Market Integrity Update - Issue 68 - February 2016
Issue 68, February 2016
- Updating AOPs for new product types
- Hochtief AG admits to insider trading contravention
- Misuse of confidential client information
- MDP outcomes
- Stories from the beat
A participant that wants to make a material change to its organisational and technical resources, arrangements or controls, must have an appropriately qualified person review the change and provide a written representation regarding the participant's ability to comply with the ASIC market integrity rules for automated order processing (AOP).
Activating a new product type for an AOP on an existing market (e.g. the commencement of warrant trading in addition to equities trading) or commencing an AOP on an additional market could potentially lead to an increase in risk and require a 'material change' review.
However, a participant may not require a material change review where it uses an existing AOP to trade warrants on the Chi-X market, and that existing AOP is:
- certified for equities trading on both the ASX and Chi-X markets, and
- certified to trade warrants on the ASX market,
and there are no apparent additional elements of risk (e.g. material differences in any execution parameters).
Participants still need to consider whether there are any additional elements of risk that may require them to perform a material change review of their AOP.
Guidance on what may be considered a 'material change' can be found in Regulatory Guide 241 Electronic trading.
ASIC has started legal action in the Federal Court of Australia against German construction group holding company Hochtief Aktiengesellschaft (Hochtief AG) for insider trading. ASIC is seeking a declaration of contravention and a financial penalty order against the company. Hochtief AG has admitted the alleged contravention.
The action centres on the early-2014 on-market acquisition of ordinary shares of Leighton Holdings Limited (now CIMIC Group Limited) (ASX code: LEI) by Hochtief AG's subsidiary, Hochtief Australia Holdings Limited (HAHL).
ASIC alleges that Hochtief AG contravened the insider trading provisions of the Corporations Act 2001 (Corporations Act) by procuring HAHL to acquire LEI when, on 29 January 2014, it varied previous instructions to acquire a large parcel of LEI (by pushing out the last day to purchase the shares from 31 January 2014 to 14 February 2014) while it was in possession of insider information – being that Leighton Holdings Limited's 2013 financial results were likely to be at the high end of previous earnings guidance.
ASIC has accepted enforceable undertakings (EUs) for misuse of client information from Sydney-based institutional stockbroker Angus Aitken and his employer Bell Potter Securities Limited, and from Philip King and Regal Funds Management Pty Ltd (Regal).
An ASIC investigation identified concerns in the way Mr Aitken handled and disclosed information about an institutional client's intentions to sell securities in Ten Network Holdings Ltd (TEN).
On 21 May 2013, Mr Aitken sent an email to Mr King, director and Chief Information Officer of Regal, regarding his client's possible selling intentions. This was done without his client's knowledge or consent. After receiving the email, Mr King and Regal sold approximately 4 million TEN shares.
ASIC was concerned that Mr Aitken knew, or ought reasonably to have known, that the information he provided to Mr King was, or was likely to have been, confidential client information.
ASIC was also concerned that because of his position and experience Mr King knew, or ought reasonably to have known, that the information he received was, or may have been, confidential and that its dissemination to him may have been contrary to the interests of Mr Aitken's client. In ASIC's view, Mr King was obliged to avoid using the information and to refrain from selling TEN shares.
AUSIEX pays $130K infringement notice penalty
Australian Investment Exchange Limited (AUSIEX) has paid a penalty of $130,000 to comply with an infringement notice issued by the Markets Disciplinary Panel (MDP).
The penalty was for allegedly contravening the Corporations Act by failing to:
- have organisational and technical resources in place, which interfered with the efficiency and integrity of the market, and
- prevent the entry of an erroneous order into the ASX trading platform which resulted in a market for Westpac Banking Corporation American call option contracts not being fair and orderly.
In determining this matter, the MDP noted that trading participants must have robust and effective processes and controls to detect when appropriate AOP filters are not in place. This includes:
- having skilled staff and technical capabilities that are commensurate with the demands of using an AOP system, and
- fostering a culture conducive to compliance with the ASIC market integrity rules (e.g. effective educational and compliance programs).
Etrade pays $65K infringement notice penalty
Etrade Australia Securities Limited (Etrade) has paid a penalty of $65,000 to comply with an infringement notice issued by the MDP.
The penalty was for allegedly contravening the Corporations Act by failing to prevent the entry of an erroneous order into the ASX trading platform which resulted in a market for Orica Limited put option market contracts not being fair and orderly. In determining this matter, the MDP noted that the misconduct was negligent on the part of Etrade because the functions of the designated trading representative (DTR) were not exercised to the requisite high standard (i.e. the DTR did not take due care in assessing the order before submitting it).
D2MX pays $120K infringement notice penalty
D2MX Pty Ltd (D2MX) has paid a penalty of $120,000 to comply with an infringement notice issued by the MDP.
The penalty was for allegedly contravening the Corporations Act by failing to:
- have organisational and technical resources in place, including:
- 'price movement' automated filters, as appropriate, for 95 direct market access client accounts, and
- processes to verify that the 'price movement' automated filters were successfully applied to the 95 direct market access clients,
which interfered with the efficiency and integrity of the market, and
- prevent the entry of an erroneous order into the ASX trading platform that resulted in a market for the price of BHP CitiFirst GSL mini short warrants not being fair and orderly.
In determining this matter, the MDP noted that:
- appropriate automated filters are essential components of AOP systems used by direct market access clients of trading participants. Appropriate automated filters are in place to ensure direct market access client orders entered through trading participant's AOP systems are submitted into the trading platform without interfering with market integrity
- it is incumbent on trading participants (and not third parties) to ensure that their AOP systems have fully functional appropriate automated filters in place, and that their AOP systems comply with the market integrity rules, and
- trading participants ought to exercise ongoing control over the development, implementation and maintenance of appropriate automated filters for their AOP systems instead of relying on third-party service providers or vendors.
Macquarie Securities pays $110K infringement notice penalty
Macquarie Securities (Australia) Limited (Macquarie Securities) has paid a penalty of $110,000 to comply with an infringement notice issued by the MDP.
The penalty was for allegedly contravening the Corporations Act by failing to prevent a non-DTR submitting trading messages into the ASX trading platform though the non-AOP component of its AOP system. As a result, a non-DTR submitted 446 trading messages into the ASX trading platform through Macquarie Securities' system, which did not comply with the AOP requirements.
In determining this matter, the MDP noted that all trading messages be submitted through manual trading systems by appropriately trained people (i.e. DTRs) or through automated trading systems with appropriate hard automated filters. This requirement is critically important for maintaining the integrity of the market.
The MDP stated that each application for access to any system should be considered individually and on its merits and not merely copied over from another person's identical access.
Important regulatory information
The parties listed above have complied with the infringement notice. Their compliance is not an admission of guilt or liability, and they are not taken to have contravened the relevant sections of the Corporations Act.
The majority of market integrity outcomes we achieve are not publicised in the media, but this does not detract from their importance. Every day, ASIC officers work to ensure our markets are fair and efficient. These are their stories.
A participant requested updated wholesale investor certificates from some of its clients. The participant subsequently identified that a number of the certificates were not genuine – the issuing accountants were never employed by the accounting firms whose letterhead appeared on the certificates.
The participant conducted an in-depth review of the issues and initiated remedial action which included changes to certificate lodgements. The participant also provided a comprehensive account of this incident to ASIC. Due to the remedial action taken and the adequacy of its monitoring and supervision procedures, ASIC decided that no regulatory intervention was warranted against the participant. However, we are looking into the source of the fraudulent certificates.
We encourage all market intermediaries to be vigilant about this issue.