MIU - Issue 135 - March 2022
This Market Integrity Update contains the following articles:
- Statement on ASX 24 futures market outage
- Market integrity rules and other ASIC-made rule books amended
- Information for social media influencers and licensees
- Thematic review of prime broking in Australia
- Managing conflicts of interest with research
- Complying with MIRs on automated order processing for Cboe technology migration
- TP ICAP's compliance as a market operator
- Extending relief to futures markets participants from aggregate loss limits
Statement on ASX 24 futures market outage
Following the ASX 24 futures market outage on Thursday 17 March, we expect ASX to provide a full incident report.
The ASX 24 futures market trading platform entered a trading halt at around 10 am and reopened around 2 pm. We remained in regular communication with ASX, market participants, and members of the Australian Council of Financial Regulators.
We view outages of this nature with significant concern, as they have a significant impact on the market, including market participants and investors.
The ASX Group forms a critical part of Australia’s national economic infrastructure. Well-functioning financial market infrastructure is critical to the integrity and reputation of the Australian financial markets and the trust and confidence investors have in them.
Market integrity rules and other ASIC-made rule books amended
We’ve introduced new market integrity rules aimed at promoting the technological and operational resilience of securities and futures market operators and participants.
We’ve also amended the prohibition on payment for order flow to address certain regulatory gaps and made deregulatory, minor and administrative amendments to 10 ASIC-made rule books.
Technological and operational resilience rules
These new rules are an important initiative to promote the resilience and robustness of the Australian equities market and avoid future outages such as the November 2020 ASX equity market outage.
Following a 12-month transition period, market participants and market operators must comply with these rules from 10 March 2023.
Prohibition on payment for order flow
We’ve amended the existing prohibition on payment for order flow in Part 5.4B of the Securities Markets Rules to address certain regulatory gaps.
Following a three-month transition period, market participants must comply with the new rules from 10 June 2022.
Deregulatory, minor and administrative amendments
We’ve made deregulatory, minor and administrative changes across 10 ASIC-made rule books.
These amendments have varying transition periods. Some non-substantive amendments are effectively immediately, other amendments will have a short transition period.
- Read the media release
Information for social media influencers and licensees
We’ve published an information sheet about discussing financial products and services online, which outlines how the law applies to social media influencers, and the licensees who use them.
Information Sheet 269 Discussing financial products and services online:
- highlights activities where influencers may contravene the law if they are unaware of the legal requirements, using a series of practical examples on:
- financial product advice
- dealing by arranging
- misleading or deceptive conduct
- explains issues for influencers to consider including:
- whether an AFS licence is needed
- being familiar with relevant regulatory guidance
- doing their due diligence on people who are paying them (including non-monetary benefits)
- reminds AFS licensees who use influencers to:
- do their due diligence
- have appropriate risk management systems and monitoring processes
- have sufficient compliance resourcing to monitor the influencers they use
- consider their design and distribution obligations.
We monitor select online financial discussion by influencers who feature or promote financial products for misleading or deceptive representations or unlicensed advice or dealing. If we see harm occurring, we’ll take action to enforce the law.
- Read the media release
Thematic review of prime broking in Australia
We recently conducted a thematic review of prime broking in Australia, following the failure of US family office Archegos to meet margin payments in March 2021. This event demonstrated the potential for prime broking to raise significant risks and to spread stress between prime broking clients and their banks.
We observed that banks in our review have and continue to take actions to address many of the risk management and governance deficiencies of the kind that led to the Archegos event, including improvements to:
- margin practices
- stress testing
- credit limit frameworks
- client onboarding and monitoring
- risk reporting and escalation of risk limit breaches and other 'red flags' to senior management
- decision-making power and accountability of staff on key oversight committees.
It’s important that prime brokers and entities offering constituent services thoroughly examine the robustness of their processes and controls, and embed improvements into their operations and business culture. We especially emphasise the importance of entities adopting thorough counterparty risk management practices for clients that have relationships with multiple prime brokers. Regulators in the United Kingdom and the United States recently published expectations for prime brokers that may also inform prime brokers operating in Australia.
Given the potential for prime broking to generate systemic risks that can threaten market integrity, we’ll remain focused on prime brokers' improvements to address similar deficiencies that led to the Archegos event, as well as other prime broking topics.
Managing conflicts of interest with research
We remind Australian financial services licensees who are involved in providing sell-side research of their obligation to manage conflicts of interest.
It’s important to the integrity of financial markets, and to the quality of financial advice provided to investors, that research is unbiased and reflects the professional judgement and expertise of the research analyst.
Regulatory Guide 264 Sell-side research outlines our expectations about how licensees should manage conflicts when preparing and producing research. Where actual, apparent or potential conflicts of interest are not managed, they have the potential to undermine confidence in financial markets and threaten investor protection.
To manage conflicts of interest, we expect licensees to generally use the three mechanisms of controlling, avoiding and disclosing conflicts.
While disclosure alone is often not enough, it’s integral to managing conflicts of interest. The disclosure of interests should be prominent, specific, and meaningful. This includes disclosure of any material interest that the licensee and its employees have in products that are subject of research.
Licensees should also consider whether conflicts from financial holdings subject to research should be avoided entirely.
We’ll continue to monitor the adequacy of conflicts of interest arrangements of licensees involved in providing sell-side research.
For more information about your obligations to manage conflicts of interest see:
- Regulatory Guide 264 Sell-side research
- Regulatory Guide 181 Licensing: Managing conflicts of interest
- Regulatory Guide 79 Research report providers: Improving the quality of investment research
Complying with MIRs on automated order processing for Cboe technology migration
We consider the migration of an existing automated order processing (AOP) system – certified for the CXA platform prior to the implementation of Cboe Technologies – a material change.
On 3 February 2022, Cboe Australia (previously known as Chi-X Australia) announced a technology migration of their CXA platform onto Cboe Technology. All market participants (participants) intending to operate an AOP system that routes orders to Cboe Technology are required to conduct an AOP Material Change Review prior to use, as prescribed in section 5.6.8 of the ASIC Market Integrity Rules (Securities Markets) 2017. This includes the addition of the proposed Cboe BIDS Australia block crossing platform.
It’s expected that participants use the testing windows provided by Cboe Australia to adequately test their AOP system(s) with Cboe Technology, as part of their material change review. This should occur in addition to reviewing their organisational and technical resources, trading management and security arrangements.
TP ICAP's compliance as a market operator
Our recent assessment of TP ICAP as a market operator revealed that while TP ICAP is compliant with their market licence obligations, they would benefit from strengthening their procedures and processes in some areas.
We assessed two over-the-counter trading platforms operated by TP ICAP entities under their Australian market licences. Our assessment focused on TP ICAP’s conflict-handling arrangements, its arrangements for monitoring and enforcing compliance with the market operating rules, and its operational resilience, systems and controls.
When assessing TP ICAP’s conflict-handling arrangements, we focused on TP ICAP’s hybrid model. We found the arrangements to ensure brokers do not disclose market-sensitive information about other participants or engage in collusive behaviour were generally adequate. We recommended strengthening some arrangements to help the compliance function to adequately monitor for potential or actual conflicts of interest, and to appropriately report/escalate conflict issues where required.
We found TP ICAP’s arrangements for monitoring and enforcing compliance with the market operating rules were generally adequate. To ensure these arrangements operate as intended, we recommended TP ICAP conducts a fit-for-purpose review of their market surveillance processes.
TP ICAP is in the process of uplifting its cyber resilience posture to ensure the investments in its growth strategy are not compromised by cyber incidents. We also made recommendations in that regard, consistent with our guidance on cyber resilience.
Extending relief to futures markets participants from aggregate loss limits
We’ve extended relief from the aggregate loss limit requirements in the ASIC Market Integrity Rules (Futures Markets) 2017 for two more years.
ASIC Class Rule Waiver [CW 17-0251] was originally issued after it became clear that participants wouldn’t be able to comply with certain aggregate loss limit requirements in Rule 2.2.1(1) once the new ASX 24 trading platform went live on 20 March 2017. The waiver was conditional on a participant implementing appropriate processes to monitor the aggregate loss limits on each of its client and house accounts.
[CW 17-0251] was remade as ASIC Market Integrity Rules (Futures Markets) Class Waiver 2018/313 [CW 2018/313] following consolidation of the market integrity rules in 2017. In March 2020, the relief in [CW 2018/313] was extended for a further two years to allow for additional consultation with industry. As a result of the COVID-19 pandemic, we suspended this work to refocus our regulatory efforts in other more critical areas.
ASIC Market Integrity Rules (Futures Markets) Class Waiver Amendment Instrument 2022/139 extends the relief in [CW 2018/313] and will give participants the certainty they need, and allow us sufficient time to consult with industry about any future proposed rule changes.