MIU - Issue 133 - December 2021

Additional licence conditions imposed on ASX and expectations to improve market resilience issued

We’ve imposed additional licence conditions on ASX following our review of the November 2020 outage. The licence conditions are directed at mitigating risks for future upgrades, with specific emphasis on the oversight of the CHESS Replacement Program, due to go live in April 2023. 

Report 708 ASIC’s expectations for industry in responding to a market outage (REP 708) outlines our expectations of market operators and participants following the review. The report notes serious deficiencies in ASX’s and market participants’ ability to limit the impact on overall liquidity highlighted by the outage. This is particularly disappointing given some of these deficiencies had previously been raised in Report 509 Review of the ASX equity market outage on 19 September 2016.

REP 708 examines the broader context behind the outage and the subsequent inability or reluctance to maintain trading through other venues. It outlines our expectations of market operators and participants, aimed at ensuring future continuity of operations and trading, especially in the event of a future incident.

We expect market operators and participants to implement the measures set out in the report to maintain compliance with their obligations under the law. These expectations require market participants to have the ability to trade on alternative venues in the event of a future market outage. The expectations also require market operators to review their procedures, including for determining session states (e.g. Enquire or Adjust), in order to facilitate continued participant interaction with their orders during any future outage.

We’ll be actively evaluating and monitoring the implementation of actions taken in response to REP 708 to ensure market operators and participants are taking appropriate steps. Failure to implement measures to address the expectations set out in REP 708 may lead to further action under the Corporations Act 2001 and the ASIC Market Integrity Rules (Securities Markets) 2017.

• Read the media release

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Report on cyber resilience assessments of financial markets firms released

We’ve released Report 716 Cyber resilience of firms in Australia’s financial markets: 2020–21 (REP 716) which provides an update on organisations’ cyber resilience in the two years since our last review.

While there has been a small improvement in the cyber resilience of firms operating in Australia’s financial markets, the increase of 1.4% falls far short of the 14.9% improvement targeted for the period.

This shortfall is the combined result of overly ambitious targets, escalation in the cyber threat environment, and disruptions caused by the pandemic – leading organisations to reassess the targets set in 2019 and redirect resources to:

• enable secure remote working on a never-before-seen scale
• ensure the delivery of products and services to customers as supply chains become increasingly burdened and threatened by cyber activists.

Other key findings from REP 716:

• The gap between large firms and small-to-medium enterprises (SMEs) is continuing to close.
• The cyber resilience of many SMEs has improved.
• The confidence of larger firms in their own cyber resilience has fallen slightly because of increased complexity in their business operating models and heavy reliance on supply chain partners.
• The level of cyber resilience for supply chain risks has remained relatively static since our last review despite the increasing number of cyber threat actors, sources and types targeting third parties and supply chains.

We encourage you to consider the information in REP 716 as you develop your cyber resilience frameworks. You should also consider the application of the good practices identified in the report for managing supply chain risks. Failure to invest in supply chain risk management could lead to significant consumer harm that might warrant our investigation and action.

• Read the media release

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Former executive of Healthe Care Australia sentenced for insider trading

Mr Gregory Campbell, the former National Development and Construction Manager at Healthe Care Australia Pty Limited (Healthe Care), has been:

• sentenced to 12 months’ imprisonment, to be released immediately upon his own recognizance of $10,000
• fined $10,000 for insider trading in the shares of Pulse Health Limited (Pulse)
• ordered to pay a pecuniary penalty of $31,996 (the profits from his offence).

On or around 19 October 2016, Mr Campbell (who was then a member of the company’s executive team) received information from another executive team member about an in-principle agreement by Healthe Care to acquire a substantial shareholding in Pulse. Mr Campbell knew this information was not generally available and would have had a material effect on the Pulse share price. With this knowledge, Mr Campbell purchased 392,257 shares in Pulse for a total value of $127,384.26.

On 20 October 2016, Pulse entered a trading halt and announced that it had received a non-binding, indicative offer from Healthe Care to acquire all of its shares for $0.47 per share.

When trading re-opened on 21 October 2016, Mr Campbell sold his shares in Pulse, resulting in a profit of $31,996.

Mr Campbell had previously pleaded guilty to the insider trading charge. In sentencing, Judge McInerney stated that Mr Campbell would have been sentenced to two years’ imprisonment with no release upon recognizance if he had not pleaded guilty.

• Read the media release

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Consulting on mandatory clearing rule amendments to reflect benchmark reforms

We’re seeking feedback on proposed amendments to the OTC derivative clearing rules, designed to reflect ongoing reforms to interest rate benchmarks, as outlined in Consultation Paper 353 Proposed amendments to the ASIC Derivative Transaction Rules (Clearing) 2015 (CP 353).

A number of interest rate benchmarks referred to in the clearing rules will either cease or no longer be representative by 3 January 2022. CP 353 includes amendments to remove contracts referencing these benchmarks from the scope of the clearing requirement and to replace them with overnight index swaps contracts, with the same range of maturities, referencing the replacement (near) risk-free rate selected for each currency.

Interested parties are encouraged to make a submission by Monday, 24 January 2022. After receiving submissions on CP 353, we’ll consider the feedback, publish a feedback report and submit the amended rules for Ministerial consent.

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Naked short selling – it’s a criminal offence

We’ve seen an increasing number of suspected breaches of the naked short selling ban. Naked short selling is the practice of selling certain financial products without ’cover’.

There’s also some misunderstanding about the differences between Australia’s short selling rules and the ‘locate’ rule in other jurisdictions.

Our short selling rules are an important safeguard against settlement failures, disorderly markets and any knock-on impacts to the financial system.

A breach of those rules is generally a criminal offence, which we have no tolerance for.

Covered short selling vs ‘locate’ rule

Generally, where a person places a sell order or executes a short sale and at the time of the order or sale relies on an existing securities lending arrangement to have a ‘presently exercisable and unconditional right to vest’ the products in the buyer, the sale of the products is a covered short sale.

Covered short selling is permitted in Australia, subject to certain reporting and disclosure obligations.

This differs from the ‘locate’ rule in many other jurisdictions, which allows a person to execute a short sale if they have a reasonable expectation they will be able to borrow stock after the transaction for delivery to the buyer. Unless you have an exemption, a locate does not satisfy short selling requirements in Australia.  

Your obligations

We remind all clients and executing brokers of their obligations under the Corporations Act 2001, including:

• the prohibition on naked short sales (section 1020B)
• executing brokers’ obligation to ask a seller if it is short selling (section 1020AE)
• to report short sale transactions and short positions (sections 1020AB and 1020AC)
• to comply with conditions imposed on any exemptions from the prohibition - we expect strict and timely compliance.

For more information about short selling rules and exemptions, see Regulatory Guide 196 Short selling.

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The end of LIBOR

We remind firms that most LIBOR tenors will cease or no longer be published on a representative basis by the end of 2021. Specifically, GBP, EUR, CHF, JPY, and one-month and two-month USD LIBOR tenors will no longer be available after 31 December 2021. All firms should finalise their preparation and ensure they are ready for cessation.

Although the Financial Conduct Authority (FCA) will compel the continued publication of certain GBP and Yen LIBOR tenors for a limited time using a ‘synthetic’ methodology, these synthetic GBP and Yen LIBOR tenors are strictly for use in legacy contracts and should not be used in new contracts. 

Also, certain key USD LIBOR tenors will continue to be published on a representative basis until 30 June 2023. Despite the later cessation date, all firms should stop entering into new contracts that use USD LIBOR from the end of 2021.

Firms should focus on transitioning to robust and suitable alternative reference rates that are based on industry consensus and recommendations from relevant regulators and working groups. Firms should be mindful that some credit-sensitive rates being considered as replacement rates for LIBOR are based on similar markets to LIBOR and may replicate many of LIBOR’s shortcomings.

We also recommend firms prioritise active transition for legacy LIBOR contracts. Fallback language and legislative solutions should not be prioritised. Active transition is the best method to mitigate litigation and conduct risks.

ASIC and other Australian regulators expect firms to completely cease offering new LIBOR products after the end of 2021 and note that the use of synthetic LIBOR is strictly for legacy contracts only. Australian regulators will continue to monitor the use of LIBOR after the cessation date.

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