Market Integrity Update - Issue 72 - June 2016
Issue 72, June 2016
- Sydney man jailed for insider trading
- Commissioner Cathie Armour discusses insider trading
- ASX Return Lodgement and Monitoring System
- Commentary on forward-looking statements
- Improving disclosure of historical financial information in prospectuses
- OTC derivatives reporting for Phase 3B
- End of financial year window dressing
- Credit Suisse Equities (Australia) Limited pays $74,000
- Educating clients is good for business
- Read about our international regulatory engagement
- Stories from the beat
Sydney man, Michael William Hull, has been sentenced to 17 months imprisonment after pleading guilty to insider trading charges brought by ASIC.
Mr Hull previously pleaded guilty to trading in the shares of Mac Services Limited, Giralia Resources NL and Jabiru Metals Limited while in possession of inside information between 8 September 2010 and 9 February 2011.
The inside information was allegedly conveyed to Mr Hull by a close friend who was employed in the investment banking department of a global financial services company that worked on major corporate transactions involving those companies.
Since 2009, ASIC has brought 39 insider trading actions before the courts and achieved either a conviction, guilty plea or guilty finding before a jury in 32 of these matters. One matter is still before the court.
In a recent episode of ASIC View (our official podcast), ASIC Commissioner Cathie Armour discussed ASIC's work on insider trading.
Commissioner Armour observed that insider trading can occur across any financial product (not just equities) and highlighted an ASIC enforcement action involving trading in contracts for difference as an example.
She noted that ASIC’s ‘record over the last couple of years is a world-class record in criminal convictions for insider trading’.
Do you use the ASX Return Lodgement and Management (RLM) system?
If you are a non-clearing market participant that uses this system, it is important that you update your RLM user accounts promptly if these details change, for example, if staff leave or when email addresses change (e.g. owing to participant name changes). This will ensure that you continue to receive communications about the RLM system and any changes that may affect you.
Instructions for maintaining user account details are located in section 4 of the RLM system user guide and in the help function within the RLM system. Only users with administrator, director or authorised signatory access are able to update or delete user account details.
In a 'letter to the editor', ASIC Commissioner John Price makes it clear that the law regarding disclosure rules has not changed, nor has ASIC's interpretation or enforcement of it.
This is an extract of the letter published in The Australian and The West Australian on 21 May 2016.
Recent media articles covering disclosure rules for mining companies, gave rise to suggestions the goalposts had somehow shifted to prevent start-up or small businesses from attracting investment capital.
This was in reference to an ASIC Information Paper released in April on forward-looking statements in the mining and resources sector.
I would like to make one thing clear: the law has not changed, and nor has ASIC's interpretation or enforcement of it. The paper simply draws together and explains the existing rules and reference sources in a useful 'one stop shop' guide with hypertext links to help reduce business costs and the risk of litigation and regulatory action, including class actions.
Indeed, we developed it at the request of industry, and have worked in close collaboration with industry bodies and regulators for around two years to achieve the best possible guidance for both businesses and investors.
The cyclical nature of the commodities and resources sector is well-known, and ASIC is as keenly aware as the industry that attracting investment in recent times is a challenge. The law and associated rules have always allowed for that, as does ASIC's guidance on them.
The existing laws provide that companies should have "reasonable grounds" for any projections, be they of its prospectivity or business case. It is obvious that predictions made without any reasonable foundation whatsoever will be unreliable, irrelevant and misleading.
We recently released Consultation Paper 257 Improving disclosure of historical information in prospectuses: Update to RG 228 (CP 257) which seeks feedback on proposals to update our guidance on the disclosure of historical financial information in prospectuses.
We intend to update Regulatory Guide 228 Prospectuses: Effective disclosure for retail investors (RG 228) to clarify the quality and quantity of historical financial information required to be included in prospectuses, and to provide worked case studies to illustrate the proposed policy settings in practice. We hope that our revised guidance will assist in the planning of transactions by providing companies and their advisers with greater transparency of our expectations for issuers.
We believe the inclusion of audited financial information in a prospectus is extremely important. Financial information about an issuer is a central component of a prospectus. It plays a key role in assisting investors to make informed investment decisions and to help them assess the assets and liabilities, financial position and performance, profits and losses, and prospects of an issuer.
ASX is separately proposing to update its admission requirements for listed entities, and has released a consultation paper, Updating ASX's admission requirements for listed entities. The proposals include:
- updates to admission requirements which are designed to enhance listing standards, and
- requiring financial information in applications for admission under the assets test.
The proposals made by ASIC and ASX about the disclosure of historical financial information seek to:
- promote good listing and disclosure standards, and
- ensure confident and informed investors.
Feedback on CP 257 is due by 6 July 2016.
Trade reporting for Phase 3B (financial entities with an over-the-counter (OTC) derivatives book size below $5 billion gross notional outstanding) commenced on 4 December 2015.
Phase 3B reporting entities must commence reporting their OTC reportable positions on 6 June 2016 and provide valuation, collateral and barrier information on 4 July 2016.
As always, Phase 3B reporting entities should ensure they have the necessary arrangements in place to comply with their trade reporting obligations. This includes making any additional arrangements that may be required to start reporting the additional valuation, collateral and barrier information.
The ASIC Derivative Transaction Rules (Reporting) 2013 set out requirements for financial entities to report derivative transactions and positions to derivative trade repositories.
In the lead up to 30 June, we sometimes see orders placed at or near the close of trading that disproportionately affect share prices. This is known as 'window dressing'.
Window dressing is a form of market manipulation and can affect share price valuations and end of financial year performance figures.
Market participants must notify ASIC if they observe or suspect window dressing. This can be done through Form M57 Suspicious Activity Report (SARS) on the market entity compliance system (MECS) portal. Participants who wish to can still submit SARS by emailing email@example.com.
We will be monitoring any trading that increases prices near the end of reporting periods, and which may be indicative of market manipulation.
If we identify conduct we think should have been reported to ASIC, but wasn't, we will contact the relevant participant for an explanation.
Example: 'Window dressing'
The client of a participant traded in a security shortly before the end of the financial year, significantly increasing the share price late in the day. The participant was alerted to this activity after conducting a review of trading across the market on the final day of the financial year. The participant submitted a SAR to ASIC.
What particularly piqued our interest was the fact that the consideration involved represented only a small fraction of the value of the client's overall holding. We conducted inquiries into the matter, including creating a profile of the client's trading behaviour and issuing notices, but were still unable to establish a sound commercial motive for the trading.
We decided to seek an explanation from the client and to explain our concerns about possible market manipulation. The client has since been warned and we are monitoring their trading.
Credit Suisse Equities (Australia) Limited (Credit Suisse) has paid a penalty of $74,000 to comply with an infringement notice issued by the Markets Disciplinary Panel (MDP).
The MDP had reasonable grounds to believe that Credit Suisse contravened Rule 5.6.1 of the ASIC Market Integrity Rules (ASX Market) 2010, which provides:
A Trading Participant which uses its system for Automated Order Processing must at all times:
(a) have appropriate automated filters, in relation to Automated Order Processing; and
(b) Ensure that such use does not interfere with:
(i) The efficiency and integrity of the Market;
(ii) The proper functioning of any Trading Platform; or
(iii) The efficiency and integrity of any Crossing System operated by the Trading Participant.
Credit Suisse used its automated order processing system to submit orders through the ASX trading platform on a particular day, which caused price increases of 42.34% and 19.91%, respectively, in two classes of illiquid shares.
The MDP had reasonable grounds to believe that Credit Suisse did not have in place appropriate automated price filters in its system to ensure that use of the system did not interfere with efficiency and integrity of the market.
Compliance with the infringement notice is not an admission of guilt or liability, and Credit Suisse is not taken to have contravened subsection 798H(1) of the Corporations Act 2001.
Better informed investors make better clients. They are less likely to invest in products they don't understand, less likely to take on unsuitable risk and less likely to panic when markets fluctuate over the short-term.
Talking to your clients about shares, exchange traded funds, hybrid securities or any type of investment is much easier once they have a basic understanding of the product or type of investment.
Financially literate clients are better able to focus on the strategy and advice you are giving, making interactions more productive for both you and the client.
Financial literacy helps reduce the incidence of poor consumer outcomes. It has also been shown to boost participation in financial services and markets, with a positive flow-on effect to the broader economy.
Our MoneySmart website can help your clients better understand their investments and money.
This article was originally published in the Stockbrokers Monthly and is also available on the ASIC website.
Many Australian financial market participants undertake cross-border transactions. A corollary of this is that global participants are also active in our markets. Grappling with the impact of international regulation is a reality for these businesses, as well as for ASIC, which must understand and respond to domestic events against a backdrop of global market and regulatory developments. One of the ways we inform our global perspective is by engaging with overseas regulators.
The majority of the market integrity outcomes we achieve are not reported by the media, but this does not detract from their importance. Every day, ASIC officers work hard to ensure our markets are fair, orderly and transparent. These are their stories.
A market participant recently experienced a technical problem that caused certain orders sent to the participant's crossing system to be marked ‘principal’ instead of ‘agency’. As a result, crossings of the affected orders with other principal orders were incorrectly reported to the market as booking purposes trades rather than crossings.
The participant's IT team identified the reporting error after receiving a separate query from the trading desk. The participant notified ASIC of this issue and put in place remedial actions to prevent a reoccurrence.
Another participant also experienced a crossing system reporting issue when a number of crossing trades were executed outside of the national best bid and offer (NBBO) range. This was caused by a network disruption and, as a result, the affected trades were reported as outside the exception for trades with price improvement.
The issue was picked up by one of the participant's designated trading representatives and a number of remedial actions have since been implemented.
While the financial impact on clients in both these examples was minimal, they highlight the importance of participants having sound crossing system reporting processes in place.
Participants are responsible for ensuring they correctly report transactions in accordance with the relevant ASIC market integrity rules. This helps to ensure our markets are transparent and that investors and financial consumers can have trust and confidence in our financial system.