Market Integrity Update - Issue 79 - February 2017
- ASIC consults on consolidating the market integrity rules
- Pershing Securities pays $40,000 infringement notice penalty
- ASIC imposes licence conditions on OpenMarkets Australia
- Cleaning up our markets from dangerous leaks of information
- ASIC’s focus on underwriting agreements
- Australia’s world-first licensing exemption for fintech businesses
- ASIC’s corporate finance report and liaison meetings
- Stories from the beat
There are currently 14 market integrity rule books that set out obligations and prohibitions applying to activities and conduct on eight licensed financial markets. Collectively, these rule books amount to more than 1,300 pages of regulation.
In preparation for a detailed review of the market integrity rules commencing later in 2017, we propose to consolidate 13 of the rule books into four, covering the:
- ASX, Chi-X, IR Plus, NSXA and SSX securities markets, and competition between securities markets
- ASX 24 and FEX futures markets, and competition between futures markets
- capital requirements for ASX, Chi-X, SSX and NSXA securities markets, and
- capital requirements for ASX 24 and FEX futures markets.
Commissioner Cathie Armour said ‘Consolidating the market integrity rules continues ASIC’s focus on reducing red tape and will create a single point of reference for market integrity rules that are common between like markets. It will also streamline the review and consideration of substantive amendments to the market integrity rules in the future.’
As part of this work we are also proposing to clarify existing obligations for:
- management requirements and responsible executives
- dealing ‘as principal’
- block trades and large portfolio trades
- disclosures to wholesale clients about derivatives market contracts, and
- record-keeping requirements for market operators.
Submissions to Consultation Paper 277 are due by 7 March 2017.
Pershing Securities Australia Pty Ltd (Pershing) has paid a penalty of $40,000 to comply with an infringement notice given to it by the Markets Disciplinary Panel (MDP) for failing to have appropriate automated filters for their automated order processing (AOP) systems.
In December 2015, a market-making client with direct market access through Pershing’s AOP system entered orders into the ASX trading platform for exchange-traded bond units. This resulted in a trade that was 99.9% from the last traded price and involved no change in beneficial ownership.
Pershing used certified AOP market filters. However, when it initiated a new connection to enable the client to use its AOP system, the new connection was incorrectly mapped to a destination that did not contain the certified AOP market filters. Although Pershing tested the operation of the filters in the test environment, it failed to sufficiently check whether the filters were operating correctly in the live, production environment.
While this was an isolated incident with minimal market impact (the trade was cancelled within minutes), appropriate automated filters had not been in place for this client for approximately three months.
Compliance with the infringement notice is not an admission of guilt or liability, and Pershing is not taken to have contravened
subsection 798H(1) of the Corporations Act.
We have imposed additional conditions on the Australian financial services (AFS) licence of OpenMarkets Australia Limited (OpenMarkets) after we identified concerns about some of its organisational arrangements.
OpenMarkets is a Melbourne-based market participant that trades in equities, exchange-traded funds, exchange-traded options and warrants on the ASX, Chi-X, NSXA and SIM VSE markets.
The action comes after our Market Supervision team identified concerns with OpenMarkets’:
- arrangements for identifying and preventing potential market misconduct (e.g. inadequate automated filters in its AOP systems and ineffective pre-trade and post-trade monitoring arrangements)
- reconciliation of its client trust accounts, and
- supervisory arrangements and organisational and technological resourcing.
The AFS licence conditions require OpenMarkets to appoint an independent expert to review the organisation’s arrangements, identify any deficiencies, and recommend enhancements appropriate to the business. The independent expert will report to ASIC and OpenMarkets in March 2017.
ASIC Commissioner Cathie Armour said, ‘Market participants have an important gatekeeper role. Those providing direct market access to clients should be vigilant in maintaining appropriate controls to ensure that trading messages do not interfere with the efficiency, fairness, order or integrity of the market. These controls include appropriate filters and a robust trade monitoring framework.’
We acknowledge OpenMarkets’ cooperative response and its engagement of an independent expert to commence the review.
Our inquiries into any potential market misconduct are continuing.
ASIC Commissioner Cathie Armour recently discussed market cleanliness as we head into reporting season in an opinion article for the Australian Financial Review.
‘…Information is the lifeblood of an economy, and the more freely it flows the better. The same applies to our markets, which can only operate fairly when the information they run on is accurate, useful and available to all.
Recent research from data-room provider Intralinks reported an uptick in information leaks ahead of major announcements such as merger or takeover deals globally and in Australia. The report also highlighted that leaks are still significantly less of an issue when doing transactions in the Australian market than in most other developed equities markets.
ASIC’s primary role is to protect and enhance market integrity and a big part of this is ensuring all investors get access to information in an orderly and transparent way. That does not mean putting the shareholder inside the boardroom; some matters must be dealt with in a confidential and frank environment. But it does mean when relevant information does emerge it should not be selectively available.
Leaks of any type can create false markets and that affects market integrity – whether the reality of actual distortion, or merely the perception. For the millions of Australians with a significant part of the national $2 trillion superannuation pool in the sharemarket, that is important.
So ASIC is keenly interested in leaks. We will continue the focus of our regulatory work on managing confidential information. And we will continue to measure the level of information asymmetry, or cleanliness, of our markets.
Our own research last year found there had been a sustained improvement in cleanliness of Australia’s listed equity market over the past decade.
Report 487 Review of Australian equity market cleanliness looked at possible insider trading and information leakage ahead of material, price-sensitive announcements by analysing price movements or shifts in trading behaviour before these announcements. (And investors should know that ASIC examines all trading surrounding significant market announcements as a matter of course).
The results suggest the extent of insider information and the loss of confidentiality ahead of material announcements has actually declined over this longer-term period and shows a statistically significant improvement in market cleanliness…’ Read the full article.
Underwriters should carefully consider whether the terms on which they have agreed to take up any fundraising shortfall may mean that they are not ‘underwriting’ the offer.
Regulatory Guide 6 Takeovers: Exceptions to the general prohibition discusses our view that a central element of underwriting is the assumption of risk – specifically the risk that investors do not take up all of the shares on offer.
In recent months, we have observed a number of agreements allowing an underwriter to terminate an underwriting if the market price of the issuer’s shares falls below the offer price at any time during the offer – even where the offer price is at or near the market price. Such events are almost certain to occur and may mean that the underwriter is not, in substance, assuming shortfall risk.
Investors may be misled where an offer is described as ‘underwritten’ in these circumstances because they will expect that the underwriter is assuming a real shortfall risk and may decide to commit funds to the offer on this basis.
Because the need to address this issue can result in additional expenses and delays for issuers, we encourage underwriters to exclude such clauses. If a clause is included, the underwriter should advise the issuer:
- not to describe the offer as ‘underwritten’ in its disclosure to investors, and
- to ensure that the nature of support for the offer under any agreement is accurately explained in any public disclosures.
For more information, see Regulatory Guide 6.
We have released new class waivers to allow financial technology (fintech) businesses to test certain services without holding an Australian financial services (AFS) or credit licence. The fintech licensing exemption reflects our commitment to facilitating innovation in financial services, while ensuring appropriate regulation that promotes good consumer outcomes.
The exemption allows eligible businesses to test specified services for up to 12 months with up to 100 retail clients, provided they also meet certain consumer protection conditions and notify ASIC before they commence business.
ASIC Commissioner John Price said, ‘No other major jurisdiction has implemented a class waiver which allows eligible businesses to notify the regulator and then commence testing without an individual application process.’
The exemption allows fintech and start-up businesses to begin testing the viability of innovative financial services before incurring many of the regulatory costs normally associated with operating such businesses.
Information about the services covered by the exemption is available in Regulatory Guide 257 Testing fintech products and services without holding an AFS or credit licence.
Businesses that are not eligible for the fintech licensing exemption are able to seek an individual exemption.
‘Individual applications are an important part of Australia’s regulatory sandbox framework,’ Mr Price said. ‘For instance, this option is open to existing licensees who wish to test an innovative product or service and comply with a modified version of the law.’
We have also updated existing guidance in Regulatory Guide 105 Licensing: Organisational competence and Regulatory Guide 206 Credit licensing: Competence and training to help these new innovative businesses meet their organisational competence requirements in alternative ways.
Twice a year we issue a report on the regulation and oversight of public corporate finance activity over the previous six months. The report provides an overview of relevant statistics, observations, policy initiatives and enforcement activity in relation to fundraising, mergers and acquisitions, corporate governance and other areas of relevance to corporate finance practitioners. We expect to publish the report later this month.
The release of the report coincides with the corporate finance liaison meetings hosted in five states by ASIC’s Corporations team. Attendance is free and open to all.
The next meetings will be held on the following dates:
- Brisbane: 28 February 2017
- Sydney: 1 March 2017
- Melbourne: 2 March 2017
- Adelaide: 7 March 2017
- Perth: 9 March 2017
A market participant (who also holds an AFS licence) recently lodged a breach report about its failure to comply with an obligation under the market integrity rules.
The market participant relies on a third-party service provider (another market participant) for clearing and settlement services, including the issuance of contract notes to its clients.
The third-party service provider experienced technical difficulties with its systems. The incident caused contract notes for some of the market participant’s clients to be issued with errors or not issued at all, contravening the market integrity rule requiring the issuance of contract notes to those clients. The participant worked with the third-party service provider to resolve the problem promptly.
The market participant recognised that, although it has chosen to use third-party clearing and settlement services, it remains responsible for complying with its obligations under the market integrity rules. Consequently, the participant promptly reported the breach to ASIC.
See Regulatory Guide 78 Breach reporting by AFS licensees for more information on breach reporting.