Market Integrity Update - Issue 95 - July 2018
- New prices for our regulatory services
- Market Liaison Meeting
- Retail OTC derivatives sector must improve practices
- Consulting on changes to foreign financial services providers
- Systems and controls inadequacies at Vantage Global Prime
- Proposed changes to the capital requirements for market participants
- Aurora fraud highlights the importance of good governance
- Former financial advisor and consultant banned for seven years
- Goldman Sachs to improve bookbuild messaging controls
- Stories from the beat
New prices for our regulatory services
The fees we charge for specific regulatory activities changed on 4 July 2018, increasing in most cases. This is the second phase of the introduction of industry funding for ASIC.
Our fees for service impact a range of industry stakeholders including Australian credit licensees, Australian financial services licensees, market infrastructure providers, responsible entities, registered liquidators, and companies. The fees, some of which are tiered, apply to specific regulatory activities requested by a single entity including:
- licensing and professional registrations
- processing applications for relief
- requests for changes to market operating rules
- formal compliance review of documents lodged under the Corporations Act.
The previous fees for these activities didn’t reflect the actual cost of the work conducted. The Government undertook several rounds of industry consultation, passing the required legislation on 28 June 2018.
New industry funding laws that changed the way we’re funded took effect on 1 July 2017. While around 90% of our regulatory activities will now be recovered from industry funding levies, the remaining 10% will be recovered via fees for service. Our Cost Recovery Implementation Statement (CRIS) - Fees for service provides information about how we’ll implement fees for service under industry funding.
- Read the media release and our industry funding arrangements
Market Liaison Meeting
Market stakeholders are invited to attend the next Market Liaison Meeting on 9 August 2018. These free quarterly meetings provide insights into the Market Integrity Group's strategic priorities and how we’re tracking against them.
The meeting will include updates on:
- our approach to supervising market intermediaries in 2018-19
- our fixed income, currencies and commodities strategy
- why companies fail and forecasting accuracy
- the proposed changes to our capital rules.
A live broadcast of the event will be held across our Sydney and Melbourne locations. Please indicate your location when registering.
Retail OTC derivatives sector must improve practices
Participants in the retail over-the-counter (OTC) derivatives sector must improve their practices after our recent activities showed their conduct fell short of expectations.
We reviewed 57 retail derivatives issuers and identified many risks associated with the products offered to retail investors by OTC derivatives issuers. These products include binary options, contracts for difference (CFD) and margin FX (foreign exchange).
Our review found that client losses in retail OTC derivatives trades seemed high, with the percentage of unprofitable traders being up to 80% for binary options, 72% for CFD traders and 63% for margin FX traders.
The most concerning practices we identified include:
- actual client profits being inconsistent with marketing materials
- a lack of transparency around pricing
- risk management practices that relied on the use of client money were outdated and needed to be reviewed
- some referral arrangements that may be in breach of conflicted remuneration requirements and referral selling prohibitions
- some issuers providing wholesale services or allowing third parties to ‘white label’ their products didn’t have adequate risk management practices and operational capital to supervise counterparties and support their exposures.
We expect licensed issuers to conduct themselves appropriately and ensure consumers trade in retail OTC derivatives with a clear understanding of the products and the risks to which they're exposed. We’ll work with issuers to raise industry standards and improve compliance with their Australia financial services licence obligations.
Consulting on changes to foreign financial services providers
We’re seeking your feedback on our proposal to enable foreign financial services providers (FFSPs) to apply for a modified form of an Australian financial services (AFS) licence.
The proposal follows our review of FFSP licensing relief, which identified some supervisory and regulatory concerns. The current FFSP licensing relief is due to expire on 27 September 2018, however we’re extending this period a further 12 months to allow adequate time to consult with our stakeholders.
Specifically, we’re seeking your feedback on our proposal to:
- repeal ASIC Corporations (Repeal and Transitional) Instrument 2016/396 – this instrument gives temporary AFS licensing relief to FFSPs that provide financial services to wholesale clients in Australia, where we have assessed the FFSP is regulated by an overseas authority that is sufficiently equivalent to the Australian regulatory regime
- repeal ASIC Corporations (Foreign Financial Services Providers—Limited Connection) Instrument 2017/182 – this instrument gives temporary AFS licensing relief to FFSPs transacting with wholesale clients in Australia, where there is a limited connection between the FFSP and Australia
- implement a modified AFS licensing regime for FFSPs, to enable FFSPs to apply for and maintain a modified form of AFS licence (foreign AFS licence)
- implement a transition period of 12 months to 30 September 2020, if ASIC proceeds with foreign AFS licensing.
Please note that our approach outlined in the proposal is indicative only and not our final policy.
We welcome your feedback on Consultation Paper 301 by 31 July 2018.
Systems and controls inadequacies at Vantage Global Prime
Financial services firms are reminded that the improper use of their confidential client information will not be tolerated, following the recent court enforceable undertaking from Vantage Global Prime Pty Limited (Vantage).
We investigated Vantage, an Australian financial services licensee, and identified that one of their senior employees used their position to access confidential client trading information to inform personal trades. While there was no evidence that any of Vantage’s clients suffered loss, the senior employee did profit as a result.
Our investigation also uncovered that Vantage didn’t have adequate systems and controls in place to identify, monitor for, prevent and respond to inappropriate use of its confidential client trading information by its employees.
Following our investigation, Vantage will appoint an independent expert to assess and evaluate its systems and controls to deal with improper access to its client confidential information.
Vantage has also undertaken to:
- not appoint the senior employee as a director for a period of 12 months
- arrange for all its representatives to complete compliance training
- make a community benefit payment of $95,000 to The Ethics Centre.
If there is a breach of this undertaking then, under the ASIC Act, we can apply for orders from the court to enforce compliance.
- Read the media release and the enforceable undertaking.
Proposed changes to the capital requirements for market participants
We’re consulting to improve and simplify the capital requirements for market participants, including further consolidating the two market integrity capital rule books into a single capital rule book.
We impose capital requirements to protect the integrity of the market and to protect investors. The capital requirements create a financial buffer that decreases the risk of a disorderly or non-compliant wind-up. They also help to ensure a market participant’s continuing capacity to meet financial obligations to clients.
We’re proposing that:
- we remove redundant rules and forms and more closely align the capital requirements with the financial requirements of the Australian financial services licensing regime
- market participants of futures markets comply with a risk-based capital regime instead of a net tangible asset requirement, and must always hold core capital of at least $1,000,000
- we increase the minimum core capital requirement for securities market participants from $100,000 to $500,000, as well as introducing new rules such as an underwriting risk requirement.
Your feedback on Consultation Paper 302 is welcomed by 15 August 2018.
Aurora fraud highlights the importance of good governance
Australian financial services (AFS) licensees are reminded of the importance of sound governance and risk management systems to mitigate risk, following the 2017 Aurora Funds Management Limited (Aurora) fraud.
We’ve imposed conditions on Aurora’s AFS licence, after uncovering its former chief financial offier (CFO), Ms Betty Poon, stole $1 million of investor funds. When investigating the case, we found that Aurora had poor governance structures, and a lack of appropriate supervision and management of its staff and executives.
As part owner, responsible manager, CFO, company secretary, compliance officer, sole operator of bank accounts and primary lead with Aurora’s auditors, Ms Poon identified and exploited weaknesses in Aurora’s systems. For one person to hold so many significant roles within a responsible entity clearly indicated a flawed governance structure with poor supervision and inappropriate segregation of duties.
The theft was not discovered by Aurora for approximately nine months, further indicating problems with a governance structure where one person held many different but intersecting responsibilities, and was able to conceal wrongdoing.
We expect to see AFS licensees taking active steps to meet compliance with Regulatory Guide 259 Risk management systems of responsible entities, including implementing clearly defined roles and responsibilities, effective monitoring of staff conduct and the segregation of duties in high-risk functions.
Effective governance structures and risk management systems are an essential part of the obligations of all AFS licensees, including responsible entities, and failure to maintain effective standards on these issues will result in action.
Former financial advisor and consultant banned for seven years
We’ve banned Mark Damion Kawecki from providing financial services for seven years, and remind financial services providers that we’ll act against those who engage in conduct which undermines the integrity of our markets.
The banning follows an investigation into Mr Kawecki’s conduct when applying for shares under the initial public offerings (IPOs) of companies that listed on the ASX between 2015 to 2017. A company must meet the 'minimum spread requirement' (a minimum number of unrelated shareholders in the company) under the ASX Listing Rules before its shares can be quoted and traded on ASX.
The investigation found that Mr Kawecki had provided false addresses and misrepresented beneficial holders in relation to applications he submitted for shares for at least three IPOs. We found that Mr Kawecki engaged in this conduct to ensure that the share applications he submitted would count towards meeting the minimum spread requirement, and that he was paid a fee per application he submitted.
Attempts to achieve the minimum spread requirement through artificial means is inconsistent with the fair and orderly operation of the market.
Goldman Sachs to improve bookbuild messaging controls
Accurate bookbuild messaging is crucial for maintaining investor confidence in capital raising transactions, a recent court enforceable undertaking from Goldman Sachs Australia Pty Ltd (GS Australia) has highlighted.
We’ve accepted a court enforceable undertaking from GS Australia to improve controls relating to bookbuild messaging in certain equity capital market transactions they’ve managed. A bookbuild is the process of generating, recording and capturing demand from potential investors for a capital raising transaction. Our investigation uncovered concerns about certain representations made to potential investors by GS Australia about the minimum fixed demand, in relation to shares in Healthscope Limited in late 2015.
Under the enforceable undertaking, GS Australia will conduct an internal review of policies, procedures, systems, controls, training, guidance and the monitoring and supervision of employees engaged in equity capital market transactions led by GS Australia and which involve a bookbuild or underwriting process. They will then implement changes to address any deficiencies identified.
GS Australia has implemented changes to its controls and processes including to require:
- legal or compliance approval of all bookbuild messages to be provided to potential investors in certain equity capital market transactions
- compliance attendance at any sales calls at the launch of certain equity capital market transactions to provide oversight of messaging to potential investors.
GS Australia will also make a community benefit payment of $500,000.
Stories from the beat
A recent suspicious activity report of some unusual contracts for difference trades led to the discovery of a client using their account with a market participant to narrow the spread of an ASX-listed security, and subsequently profit from trading.
Analysis of over-the-counter (OTC) derivatives and cash equity data revealed similar strategies in other ASX listed securities. The OTC data used for this analysis is the data we now receive because of the reporting requirement we put in place for all OTC derivative transactions. This requirement was part of the global OTC derivative reform program and was designed, in part, to assist regulators to better deal with market misconduct.
After conducting additional inquiries, we found that the same person’s cash securities account had recently been suspended for uneconomical trading, through transacting small parcels of these securities over short timeframes.
Although the trading resulted in limited gains, the person’s cash securities account was no longer allowed to transact directly into the market. We approached the individual, issuing them with a warning letter and highlighting that their trading activity had been identified. The letter further reminded them that market manipulation, false trading and market rigging are criminal offences that carry a maximum penalty of $945,000, imprisonment for 10 years, or both. As a result, the trading activity ceased.