Market Integrity Update - Issue 85 - August 2017

Issue 85, August 2017

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Market supervision priorities for the year ahead

PrioritiesTo keep you informed of the emerging issues in Australia’s markets, our Market Supervision team has identified three strategic priorities for 2017–18. We encourage you to plan for the year ahead by assessing your firm’s risk management framework against these priorities.

1. Technology, risk and resilience

  • Consider the systems and controls that apply to your operational and technology infrastructure.
  • Cyber threats are a risk to businesses and the stability of the financial markets. You should consider your cyber resilience profile relative to your risk appetite.

2. Conduct

  • Review the culture in your organisation to make sure it drives good conduct.
  • Ensure your firm is adequately managing confidential information and conflicts of interest. Review your firm’s controls to make sure you are appropriately managing risks identified by ASIC in Report 486 Sell-side research and corporate advisory: Confidential information and conflicts.
  • Contribute to the consultation on the proposed guidance for sell-side research in Consultation Paper 290 Sell-side research.

3. Effective capital markets

  • Review your systems and controls for managing conduct risk in fixed income, commodities and currencies, and equity derivatives.
  • Review your capital arrangements and the capital calculations used to assess financial strength.
  • Make sure you are prepared for the new client money reporting rules.

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Removal of unlicensed binary option mobile apps

PhoneEarlier this year we conducted a review of binary option trading apps. The review identified over 330 apps offered to Australians by entities and individuals that appeared to be unlicensed. Of these:

  • 63% were offered by binary option issuers and facilitated trading
  • 25% were from various signal providers, and
  • the rest were controlled by introducing brokers or were apps designed to influence people to trade binary options.

Many of the mobile app descriptions contained misleading statements about the profitability of trading and the amount of profit that could be made. For example:

  • ‘Earn up to 90% in less than an hour, in fact you can profit quickly as 60 seconds and profit as much as 620% via one trade’
  • ‘[our app] generates around 85% profitable signals from the top traders to guarantee the safe trading’.

The majority of these apps failed to outline the risks of trading binary options – with 80% having no risk warning at all. And, while some investors made money in the demo mode, they lost money once they moved to a live trading system.

We contacted Apple and Google and were encouraged with the speed both entities removed the apps from their app stores. We also note that Apple recently changed its review guidelines to state that apps that facilitate trading in binary options will not be permitted in its app store.

Commissioner Cathie Armour said, ‘In an age where technology can hide who is offering and controlling a product, buyer beware has never been so important. If something appears too good to be true, it probably is’.

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ASIC consults on proposed financial benchmark regulatory regime

Trading ScreenOn 26 June 2017, Government released draft legislation to establish a framework for a financial benchmark regulatory regime. The regime is designed to strengthen regulation of financial benchmarks used in Australia.

Consultation Paper 292 Implementing the financial benchmark regulatory regime sets out the proposed licensing regime for administrators of significant benchmarks in the event amendments to the Corporations Act 2001 (Corporations Act) are passed by Parliament. This early consultation will ensure the regime is implemented quickly and smoothly.

We want your feedback on our:

  • proposed rules for the administration of licensed financial benchmarks, and
  • proposed regulatory guidance on how we would administer the proposed financial benchmark regulatory regime.

Together with our proposals, the draft legislation will help make sure Australia’s financial benchmarks are in line with the International Organization of Securities Commissions’ Principles for financial benchmarks (PDF 389 KB). The proposals are also designed to facilitate equivalence assessments under overseas regimes, including the European Benchmarks Regulation.

ASIC Commissioner Cathie Armour said, ‘It is critical to market confidence that financial benchmarks are robust and reliable. This is especially true of benchmarks that are significant in the Australian financial system. These reforms should also facilitate the continued use of significant financial benchmarks, such as the Bank Bill Swap Rate, in the European Union.’

Submissions to Consultation Paper 292 are due by 21 August 2017.

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ASIC consults on a revised licence regime for domestic and overseas market operators

ReportWe are consulting on proposals to update regulatory guidance on the licence regime for financial markets.

Consultation Paper 293 Revising the market licence regime for domestic and overseas operators proposes the introduction of a two-tiered market licence regime, based on a risk-based assessment. The second tier of licence will facilitate a range of market venues, including specialised and emerging market venues.

We also propose to:

  • update and clarify guidance about how licensees can comply with specific licence obligations, and
  • consolidate Regulatory Guide 177 Australian market licences: Overseas operators into updated Regulatory Guide 172 Australian market licences: Australian operators.

The proposals follow the passage of the Corporations Amendment (Crowd-sourced Funding) Act 2017, which amended Chapter 7 of the Corporations Act relating to the market licence regime. Implementing the reforms will allow the market licence regime to reflect recent developments in the role of financial markets. Importantly, the proposals will introduce a two-tiered market licence regime, which will be aligned with the approach taken in overseas financial markets.

Submissions to Consultation Paper 293 are due by 31 August 2017.

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Markets Disciplinary Panel outcome

RoundtableThe MDP recently declined to issue an infringement notice to a market participant for trading using a volume weighted average price (VWAP) algorithm with a daily volume limit.

The algorithm aimed to match the daily VWAP benchmark in a way intended to minimise market impact. The algorithm pursued liquidity throughout the trading day (crossing the spread if necessary) and sought to participate in all closing ASX auctions.

ASIC submitted that, over a two-month period, the trading behaviour of the algorithm (particularly towards the close) resulted in the market for certain shares not being fair and orderly. The MDP, after taking into account the views of ASIC and the market participant, was not satisfied the conduct amounted to a breach of the market integrity rules.

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Areas of focus for IPOs

IpoAn initial public offer (IPO) is the first time that securities in a company are offered to the public. An IPO also allows companies to generate additional capital. At ASIC, we proactively regulate IPOs with the aim of promoting confidence in our markets.

In the six months to 30 June 2017, prospectuses for 210 offers were lodged with ASIC – 60 of these were IPO prospectuses. We raised disclosure concerns in 70 of the 210 offers.

It is important for issuers to get their prospectus disclosure right. Failure to do so may result in fundraising delays or failure, and additional costs to the issuer.

The most frequent disclosure concerns were that the documents contained unclear or insufficient detail on the use of funds and the business model. The proposed use of funds and business model is something every issuer should know – so it is surprising that issuers have difficulty communicating this information.

For the rest of this year we will continue to review a significant proportion of prospectuses to help make sure they are reliable. We will also look at marketing and other commentary to investors about the offer, including online investor forums and social media.

Recent work we have undertaken suggests a strong interest by investors in gaining access to management presentations. We will be encouraging issuers to provide greater access to management for IPOs, including for retail investors after lodgement of the prospectus.

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ASIC accepts enforceable undertaking from NSX market participant

Scales Of JusticeWe have accepted an enforceable undertaking from Avalon Pacific Capital Pty Ltd (Avalon Pacific) in relation to its dealing in securities of five overseas registered companies listed on the National Stock Exchange of Australia (NSX).

Avalon Pacific accepted and placed orders to trade in four companies registered in Samoa, and one registered in the British Virgin Islands. We are concerned that Avalon Pacific did not take into account the following circumstances of the orders:

  • the orders resulted in trades that materially increased the price of each security
  • the trades appeared to be part of a series intended to increase the price of each security
  • the orders were provided to Avalon Pacific by individuals who appear to be involved in the management of the companies
  • some of the orders were accompanied by unusual settlement instructions, and
  • some of the substantial price increases did not appear to be matched by company announcements that would explain the price increases – and Avalon Pacific made no attempts to determine if there was a legitimate commercial reason for the orders.

Avalon Pacific should reasonably have suspected the orders were placed with the intention of creating a false or misleading appearance of the price of the securities.

Avalon Pacific has agreed to cancel its NSX market participant status and not deal in NSX-listed companies via another market participant.

ASIC Commissioner Cathie Armour said, ‘As gatekeepers, market participants must have systems in place to detect and prevent suspicious orders from being placed on Australian licensed financial markets. ASIC considers this is a significant outcome that will help protect investors and ensure the integrity of the market’.

Our investigation into trading in the companies is continuing.

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Stories from the beat

Typewriter StandardMost of the market integrity outcomes we achieve don’t make it to mainstream media, but this doesn’t take away from their importance. Every day, ASIC officers work to ensure our markets are fair and efficient. These are their stories.

We recently conducted an investigation of a market participant’s trading after identifying a number of transactions executed by the participant that raised our suspicions.

The market participant had bought or sold as principal on one side of a transaction and then, moments later, sold or bought the same line in the market at the same price. This raised concerns that the participant was unnecessarily acting as principal.

After making inquiries, we found no evidence of the market participant executing these trades to inflate its trading volume.

While no enforcement action was taken, we would like to remind all market participants of their obligations under Rule 5.7.1(a) of the ASIC Market Integrity Rules (ASX Market) 2010. Rule 5.7.1(a) (ASX) states that a market participant must not create a false or misleading appearance of active trading. Breach of Rule 5.7.1(a) (ASX) can result in a maximum penalty of $1,000,000.

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Last updated: 30/03/2021 09:22