Market Integrity Update - Issue 97 - September 2018

Issue 97, September 2018

Market Integrity Group’s priorities for 2018–19

We recently published our strategic priorities for 2018–19. We encourage market intermediaries to plan for the year ahead by assessing your firm’s risk management framework against these three priorities:

1. Conduct

  • Culture and conduct can directly affect a firm’s ability to put the client first and deliver good outcomes. Good culture and conduct should be embedded in your organisation.
  • We’re enhancing our supervision of the highest risk firms, with a greater focus on governance, and the systems and controls that prevent poor conduct. Our focus includes FICC, retail OTC derivative providers, initial coin offerings and client money.

2. Technology risk and resilience

  • Robust market infrastructure and market intermediaries, with effective systems and controls to identify and manage conduct risks, underscore our strong financial system.
  • Our focus is on poor technological controls, including for cyber security and the use of artificial intelligence. We support the opportunities and economic benefits of innovation in financial markets, while managing the risks.

3. Effective capital markets

  • We help to shape developments in market structure and market integrity to maintain a fair, strong and efficient financial system for all Australians.
  • We’re reviewing high-frequency trading in foreign exchange (FX) markets, retesting the cleanliness of our markets and continuing to enhance our market integrity rules.

We encourage you to review our priorities and activities and use them as a reference tool for your compliance, supervisory and risk management programs, and to prepare for your interactions with us.

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Report reviewing ASX Group’s risk standards released

We’ve published our recent review of the Australian Securities Exchange (ASX) Group’s technology governance and operational risk management arrangements, which has identified a number of recommendations.

Report 592 Review of ASX Group’s technology governance and operational risk management standards acknowledges that ASX’s arrangements have historically served the Australian market well and sets out identified areas for improvement and recommendations for ASX to address these.

The review found that ASX’s practices were more comparable to those of other global exchanges but lagged behind better practices in the broader financial services sector.

ASX recognises the areas for improvement identified in the review. It’s undertaking an extensive work program to implement all the recommendations and already had improvements in progress in almost half of the identified areas before the review started or before the recommendations were finalised.  

Once completed and embedded, the recommendations will better enable ASX to meet the expectations of its customers, its regulators and the wider users of the Australian financial market. ASX Group anticipates a significant component of the action items in this work program will be completed by the end of 2018 and expects all the recommendations from the review to be fully implemented and embedded within three years.

Many of the findings and recommendations from this review will be relevant to other financial services sector organisations we regulate.

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Regulatory data and industry funding – are your errors costing your clients?

ASX and Chi-X participants are reminded of the importance of ensuring regulatory data is accurate. This data is used for market surveillance and to calculate the fees paid by securities dealers that trade through market intermediaries under ASIC industry funding.

Errors in the content or format of the ‘intermediary identifier’ field, for example, which is required under Rule 7.4.4 of the ASIC Market Integrity Rules (Securities Markets) 2017, may impact the fees paid by your clients.

You should check that the data your firm has provided under Rule 7.4.4 is accurate.

Regulated entities must register through the ASIC Regulatory Portal and submit their industry funding metrics before 27 September 2018.

If you identify any issues, please contact your ASIC Intermediary Supervisor as soon as possible before this date.

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Licence required for MDA providers by 1 October 2018

Managed discretionary account (MDA) providers using a regulated platform are reminded to obtain an Australian financial services (AFS) licence, with an MDA specific ‘dealing by issue’ authorisation, by 1 October 2018.

The temporary no-action position will no longer have effect from 1 October 2018, and those MDA providers who don’t have the authorisation at this time must cease providing MDAs to retail clients until they have updated their AFS licence.  

This important change was consulted on in 2013 and confirmed with the publication of revised Regulatory Guide 179 Managed discretionary account services in 2016. MDA providers have had two years to transition to the revised requirements and either obtain the necessary AFS licence authorisation or wind up their MDA activities.

If MDA providers lodge a licence variation application with us, they’ll need to also provide the mandatory supporting documents, as well as meet the minimum experience requirements and have the necessary professional indemnity insurance and financial resources. We’ll also take into consideration experience gained by a licensee under the no-action position.

For those MDA providers who have relied on the no-action position and haven’t applied for the necessary licence authorisation, they’ll need to act quickly to comply with the revised requirements after the no-action position ends.

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Advice on industry funding metric

After receiving several enquiries on the operation of the over-the-counter (OTC) traders’ entity metric in regulation 66 of the ASIC Supervisory Cost Recovery Levy Regulations 2017, we wish to clarify how we intend to administer aspects of that metric.

Our view is that subregulation 66(3) captures staff who carry out any of the activities on behalf of the OTC trader in relation to dealings covered by the OTC trader’s licence or exemption (being dealings that are subject to regulatory oversight by ASIC).

Additionally, we believe that if a full-time employee engages in any of the relevant OTC activities at any time over the year, that employee counts as one full-time equivalent person for the purposes of the entity metric, no matter how much of the person’s time is spent on other activities.

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Are ETPs meeting retail investors’ expectations?

Our recent review of the exchange traded products (ETP) market in Australia has found that while the market is generally performing well, several risks require monitoring by issuers and oversight by market operators.

We released our findings about the steadily growing ETP market in Report 583 Review of exchange traded products, following our review which examined whether the market is meeting the expectations of retail investors.

We found that ETPs are generally meeting the relatively low-cost and liquidity expectations of investors, with trading liquid, bid/offer spreads narrow, and secondary market prices close to the net asset value (NAV). However, this doesn’t always apply to all products.

We recommend that ETP issuers frequently publish and make available an indicative net asset value (iNAV) that enables investors and financial advisers to make more informed decisions.

We also encourage issuers to monitor market making. A significant concern identified was the potential for the bid/offer spread to temporarily widen in some circumstances for ETPs, which undermines their relatively low-cost proposition.

Issuers should continue educating investors and financial advisers about the ETP market, for example regarding liquidity, order type, and the need to exercise caution when trading during market volatility.

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Regulatory framework adjustments enable new products on Chi-X

We’ve adjusted our regulatory framework to allow market participants to trade in transferable custody receipts (TraCRs) and exchange traded funds (ETFs), which may soon launch on the Chi-X market.

TraCRs are investment products that will trade on the Chi-X market and provide holders with a beneficial interest in shares that trade on overseas stock exchanges, such as NYSE and NASDAQ.

The updated framework for TraCRs includes:

  • their inclusion in the definition of cash market products in the new consolidated rule book, the ASIC Market Integrity Rules (Securities Markets) 2017
  • new conditions on Chi-X’s market licence
  • making an ASIC instrument to set the disclosure and registration requirements for the issuer of TraCRs
  • appropriate market supervision and disclosure arrangements for TraCRs.

We’ve also amended various class orders to extend existing relief that facilitates the quotation and trading of ETFs on the ASX market to also include the Chi-X market, including relief for product issuers, authorised participants and market makers. Various definitions in the class orders have also been amended so that they are more market neutral with respect to both ASX and Chi-X markets.

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Changes to reporting for several derivatives products

We’re implementing our recently proposed changes to the way transactions in contracts for difference (CFDs), margin FX and equity over-the-counter (OTC) derivatives must be reported. The changes will provide better reporting to help us monitor market misconduct.

The changes involve making an excluded derivative determination, requiring these types of transactions to be reported to derivative trade repositories using a ‘lifecycle’ method, rather than an end-of-day ‘snapshot’ method.

Following consideration of feedback received on the proposal, we intend to proceed with making the excluded derivative determination for CFDs, margin FX and equity OTC derivatives to be effective from a date to be specified in the determination, likely to be in Q2 2019. 

When made, the excluded derivative determination will be posted on our website and a further article published in the Market Integrity Update.

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Former managing director of mining company found guilty of insider trading

Market participants who trade with insider knowledge are reminded that they risk ruining their career and being convicted of a criminal offence, following the recent conviction of a former managing director.

Darren Lind has been found guilty of two charges of insider trading in shares of ASX listed mining exploration company Minotaur Exploration Ltd (Minotaur).

Mr Lind was a former managing director of Golden Fields Resources Pty Ltd, a company which had a joint venture partnership with Minotaur to explore for copper-gold at its ‘Eloise Project’ site in Cloncurry, Queensland.

The charges relate to two share purchases of Minotaur shares by Mr Lind, via his self-managed superannuation fund company, after he learned of positive confidential preliminary exploration drilling results during a meeting with Minotaur executives.

It was alleged that Mr Lind came into possession of inside information about the copper-gold discovery at Cloncurry during a meeting with Minotaur executives on 25 July 2014. Following an ASX announcement about the copper-gold discovery on 31 July 2014, Minotaur’s share price doubled in value.

Mr Lind has lodged a Notice of Appeal against his conviction and a hearing is listed on 2 October 2018 in the Supreme Court of South Australia.

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Last updated: 30/03/2021 09:22