Market Integrity Update - Issue 73 - July 2016

Issue 73, July 2016

ASIC and Guvera

Disclosure Medium (1)

ASX recently took the step of exercising its discretion not to list Guvera Limited (Guvera) on the ASX market. This high-profile matter has generated much interest in the respective roles of ASX and ASIC when it comes to listings.

ASIC is a disclosure regulator. When companies seek to list and offer shares to retail investors, our role is to assess whether the information in the prospectus reflects ASIC's guidance on the type of information required and the manner of presentation, and to make sure there are no material omissions. We do not assess the commercial merits of any particular offer or decide whether it is appropriate for the company to list on a licensed financial market in Australia.

In its role as a licensed market operator in Australia, ASX is required to oversee compliance with its listing standards, including the ASX Listing Rules. For an entity to be admitted to ASX’s list, ASX needs to be satisfied the company has met a range of conditions. Under Listing Rule 1.19, ASX has absolute discretion to grant or refuse applications for admission.

The prospectus lodged by Guvera to raise up to $100 million was reviewed by ASIC to ensure that investors had full disclosure of all the information reasonably required to make an informed assessment of the financial position, performance and prospects of the company.

We extended the exposure period on the prospectus because we were of the view that the original prospectus did not contain the required disclosure. We raised our concerns and entered into discussions with Guvera and its advisors to address the shortcomings. This resulted in significant alterations to the prospectus in terms of financial disclosure and a change in the terms of the offer.

ASX assessed the application for quotation by Guvera and exercised its discretion not to accept the application.

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ASIC assessment of ASX listing standards

Securities Board Medium

On 14 June we released Report 480 Assessment of ASX Limited’s listing standards for equities which concludes that, up to this point in time, ASX has met its statutory obligations in relation to its listing standards.

In reaching this conclusion, we were informed by our own surveillance of ASX’s equities market and our ongoing oversight of ASX and its surveillance practices. We also engaged extensively with ASX and regulators in the United Kingdom, United States, Canada, Singapore, Hong Kong and New Zealand.

Listing standards are particularly important in Australia because:

  • Australians have one of the highest rates of share ownership in the world (around a third of all adult Australians)
  • an enormous proportion of Australians' retirement savings are invested in ASX equities (approximately $500 billion of self-managed and other superannuation fund investments)
  • ASX has one of the highest numbers of publicly listed entities in the world (approximately 2,200, only around 200 fewer than New York Stock Exchange or London Stock Exchange), and
  • equity funding is a major source of funding for Australian business.

The report notes that administration by ASX of its listing standards has largely served Australian businesses and investors well. The report also highlights important changes in financial markets driven by developments in globalisation, competition, technology and information management, and shifting business cycles. These raise key considerations for ASX in ensuring its listing standards continue to be fit for purpose.

ASIC Commissioner Cathie Armour said, ‘Effective listing standards support the Australian equity market to fund growth and innovation which, in turn, promotes the wealth and prosperity of all Australians. As the listings venue for the vast majority of listed entities in Australia, ASX has a key role to play.’

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Insider trading outcome

Gavel Large

This is an excerpt of an opinion piece by ASIC Chairman Greg Medcraft that was published in the Australian Financial Review after the conviction of Oliver Curtis on 24 June 2016.

Oliver Curtis was found guilty on 2 June 2016 of involvement in an insider trading conspiracy, one in which 45 trades netted him a personal profit of $1,433,727.85. He has never admitted his guilt. On Friday 24 June, Mr Curtis was sentenced to two years' imprisonment, to serve a minimum of one year in jail.  

His co-conspirator John Hartman has admitted guilt, pleading guilty to related, and unrelated, insider trading offences in 2010. He was ultimately sentenced to three years imprisonment, with a single pre-release period of 15 months.

It remains to be seen whether any opportunities for appeal may be identified by Mr Curtis' legal team, so I am reluctant to discuss the specifics of the case.*

More broadly, this case demonstrates the resources and the determination ASIC will apply in its quest to prosecute insider trading.

The Curtis case is the latest in a string of market integrity cases brought over the past five years, with an impressive 'success' rate, and increasingly so. 

Since 2011, 35 people have been criminally prosecuted for insider trading as a result of ASIC investigations, with a conviction rate of over 85%.

In March 2016, former Hanlong managing director Hui Xiao was sentenced to eight years and three months' jail for insider trading, and that was after we had him extradited from Hong Kong.

Not so long ago it was a truism to say "insider cases never get up". The law was stacked against you. It was too hard to prove. It was too easy for traders to cover their tracks. The definition of "insider knowledge" was too tricky to establish, and how could anyone know for certain which way the market would turn? Et cetera.

I'm not sure that this was ever the case, but it was a widely held view. It certainly could not be argued now, and the market has been put on notice. Insider trading is a crime and it is increasingly likely to be detected. It will be investigated and, where possible, prosecuted.

Should we bother? Does it really matter? Yes and yes, and the law is quite clear why.

Its aim is to enable "confident and informed decision making by consumers of financial products". Insider trading is a serious offence because it can undermine the integrity of financial markets, the integrity of which is "of the utmost importance to the economy and society," as our counsel told the Supreme Court last Friday.

This is not a victimless crime. Those on the other side of the trade – those who were not "in the know", certainly suffered. They did not make the $1,433,727.85 that Curtis did, and were denied a fair and equal chance to make a profit from their trading. 

We are all affected, at least indirectly, by insider trading. Just as we are all beneficiaries of living in a society where the rule of law is respected, where markets are assumed to be fair and transparent and where it is assumed sensible, informed decisions are possible.

For its part, ASIC has invested heavily in getting the right people, and right structures and the right systems in place to rigorously scrutinise the market and follow suspicious trading patterns, or act on information gained through other means.

The bottom-line is simple: insider trading will not be tolerated. ASIC has the systems, the people and the powers to detect and prosecute breaches, and we will not hesitate to take offenders before the criminal courts.

* At the time of preparing Issue 73 of the Market Integrity Update, no appeal had been lodged.

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Crackdown on unlicensed retail OTC derivative issuers

Licence MediumOn 6 July 2016, we issued a media release about a crackdown on unlicensed retail over-the-counter (OTC) derivative providers.

The media release warns of a dramatic increase in the extent of unlicensed conduct by retail OTC derivative providers seeking to expand their market to new customers in complex and risky products such as binary options.

Our findings in Report 482 Compliance review of the retail OTC derivatives sector highlighted an increase in activity among retail OTC derivatives providers (especially binary option providers) operating through online platforms or websites that are offering financial services to retail investors in Australia without the appropriate Australian financial services (AFS) licence or authorisation.

We have raised our concerns with more than 40 unlicensed providers – the majority of which are binary option issuers. We also contacted providers of binary option review websites, binary option trading signals, binary option broker affiliate websites, margin foreign exchange (FX) and managed FX services.

Of those providers contacted, 21 have agreed to cooperate with ASIC and take remedial steps to ensure they are no longer providing financial services in Australia until they are appropriately licensed or authorised. Remedial actions that have been implemented include:

  • removing references to Australia on their website
  • ceasing marketing campaigns directed at Australian investors
  • adding appropriate disclaimers to websites and mobile apps
  • blocking sign-up access to Australian investors
  • educating introducing brokers and affiliates to cease targeting Australian investors
  • closing down existing Australian accounts, and
  • informing Australian investors that the entity is not appropriately licensed in Australia.

Some of these providers have indicated an interest in obtaining the appropriate AFS licence to operate in Australia and have been provided with information to assist them with that process.

A further nine entities have not directly responded to ASIC regarding our concerns but appear to have made some changes to their websites, including removing references to Australia.

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Identity theft warning

Warning MediumASIC has been alerted to another instance of account intrusion at a European-based broker. A retail investor’s trading account has been hacked and used to manipulate the share price of small capitalisation stocks.

We previously warned market participants of this risk following a number of incidents: see Market Supervision Update issues 49, 55 and 62.

ASIC urges participants to be extremely vigilant to the possibility of identity theft and account hacking. Participants must have robust due diligence procedures in place.

For existing clients, ASIC urges participants to be on the lookout for:

  • IP addresses that are not reflective of the original client documentation, and
  • changes to bank accounts, email accounts and contact details.

Participants should encourage their clients to:

  • change their passwords regularly
  • avoid using public domain email addresses when communicating with their broker, and
  • check what rules have been set up on their email accounts (hackers may divert genuine emails from a participant to the client's 'trash' to avoid detection).

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Macquarie Securities pays $120,000 infringement notice penalty

Mdp LogoMacquarie Securities (Australia) Limited (Macquarie Securities) has paid a penalty of $120,000 to comply with an infringement notice given to it by the Markets Disciplinary Panel (MDP).

The penalty was for failing to:

  • prevent entry of an erroneous order into the Chi-X trading platform that resulted in the market for an equity market product not being fair and orderly, on two occasions, and
  • have in place appropriate automated filters to ensure that use of the Automated Order Processing system did not interfere with the efficiency and integrity of the Chi-X market.

In determining the matter and the appropriate penalty to be applied, the MDP noted the contraventions had the potential to cause widespread detriment and undermine public confidence in the integrity of the market.

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

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Stakeholder update session

Speech Bubbles Medium

ASIC Insights is an interactive session presented by senior ASIC representatives which provides an update on our recent work and regulatory issues in the managed investments and superannuation sectors.

The next ASIC Insights session will run on 15 September 2016. To sign up for notification of sessions and further details please email

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MECS update

Market Entity Compliance Portal

Around 400 individuals from 150 market entities use the Market Entity Compliance System (MECS). MECS is the main communication portal for stakeholder interactions. In the 12 months since going live, over 1,300 applications and notifications have been submitted through MECS. We have received positive user feedback that MECS makes undertaking regulatory functions simpler and more efficient.

ASIC has plans to extend how we use technology to reduce the regulatory burden, and improve industry communication and compliance. We are looking at incorporating more surveillance-related activity onto the platform and progressively bringing more entities onto MECS, including investment banks. Speak to your ASIC contact if you want to know more about MECS.

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Stories from the beat

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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.

ASIC officers have seen an increase in the number of suspicious activity reports made to ASIC. These reports are an example of stockbrokers taking direct action to keep markets clean.

Suspicious activity report: Example 1

An executive of Company A indirectly opened a trading account with a stockbroker. Shortly later, Company A listed and the client began buying small parcels of shares in Company A (and only Company A), which had a price impact.

The stockbroker attempted to contact the client to ask about their trading strategy and whether they had a connection to Company A. The mobile number on the client’s application form was answered by the executive, and the connection was established.

Given this event, the timing of the account opening and subsequent trading patterns, the stockbroker formed the view that the trading may be an attempt to manipulate the share price. They submitted a suspicious activity report to ASIC that day.

Suspicious activity report: Example 2

A client bought a large volume of mining shares immediately before a trading halt was called pending the release of exploration test results. Soon after, the same client submitted an order to purchase a large number of shares in another company – after the purchase of these shares the company released a material announcement to the market.

The coincidence of timing, with both large orders being placed by the same client immediately before market announcements, gave rise to suspicions the client may have been in possession of material information yet to be made public. A suspicious activity report was sent to ASIC.

Reports like this demonstrate that stockbrokers aren’t willing to tolerate individuals trying to manipulate the market in their favour, and at the expense of the 6.5 million Australians who own shares or other listed investments.

Further information about suspicious activity reporting obligations is provided in Regulatory Guide 238 Suspicious activity reporting (RG 238).

To further assist businesses and their staff comply with this obligation, we have designed an educational poster. We encourage you to print and display it in high visibility locations around your business, such as on trading desks, above the office photocopier and in your lunch room.

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Last updated: 30/03/2021 09:22