Market Integrity Update - Issue 89 - December 2017

Issue 89, December 2017

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ANZ and NAB enter into enforceable undertakings to address conduct relating to BBSW

Scales Of JusticeWe have entered into enforceable undertakings (EU) with Australia and New Zealand Banking Group (ANZ) and National Australia Bank (NAB) in relation to their bank bill trading business and participation in the setting of the bank bill swap rate (BBSW).  

On 10 November, the Federal Court made declarations that ANZ and NAB had attempted to engage in unconscionable conduct in connection with the supply of financial services by attempting to change where BBSW set on certain dates. The Court also declared that both banks had failed to do all things necessary to make sure they provided financial services honestly and fairly.

The Court imposed penalties of $10 million each on ANZ and NAB and noted that the EUs would require them to take certain steps and pay $20 million for the benefit of the community. ANZ and NAB will also each pay $20 million towards ASIC’s investigation and other costs.

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EU legal entity identifier requirement from 3 January 2018

ReadyThe Markets in Financial Instruments Directive II (MiFID II) comes into effect in the European Union on 3 January 2018.

From that date, firms that are subject to MiFID II transaction reporting obligations will not be able to execute a trade on behalf of a client (including those in non-EU jurisdictions) who is eligible for a legal entity identifier (LEI) and does not have one.

Although this is not a requirement under Australian law, our understanding is that from 3 January 2018 Australian firms will not be able to transact with EU investment firms (which may include European Union firms that operate in Australia) without having an LEI.

LEIs are relatively cheap and easy to acquire and can be obtained from either a domestic or overseas entity that is accredited or endorsed to issue LEIs, or the local registration agent of such an entity.

For more information, visit the links below:

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ASIC accepts enforceable undertaking from Foster Stockbroking following investigation

PlanWe have accepted an EU from Foster Stockbroking Pty Limited (FSB) over the stockbroker’s capital markets and research businesses, following an ASIC investigation into conflicts of interest.

FSB is an Australian financial services licensee based in Sydney that provides investment banking and traditional stockbroking (including research) services to its clients. It was the sole lead manager for an initial public offering (IPO) of Reffind Limited (RFN), a small cap technology company in July 2015. The RFN IPO was oversubscribed by at least 385%.

We found that FSB scaled back IPO subscription bids made by FSB’s directors disproportionately less than subscription bids made by other investors – including FSB retail clients – and did not fully disclose to RFN the shares allocated to FSB directors. By giving preferential treatment to its directors when allocating shares, FSB failed to adequately manage its conflicts of interests.

We are concerned that conflicts between the commercial and personal interests of FSB (and its directors) and the interests of FSB’s clients to receive independent and objective research were not appropriately managed by FSB.

FSB has undertaken to implement a number of changes to its systems, see the media release for details.

FSB will appoint an independent expert to assess and evaluate the adequacy and implementation of the policies and undertakings of FSB.

FSB will also make a community benefit payment of $80,000 to The Ethics Centre.

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No action position for trading during deferred settlement periods

Trading ScreenTo clarify any uncertainty in the market, we have adopted a limited no-action position for trading in certain financial products, including securities, during deferred settlement periods.

Under section 1020B of the Corporations Act a person can only sell these products if they have a ‘presently exercisable and unconditional right’ to vest them in the buyer at the time of the sale. Where the sale occurs before the products have been issued, this could be in breach of section 1020B(2).

This no-action position is subject to the seller only selling unissued products if they – or the person selling on their behalf – believe on reasonable grounds that they have an unconditional entitlement to the products. It does not apply where the market operator has declared a ‘conditional market’ for trading in the products. 

We have decided to adopt this position while we consider whether a legislative instrument should be granted. We expect to consult on the terms of a legislative instrument in early 2018.

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ASIC consolidates market integrity rules

MirsLast month, ASIC consolidated the existing market integrity rule books to create a common set of rules for securities markets and a common set of rules for futures markets:

  • The ASIC Market Integrity Rules (Securities Markets) 2017 apply to the ASX, Chi-X, NSXA, SSX, IR Plus securities markets as well as competition between securities markets.
  • The ASIC Market Integrity Rules (Futures Markets) 2017 apply to the ASX 24 and FEX futures markets.
  • The ASIC Market Integrity Rules (Securities Markets – Capital) 2017 set out capital and reporting requirements for participants of the securities markets.
  • The ASIC Market Integrity Rules (Futures Markets – Capital) 2017 set out capital and reporting requirements for participants of the futures markets.

The consolidated market integrity rules reduce red tape for market participants trading on Australia’s securities and futures exchanges and remove confusion arising from differences in rules between markets.

Most market operators and market participants will have to comply with the consolidated market integrity rules from Monday 7 May 2018. Before then, we will:

  • reissue all class rule waivers and individual rule waivers that remain in force, and
  • update our regulatory guides to reflect consolidation of the market integrity rules and provide enhanced guidance on ASIC’s expectations about management structures.

Some transitional arrangements apply for the NSXA, IR Plus and SSX markets. NSXA and its participants will transition to the Securities Markets and Securities Capital rules in stages:

  • from Monday 4 December 2017—NSXA participants using their systems for automated order processing must comply with the Securities Capital rules and Parts 5.5, 5.6 and 5.7 of the Securities Markets rules
  • from Monday 5 November 2018—NSXA and its participants must comply with the Securities Markets rules, and
  • from Monday 6 May 2019—all NSXA participants must comply with the Securities Capital rules.

We will also grant transitional relief for three years to the IR Plus, NSXA, SSX markets and their participants from the rules derived from the ASIC Market Integrity Rules (Competition in Exchange Markets) 2011, other than a small number of rules that promote market integrity but are not specific to competition between markets.

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Cyber resilience in our financial markets

FocusCyber resilience is widely regarded as one of the most significant concerns for the financial markets sector and the economy at large. Given the central role financial markets firms play in our economy, the cyber resilience of our regulated population is a key focus for ASIC.

Last month, ASIC released a report on the cyber resilience of firms operating in Australia’s financial markets. Report 555 collates and analyses the results of self-assessments from over 100 stockbrokers, investment banks, market operators, post-trade infrastructure providers and credit rating agencies.

While our findings show greater engagement by firms on the issue, there is disparity between firms and insufficient investment in cyber resilience measures.

Key insights from the assessments include the following:

  • There is a growing understanding that cyber risk is a strategic, enterprise-wide issue that is on all organisations’ radars and is attracting increasing investment.
  • The disparity between large firms and small-and-medium firms is reflective of their investment in cyber security, the period of time cyber security has been an investment priority, and the ability to acquire highly specialised skills.
  • Larger firms have demonstrated a relatively high degree of cyber resilience.
  • Small-and-medium firms are working towards developing their cyber resilience by investing in cyber security, but there is a long way to go.

Report 555 is designed to:

  • raise awareness of cyber risks
  • highlight existing good practices and areas for improvement
  • monitor and assess the cyber preparedness of financial markets firms.

We encourage all financial markets firms to consider and discuss the information in this report as they develop or enhance their cyber resilience frameworks.

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Trader banned from providing financial services

BanWe have banned Damien Rodr, a designated trading representative for Bell Potter Securities Ltd, from providing financial services for four years. The banning follows an ASIC investigation into his involvement in trading in DirectMoney Ltd shares between 14 July 2015 and 23 July 2015.

Bell Potter was the manager and underwriter to a capital raising, resulting in DirectMoney being admitted to the ASX on 13 July 2015. In the two weeks following the commencement of trading, Mr Rodr entered bids for DirectMoney shares, through Bell Potter’s house account, with the dominant purpose of supporting the DirectMoney share price on ASX.

The investigation found that Mr Rodr took part in transactions that had the effect of creating an artificial price for trading in DirectMoney shares, including transactions that increased and/or restored the ASX’s closing price for DirectMoney.

We are concerned that Mr Rodr is likely to contravene a financial services law, on the basis that his conduct involved multiple transactions during the relevant period, and that he has not addressed his conduct or accepted responsibility for it.

We will take action to ban people from providing financial services if they engage in conduct that undermines the integrity of our markets. This is particularly the case of gatekeepers entrusted with ensuring public confidence.

Mr Rodr has the right to appeal to the Administrative Appeals Tribunal for a review of ASIC’s decision.

Our investigation into trading in the shares of DirectMoney is continuing.

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Merrill Lynch Equities (Australia) Ltd pays $140,000 in infringement notice penalty

GavelMerrill Lynch Equities (Australia) Limited (MLEA) has paid a penalty of $140,000 to comply with an infringement notice given to it by the Markets Disciplinary Panel (MDP).

The MDP found that between July 2014 and April 2016, MLEA:

  • executed orders contrary to wholesale clients’ instructions to opt out of the ‘best execution’ rule
  • failed to conduct adequate periodic reviews to ensure that it could comply with those instructions
  • failed to permit wholesale clients to opt out of its crossing systems by allowing trades to be executed on its crossing system
  • entered into transactions on behalf of clients without instructions to do so.

These actions gave the MDP reasonable grounds to believe that MLEA contravened the ASIC Market Integrity Rules (Competition in Exchange Markets) 2011 and ASIC Market Integrity Rules (Chi-X Australia Market) 2011.

Despite ASIC issuing a ‘warning letter’ during that period, MLEA failed to undertake adequate remedial action to prevent ongoing breaches in relation to client instructions. This highlights the need for participants to make sure their compliance reviews and remediation procedures and resources are appropriate for the size and complexity of the underlying business.

The MDP found that MLEA’s conduct was careless and there was no suggestion that MLEA intended to mislead its clients.

MLEA’s compliance with the infringement notice is not an admission of guilt or liability and MLEA is not taken to have contravened subsection 798H(1) of the Corporations Act.

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ASIC data strategy

TechOur data strategy describes our vision for data, our objectives and our approach to improving how we capture, share and use data.

Understanding the regulatory environment, how the regulated community behaves, and the outcomes for consumers and markets is key to performing our role. We monitor behaviour and outcomes by examining data relating to registration and licensing, regulated entity reporting and regulatory activities. We also review related data obtained from partner regulators and other third parties.

Our data strategy is part of ‘One ASIC’ which is about ‘connecting the dots’ to achieve better regulatory outcomes.

Our data strategy is a high-level, principles-based document that describes how we plan to be more data-driven and intelligence-led in the future.

We will review our progress and publish an update annually.

This data strategy supports ASIC’s alignment with whole-of-government initiatives, including the Public Data Policy and the Digital Continuity 2020 Policy.

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Last updated: 20/01/2022 01:46