Market Integrity Update - Issue 91 - March 2018
- ASIC releases latest market integrity report
- Industry funding update
- ASIC’s expectations for ‘give-up’ trading
- Breach reporting reminder
- ASIC reviews credit rating agencies
- Charges laid against former FX trader
- ASIC warns investors against AGM Markets, OT Markets and Ozifin
- Consolidating our guidance on the market integrity rules
- ASIC extends the relief to ASX 24 participants from aggregate loss limits for two years
- Identity fraud warning
We have released our latest report on market integrity. Report 569 covers the work of ASIC’s Market Integrity Group for the period 1 July to 31 December 2017.
The Market Integrity Group is responsible for ensuring Australia’s financial markets are fair and efficient. It does this by setting standards and educating stakeholders, pursuing behavioural change and taking enforcement action to deter market misconduct.
The report looks at ASIC’s focus on cyber resilience, client money and sell-side research. It also looks at some of our key activities over the last six months in areas such as financial benchmarks, continuous disclosure and binary options.
ASIC Commissioner Cathie Armour said, ‘At ASIC, we work hard to protect the success of Australia’s financial markets – so that firms can thrive and investors can participate with confidence. We do this by setting standards and educating stakeholders, pursuing behavioural change and taking enforcement action to disrupt market misconduct.’
Ongoing priorities and areas of focus for ASIC’s market integrity work in 2018 include:
- technology and cyber resilience
- effective capital markets.
The Market Supervision Cost Recovery regime ceased on 30 June 2017 and has been incorporated into the ASIC industry funding model from FY2017–18 onwards.
Final Market Supervision Cost Recovery invoices were issued for the quarter ended 30 June 2017 and the first invoices under the ASIC industry funding model will be issued in January 2019 for FY2017–18.
To help you navigate the changes, we have released FAQs for the market intermediaries and market infrastructure sectors.
We’ve recently had a number of queries about a practice in cash equities markets known as ‘give-up’ trading.
A client wants to open a long (or short) OTC equity swap position with a swap counterparty.
The client instructs an executing broker to place an order to buy (or sell) listed cash equity securities on an Australian exchange market or in a dark pool.
After a cash market transaction is executed, the client arranges for its obligations under the trade to be settled by the swap counterparty (i.e. the client ‘gives up’ the trade to the swap counterparty).
The client enters an OTC equity swap position with the swap counterparty referencing equivalent securities.
At settlement of the cash market transaction, the swap counterparty:
- for a purchase – pays the transaction consideration and receives legal title in the purchased securities for its own benefit (e.g. to hold as its hedge for the swap), or
- for a sale – delivers the securities and receives payment of the transaction consideration.
A ‘give up’ occurs when a client arranges with its executing broker for their obligations under a cash market transaction to be settled by another broker acting as principal.
A client may also want to ‘give up’ a trade when unwinding an OTC equity swap position.
We expect executing brokers to make sure they have clear instructions from their client about whether an instruction is an order to buy or sell ‘physical’ cash equities or an instruction to open or close an OTC equity swap position.
We also expect clients, executing brokers and swap counterparties to comply with their obligations under the Corporations Act and the market integrity rules, including:
- the ‘naked’ short sales prohibition (section 1020B)
- executing brokers’ obligation to ask a seller if it is short selling (section 102AE)
- obligations to report short sale transactions and short positions (sections 1020AB and 1020AC)
- market participants’ pre-and-post-trade transparency obligations under the market integrity rules
- the takeover provisions in Chapter 6 (including relevant interest reporting obligations and ‘anti-creep’ provisions) and requirements for foreign investment proposals to be made to the Foreign Investment Review Board under the Foreign Acquisitions and Takeovers Act 1975.
We will be taking a closer look at give-up trading arrangements from May 2018.
If you are an Australian financial services (AFS) licensee and you have come across a significant breach, or likely breach, you must notify ASIC.
Regulatory Guide 78 Breach reporting by AFS licensees outlines your obligations, explains the breach reporting process and sets out our expectations when reviewing self-reported breaches. You can avoid delays and additional requests for information by sending us a complete breach report using ASIC Form FS80 (or by letter).
While we understand your assessment of the significance of a breach and any remedial action may take longer than the 10 business days allowed for reporting – most of the information in Table 5 of Regulatory Guide 78 should be provided when the breach is first reported to ASIC.
Keep in mind that your breach reporting obligations as an AFS licensee are in addition to your notification obligations under the ASIC market integrity rules.
If you have any questions about your breach reporting requirements, please get in touch with your relationship manager or email firstname.lastname@example.org.
Credit rating agencies play an important role in our markets by giving market users a better understanding of credit risks – and informing their investment and financing decisions.
Following a market-wide surveillance of CRAs currently operating in Australia, we’ve made a number of recommendations for change.
The focus areas of our surveillance included CRAs’ governance arrangements (including conflicts of interest and corporate structure), transparency and disclosure. Report 566 Surveillance of credit rating agencies makes a number of observations about CRAs’ activities with some leading to recommendations for change in areas such as board reporting, compliance teams and compliance testing, analytical evaluation of ratings and human resources.
It is important that CRAs that operate in Australia do not lose sight of their regulatory obligations in Australia – even if they operate in a global market.
Former Deutsche Bank FX options and futures trader, Andrew Donaldson, has been charged with 85 offences under s184(2) of the Corporations Act.
ASIC alleges that, between July 2013 and June 2014, Mr Donaldson recorded false transactions and false fixed cashflows in Deutsche Bank's internal systems in relation to financial products, including US Treasury Note Futures. It is alleged that by making these false entries in Deutsche's records, Mr Donaldson falsely increased his reported trading profits and temporarily offset trading losses he had suffered.
The alleged false entries related to trades purported to have been carried out by Mr Donaldson on behalf of Deutsche Bank. Because the entries related to trades that were never executed in the market, no external parties were affected.
The Commonwealth Director of Public Prosecutions is prosecuting the matter.
We have warned investors not to deal with AGM Markets, OT Markets and Ozifin in relation to trading in margin FX contracts for difference (CFDs) and bitcoin CFDs.
ASIC is concerned that these businesses are offering personal advice to retail investors that is not authorised by an AFS licence and engaging in conduct that is misleading and deceptive.
Any potential investors could suffer a financial loss as a result of the conduct of these organisations.
We have also obtained an interim injunction against AGM Markets, OT Markets and Ozifin to protect investors' funds while our investigation is continuing.
Our consolidated regulatory guidance for equities and futures market participants is on its way!
The guidance will reflect the structure of the new market integrity rule books – with one regulatory guide for market participants subject to the ASIC Market Integrity Rules (Securities Markets) 2017 and ASIC Market Integrity Rules (Securities – Capital) 2017; and another one for market participants subject to the ASIC Market Integrity Rules (Futures Markets) and ASIC Market Integrity Rules (Futures – Capital) 2017.
Each regulatory guide will merge and consolidate guidance in our existing regulatory guides – making it easier for you to find what you need. The regulatory guide for securities market participants will consolidate relevant guidance in Regulatory Guides 214, 215, 223, 224, 226 and 238; and the regulatory guide for futures market participants will consolidate relevant guidance in Regulatory Guides 214, 223, 226 and 250.
As part of the consolidation process we will:
- merge guidance and make minimal changes necessary to reflect updated market integrity rule references as contained in the consolidated rule-books
- remove information that is purely descriptive or no longer relevant
- introduce new guidance on management structures– no other new guidance will be introduced as part of this process.
Regulatory Guide 241 Electronic trading will continue to be a stand-alone regulatory guide but will be updated to reflect the consolidated market integrity rule books.
Look out for the three consolidated regulatory guides in April.
We have extended relief from the aggregate loss limit requirements in the ASIC Market Integrity Rules (ASX 24) for two years. ASIC Class Rule Waiver [CW 17/0251] was originally issued after it became clear that participants wouldn’t be able to comply with the aggregate loss limit requirements in subrule 2.2.1(1) once the new ASX 24 trading platform went live on 20 March 2017.
[CW 17/0251], which is due to expire on 20 March 2018, is conditional on a participant implementing appropriate processes to monitor the aggregate loss limits on each of its client and house accounts.
ASIC Class Rule Waiver [18/0143] extends the relief in [CW 17/0251] and will give participants the certainty they need – allowing us to consider how to best implement the protections in subrule 2.2.1(1).
We have recently come across a number of cases of identity theft where alleged fraudsters appear to have targeted online trading accounts – including opening one-off accounts in the registration name of issuer-sponsored holders whose details have been intercepted to sell those holdings.
If you are a market participant, you must be vigilant to the possibility of identity fraud and account hacking. To make sure you have appropriate arrangements to avoid unauthorised transfers, we encourage you to review your online account arrangements (and any arrangements outsourced to intermediaries), including:
- one-off sales and the limits imposed on the size of transactions
- client and payment verification processes
- off-market transfers
- third-party payments processes.
Keep an eye out for IP addresses that don’t reflect original client documentation and changes to bank accounts, email accounts and contact details.
You should also encourage your clients to:
- change their passwords regularly
- avoid using public domain email addresses when communicating with their broker
- 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).