Market Integrity Update - Issue 129 - August 2021
- Summary on independent expert review of November’s ASX Trade outage
- Approach to new laws reforming the financial services sector
- Applying design and distribution obligations to ETOs
- LIBOR transition information for corporate treasurers
- Updated guidance for AFS licensees that hold reportable client money
ASIC, together with the Reserve Bank of Australia (the regulators), have published a summary of an independent expert review of the ASX Trade outage, which occurred in November 2020.
The outage occurred shortly after a major upgrade to ASX’s equity trading platform, ASX Trade, called the ASX Trade Refresh Project (the project). The regulators view operational incidents of this nature with significant concern.
The purpose of the independent expert review was to examine the project and assess whether it met internationally recognised standards or frameworks and relevant securities industry practices.
Overall, the independent expert, IBM Australia Limited, found that ASX met or exceeded expected leading industry practices in 58 out of 75 of the capabilities assessed, including:
- business case development and project change management, which exceeded accepted practices
- the project was provided with and had access to sufficient financial, time, people and technological resources at all stages of delivery to meet its objectives
- communications with key stakeholders were appropriately managed
- incident management actions taken by ASX were appropriate.
Significantly, the independent expert identified several key shortcomings in the project including:
- factors that suggested the ASX Trade system was not ready to go live considering ASX’s near zero appetite for service disruption. This was the case even though the formal implementation readiness processes were completed and verified by multiple parties without objection to go live
- there were gaps in the rigour applied to the project delivery risk and issue management process expected for a project of this nature
- risk and issue management, project compliance to ASX practices, project requirements and the project test strategy/planning did not meet accepted industry practices. It was not reasonable to expect the test plan used would meet the ASX’s near zero risk appetite for service disruption.
The independent expert made recommendations in seven key categories: risk, governance, delivery, requirements, vendor management, testing and incident management.
We’ll continue to engage with market operators, participants, institutional investors and other stakeholders on the impact of the incident 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.
- Read the media release
Several reforms arising out of recommendations from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry and other inquiries will commence in October 2021.
Some of the reforms include:
- design and distribution obligations – firms will be required to design financial products to meet the needs of consumers, and to distribute their products in a more targeted manner. The obligations were passed by parliament in 2019 following a recommendation of the Financial System Inquiry. The obligations reflect similar obligations placed on financial product issuers in the United Kingdom, the Netherlands and the European Union.
- breach reporting – seeks to address long-standing concerns about inconsistent, inadequate and delayed reporting of breaches by licensees. The reforms will allow us to identify and address emerging trends of non-compliance in industry. Under the new law, industry will be obliged to identify and report breaches and remediate consumers in a more timely manner.
- internal dispute resolution – aims to assist in improving timeliness of complaints handling, clearer messaging to consumers, and consistent recording of complaints. The updates also clarify the enforceability of our IDR standards and ensure that firms are identifying systemic issues that arise from complaints.
We recognise there’ll be a period of transition as industry finalises implementation of additional compliance measures, and we’ll take a reasonable approach in the early stages of these reforms provided industry participants are using their best efforts to comply.
- Read the media release
To assist you to apply the new design and distribution obligations, which take effect on 5 October 2021, we’ve published a case study on exchange traded options (ETOs).
ETOs are standardised products authorised for trading by ASX, a licensed market operator. Firms that are required to prepare a PDS for these products or who are distributors of these products are captured by the design and distribution obligations.
Following extensive consultation in December 2020, we released Regulatory Guide 274 Product design and distribution obligations (RG 274), to explain our interpretation of design and distribution obligations, our expectations for compliance, and our general approach to administering the obligations.
The design and distribution obligations require firms to design financial products to meet the needs of consumers, and to distribute their products in a more targeted manner.
While the case study is not intended to provide exhaustive guidance, it highlights some areas that may assist firms that issue and distribute ETOs. For more detailed guidance, issuers should consider RG 274.
- Read the case study
We’ve published guidance and recommendations on key LIBOR transition issues for companies and corporate treasurers on how to ensure an orderly transition away from LIBOR.
We urge corporate treasurers to act now and take necessary steps to ensure a smooth transition. There are significant risks associated with a failure to prepare adequately for the transition away from LIBOR.
We recommend companies consider using alternative reference rates (ARRs) that are robust and suitable to their objectives and needs. Companies should discuss their options with their banks and financial services providers and consider ARRs endorsed by the relevant regulators and working groups
- Read the guidance and recommendations
We’ve updated Information Sheet 226 Complying with the ASIC Client Money Reporting Rules 2017 to provide further guidance to Australian financial services (AFS) licensees that hold reportable client money and are required to comply.
The updates follow our recent review of a sample of retail over-the-counter (OTC) derivatives issuers which highlighted the need to clarify:
- the correct designation of client money accounts under section 981B of the Corporations Act 2001 (the Act)
- an AFS licensee’s obligations relating to the use of buffers.
Under section 981B of the Act, a client money account is generally operated as a trust account and the funds in it must be held on trust for the persons entitled to them. We expect licensees to clearly designate their client money accounts, as outlined in Regulatory Guide 212 Client money relating to dealing in OTC derivatives.
Licensees are reminded that buffer money is not client money. It does not fall within the client money definition in section 981A(1) of the Act. Accordingly, the practice of depositing buffer money in a client money trust account or segregated account is not permitted.
- Read INFO 226