-hoc risk-based returns.

The portal offers a secure and efficient way for entities to meet their obligations, including the ability to transact with ASIC in a central location.

All market participants will be required to use the portal to lodge their risk-based returns from 17 June 2022. To opt into the Capital Rules before 17 June 2022, market participants must provide written notice that they wish to do so, confirming the date this is to occur. Written notice should be sent to market.participants@asic.gov.au.

Market participants who remain subject to the ASIC Market Integrity Rules (Securities Markets – Capital) 2017 or ASIC Market Integrity Rules (Futures Markets – Capital) 2017 must continue to lodge risk-based returns using the ASX RLM system or email.

Contact market.participants@asic.gov.au for any inquiries.

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Market integrity during increased merger and takeover activity

We’ve recently observed an increase in merger and takeover activity and remind market participants to be vigilant to the risk of leaks or mishandling of information. This can lead to illegal insider trading activity, which affects market integrity.

We continue to monitor trading surrounding significant market announcements to identify market misconduct and insider trading.

For market participants

Sound and effective policies and procedures addressing behaviours and processes for handling inside information are vital. Measures include:

• implementing effective information barriers
• limiting information to a ‘need to know’ basis
• having wall-crossing staff who are made aware of inside information
• maintaining insider lists
• having appropriate restrictions on personal account dealing
• ensuring oversight by a compliance or control function.

Market participants who have reasonable grounds to suspect a person has placed an order or entered into a transaction while in possession of inside information must lodge a suspicious activity report (SAR).

Ask yourself:

• Did the client buy before a positive announcement or sell before a negative one?
• Has the client traded in the security before and is the trading consistent with their trading history?
• How close to the announcement did the trade occur?

SARs must be submitted when you first become aware of the conduct, not after investigating it. SARs should be emailed to markets@asic.gov.au or submitted through the Market Entity Compliance System (MECS) portal using Form M57 Suspicious Activity Report.

You should also provide effective training to staff to help them identify potentially suspicious transactions and orders.

For listed entities

Entities involved in control transactions should proactively manage information about the transaction. This includes:

• requiring consultants and contractors to enter confidentiality agreements
• having appropriate arrangements to handle inside information, including on a ‘need to know’ basis
• recording who has been provided with the inside information – and when.

Entities should have a formal leak policy outlining steps to monitor and react to any leaks of proposed transactions.

Advisers to these entities should have policies and appropriate controls to limit access to inside information to only those who require it.

For more information, see:

• Regulatory Guide 265 Guidance on ASIC market integrity rules for participants of securities markets
• Report 393 Handling of confidential information: Briefings and unannounced corporate transactions

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AFS licence of BBY cancelled

We’ve cancelled the Australian financial services (AFS) licence held by BBY Limited (BBY), effective 24 June 2021.

The terms of the cancellation allow BBY’s AFS licence to continue in effect until 31 March 2022 for the following purposes only – to ensure that:

• clients of BBY continue to have access to an external dispute resolution scheme
• clients of BBY continue to have access to the National Guarantee Fund
• the receivers and liquidators have the legal authority to transfer a client’s ‘holder identification number’ to another market participant with instructions from the client or to convert a licensee-sponsored holding to an issuer-sponsored holding under the ASX Settlement Operating Rules
• BBY continues to be required to have arrangements for compensating retail clients for loss or damages suffered as a result of breaches of the Corporations Act 2001 by the companies or their representatives.

Under the Corporations Act 2001, we have the power to suspend or cancel an AFS licence, without holding a hearing, when the AFS licence is held by a body corporate that is placed under external administration.

BBY has a right to seek a review of our decision at the Administrative Appeals Tribunal.

• Read the media release

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Life Trading complies with MDP infringement notice

Life Trading Pty Ltd (Life Trading) has paid a penalty of $200,000, and entered into a court enforceable undertaking, to comply with an infringement notice given by the Markets Disciplinary Panel (MDP).

The MDP had reasonable grounds to believe that Life Trading contravened Rule 2.2.8 of the ASIC Market Integrity Rules (Futures Markets) 2017. This rule requires a market participant to have appropriate supervisory policies and procedures to ensure compliance by the participant and each person involved in its business with the market integrity rules and the Corporations Act 2001.

The MDP found that Life Trading did not have appropriate supervisory policies and procedures from the time it became a market participant on 28 January 2019 until 4 June 2020, a period spanning 17 months. The MDP found that:

• Life Trading’s framework for the supervision of traders was under-resourced, uncoordinated and undocumented for that period.
• Life Trading’s compliance culture throughout the relevant period was lax, with minimal commitment to ensuring implementation of an appropriate supervisory framework.
• There was a lack of proactive engagement in relation to supervisory compliance, with the drivers of meaningful change being primarily attributable to responding to our investigation.

The MDP notes that Life Trading has gradually made several improvements to its supervisory and compliance procedures. Despite those remedial steps, the MDP still remains concerned about the appropriateness of Life Trading’s supervisory framework and, for that reason, the MDP required Life Trading to enter into an undertaking for an independent expert to review and provide a report on Life Trading’s supervisory framework following the improvements made to that framework.

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

• Read the media release

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Former Quantum director pleads guilty to market manipulation and insider trading

Former Quantum Resources Limited (Quantum) CEO and director, Avrohom Mordechai Kimelman, pleaded guilty to one charge of conspiracy to manipulate the market in Quantum shares and one rolled-up charge of procuring the acquisition of shares in Quantum while in possession of inside information.

We alleged that, on 16 November 2015, Mr Kimelman conspired with others to manipulate Quantum shares. We also alleged that Mr Kimelman procured the acquisition of 1,990,963 Quantum shares between 27 April 2016 and 5 May 2016, while in possession of inside information concerning Quantum’s intention to acquire Manitoba Minerals Pty Ltd, which had agreed to acquire an interest in a lithium resource in Canada.

On 3 December 2015, Mr Kimelman was appointed CEO of Quantum. On 30 April 2016, he also became a director of the company.

At the time of the offences, both charges carried a maximum penalty of 10 years imprisonment.

The matter has been listed for a plea hearing on 23 February 2022.

• Read the media release

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