Market Integrity Update - Issue 75 - September 2016

Issue 75, September 2016

CommSec pays $700,000 penalty and refunds $1.1 million in brokerage


Commonwealth Securities Limited (CommSec) has paid a total penalty of $700,000 to comply with two infringement notices given to it by the Markets Disciplinary Panel (MDP), and has voluntarily refunded $1.1 million in brokerage to more than 25,000 clients.

The MDP had reasonable grounds to believe that CommSec contravened the ASIC market integrity rules for the following reasons:

  • Failure to disclose crossings: Between August 2010 and February 2014, CommSec issued 114,841 confirmations to retail clients which did not contain the required statement that the transactions had involved a crossing.
  • Failure to disclose trading as principal: From May 2011 to February 2014, CommSec issued 50,484 confirmations to retail clients for transactions which did not contain the required statement that CommSec entered into the transactions as principal and not as agent. The MDP issued a penalty of $400,000 for the alleged contraventions. CommSec voluntarily refunded approximately $1.1 million in brokerage to more than 25,000 clients, and notified 48,205 clients of the lack of disclosure and to provide corrective disclosure. CommSec also co-operated with ASIC throughout its investigation and did not dispute any material facts.
  • Failure to verify the identity of clients selling shareholdings: Between August 2010 and April 2013, CommSec did not have adequate organisational and technical resources to verify that the name and address on an issuer-sponsored holding matched that of the client who provided the instructions before submitting the orders for the sale of the holdings. The MDP specified a penalty of $300,000 for the alleged contravention.

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

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Yieldbroker receives CFTC relief

Securities Chart1On 14 September, the US Commodity Futures Trading Commission (CFTC) granted Australian market licensee Yieldbroker Pty Limited (Yieldbroker) long-term, no-action relief in connection with the CFTC No-Action Letter No. 15-29 (PDF 374 KB). This makes Yieldbroker the first non-US swap trading facility in the world that is allowed to offer direct access to US participants without having to register as a swap execution facility with the CFTC.

‘The Yieldbroker relief letter is an important step in cross-border regulatory coordination for swaps trading,’ said Vincent McGonagle, the CFTC’s Director of Market Oversight. Mr. McGonagle further commented that, ‘The relief issued today recognizes that where regulators share mutual interests in ensuring the integrity and transparency of swaps platforms, establishment of mutual deference may be justified based upon the comparative quality of the respective regulatory regimes.’

The relief the CFTC has provided Yieldbroker is another important step in ASIC's ongoing work to support Australian entities seeking regulatory recognition in foreign markets. Through ASIC's efforts on regulatory co-ordination, entities like Yieldbroker enjoy continued access to open, fair, orderly and transparent global markets.

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Capital raising and research

Prospectus Graphs Pen

Around this time of year there is usually an increase in capital raising activities such as initial public offerings and secondary market transactions (including block trades).

Firms engaged in the provision of capital raising and research services should be aware of recently published Report 486 Sell-side research and corporate advisory: Confidential information and conflicts.

Firms should consider whether their controls – including policies, procedures, training and monitoring – are appropriate and meet legal and regulatory requirements.

Some good practices relevant to capital raising activities are set out below.

Good practices

Research coverage and remuneration decisions

  • Research coverage decisions should be made by the research team and not subject to influence from other parts of the firm or from corporate issuers and their advisers.
  • Research reports should be based on objective and verifiable facts and analysis, and not on the special interests of the firm, the research analyst or others.
  • Remuneration decisions for research analysts should not be made by corporate advisory or take into account specific corporate advisory transactions.

Research involvement in pitching for and marketing corporate transactions

  • Firms should not commit to provide research coverage (either explicitly or implicitly) for an issuer.
  • Firms are encouraged to restrict research analyst involvement in pitching for corporate advisory mandates.
  • Draft research reports should only be provided to persons outside the research department for fact checking and should not include price targets, recommendations or valuation information.

Share allocations in capital raisings

  • Firms should discuss the approach to allocations with the corporate issuer during the course of the transaction.
  • Client interests should come ahead of staff interests when assessing staff and principal participation in capital raising transactions.
  • Firms should develop clear processes and responsibilities on who can provide messaging about the status of a capital raising transaction. Statements cannot be false, misleading or deceptive.

We will continue follow-up testing of firms' policies and procedures for the handling of confidential information and management of conflicts, including the review of specific transactions.

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Morgan Stanley pays $123,750 penalty


Morgan Stanley Australia Securities Limited (Morgan Stanley) has paid a penalty of $123,750 to comply with an infringement notice given to it by the MDP.

The MDP was satisfied that Morgan Stanley had failed to perform and/or provide a number of monthly reconciliations for client money between September 2013 and May 2015. Morgan Stanley also failed to provide:

  • an explanation for a variation in New Zealand dollars for June 2014
  • a statement signed by a director on four occasions in 2013 and 2014, and
  • an explanation about why the movement in total future client money was more than 20% from the last business day of the previous month for February and March 2015.

The MDP was also satisfied that Morgan Stanley had failed to:

  • prepare and give to ASIC annual declarations for the 2013 and 2014 financial years
  • provide accurate prior date balances in its daily reconciliation for 28 March 2014, and
  • provide explanations in its daily reconciliations for three days in 2014 to explain why total future client money was greater than 20% from the previous day.

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

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Proposed new product for the Chi-X market

Box Crate New Product MediumWe are intending to update the ASIC Market Integrity Rules (Chi-X Australia Market) 2011 (ASIC Market Integrity Rules (Chi-X)) to include a new type of financial product that Chi-X is seeking to launch on its market, known as transferable custody receipts (TraCRs). This will allow appropriate market supervision arrangements for TraCRs by bringing these products into ASIC's market supervision framework.

On 30 March 2016, Chi-X published a consultation paper (PDF 1.15 MB) proposing changes to its operating rules and procedures to allow for the introduction of TraCRs to the Chi-X market. TraCRs are units of beneficial ownership in equities listed on certain overseas exchanges, where the foreign equities are held in custody for the issuer of the TraCRs. They are 'unsponsored' in the sense that the overseas equity issuer does not consent to custody receipts being issued by an Australian-based issuer, or consent to the quotation and trading of the TraCRs on the Chi-X market.

Last year, we consulted on changes to the ASIC Market Integrity Rules (Chi-X) to support the introduction of warrants and exchange-traded funds: see Consultation Paper 235 Proposed amendments to ASIC market integrity rules and instruments for the Chi-X investment product market. We are now proposing to update the rules to include TraCRs in the definition of 'cash market products'. Our proposed amendment to Rule 1.4.3 of the ASIC Market Integrity Rules (Chi-X) is set out below.

1.4.3 Definitions

Investment Product” means an Investment Product (TraCR), Investment Product (MIS) and an Investment Product (Warrant).

Investment Product (TraCR)” means a transferable custody receipt and is a unit of beneficial ownership in a share issued by a foreign company, where the share is listed on a foreign stock exchange and is held in custody for a TraCR issuer and the TraCR issuer holds its interest in the foreign share on trust for a TraCR holder.

Before the launch of TraCRs, Chi-X will need a variation to its Australian market licence, a declaration under s1075A(1)(b) of the Corporations Act for TraCRs, and will be required to amend the Chi-X Operating Rules. These regulatory requirements are being progressed by Chi-X and are subject to the requisite regulatory approvals.

If you have feedback on our proposed approach to TraCRs it can be sent to by Friday, 30 September 2016.

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ASIC Commissioner speaks about culture


Commissioner Cathie Armour recently delivered a thought-provoking speech at the Risk Australia Conference, themes included:

  • use of regulatory technology (regtech)
  • what governance and culture means for firms, and
  • the importance of governance, culture and conduct when firms are implementing major regulatory reforms.

There are opportunities for firms to better manage conduct risk when implementing regulatory reform. Technology can be used to automate processes, reduce operational risk and deepen insight into a whole range of areas. However, when it comes to governance, risk management and compliance, it does not replace the need for humans to make decisions.

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Court finds that Storm Financial directors breached their directors’ duties

Gavel Large

The Federal Court of Australia has found that the directors of Storm Financial Limited (Storm Financial), Emmanuel and Julie Cassimatis, breached their duties as directors. The court also found that Storm Financial provided inappropriate advice to certain investors.

ASIC Commissioner Greg Tanzer said, ‘This is an important decision which emphasises the importance of directors' duties to ensure that they do not cause the companies that they control, to breach the law. The decision also highlights the significant obligation on financial services licensees to provide financial advice that is appropriate to the persons to whom it is given.’

The matter will be listed for a further hearing to determine what civil penalties and disqualification orders should be imposed on the Cassimatises as a result of the breach of their directors' duties.

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Stories from the beat

Typewriter MediumThe 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.

We have identified instances where staff had left a market participant, but continued to have access to the MECS portal for that organisation. The portal contains confidential information about the market participant. Failing to remove access for past employees represents an operational risk that could adversely affect market participants' businesses.

We suggest each market participant include a process to remove access to MECS as part of their staff cessation procedure.

We retain a user log and full audit trail of all users' activity within the MECS portal. If you become concerned about potentially inappropriate access to your organisation's records through the portal, feel free to contact your relationship manager for assistance.

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Last updated: 30/03/2021 09:22