MIU - Issue 141 - September 2022

Our priorities for supervising market intermediaries in 2022-23

We recently published our priorities for supervising market intermediaries in 2022–23, informed by the strategic priorities in the ASIC Corporate Plan 2022–26 – Focus 2022–23.

Our priorities target the most significant threats and harms in our regulatory environment. Supporting ASIC’s priorities and core strategic projects, our major planned activities for supervision of market intermediaries in 2022–23 is focused on:

We encourage you to plan for the year ahead by using these priorities as a reference tool for your compliance, supervisory and risk management programs, and to prepare for your interactions with ASIC. 

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Warning to brokers considering high-risk offers to retail investors

We’re warning brokers to be careful about or reconsider offering high-risk products and services to retail investors, such as securities lending, crypto-assets and offers of ‘zero’ or ‘low-cost’ brokerage – where the true cost is masked.

Securities lending for retail investors

Securities lending is complex and may be difficult for retail investors to understand. Design features that may not be fair or appropriate for retail investors include:

  • bundling of securities lending with other services or automatic opt-in of clients to securities lending (e.g. clients are required to take active steps to opt out)
  • no pre-qualification or vetting of investors
  • a fee split that is heavily skewed in favour of the provider.

Some brokers have, or are seeking to, offer unregulated crypto-assets alongside shares and other regulated financial products through their trading apps. We’re concerned this may give investors a false sense of security, leading them to believe crypto-assets have the same protections as regulated financial products or they may underestimate the risks.

Crypto-assets are high-risk, volatile and complex. Brokers should think very carefully before offering crypto-assets through their share trading apps. The differences in risks and protections must be made clear to investors.

Misleading or deceptive statements about brokerage

We’re concerned that ‘zero brokerage’ claims may not be true to label where the service is ‘bundled’ with other products or services that effectively subsidise brokerage and cause retail investors to take on additional risk.

The law prohibits conduct that is misleading or deceptive, or likely to mislead or deceive. Brokers that claim to offer zero or low-cost brokerage should carefully consider whether they may be in breach of the law.

AFS licensee oversight of authorised representatives

Some online-only brokers operate as authorised representatives of an Australian financial services (AFS) licensee. We remind licensees of their obligation to have adequate resources to monitor and supervise their representatives. Licensees also need to carefully review and engage with the design of new products or services. We’ll take action when licensees fail to meet these obligations.

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Gatekeeper responsibilities in higher risk environment 

We remind all securities and futures market participants (participants) of the important role they play as gatekeepers in maintaining the integrity of our markets, particularly in this period of heightened conduct risk.

The recent period of increased market volatility, supply chain issues, and rising interest rates and inflation, has resulted in significant stress for some sectors.

In such times, individuals and businesses may face considerable losses, creating a heightened risk of market manipulation, insider trading and other possible misconduct.

We’re observing cases of deficient monitoring and surveillance controls, or surveillance system alerts going unchecked or with significant delays.

Participants should take active steps to identify and stop potential market misconduct, both through pre-trade filters and timely post-trade reviews of all order flow to trading platforms. Participants should know their clients and understand their trading patterns and risks.

Participants must also ensure that their pre- and post-trade controls continue to be appropriate in the current environment and consistent with their risk appetite. Designated trading representatives and compliance staff need to be vigilant and agile, and alerts and exception reports should be reviewed without delay.

We view the failure of participants to take reasonable and appropriate actions to maintain market integrity very seriously. 

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AOP system annual review and notification reminder

We remind securities trading participants (participants) who operate automated order processing (AOP) systems of their obligation to have an appropriately qualified person undertake an annual review of relevant documentation, for compliance with Part 5.6 of the ASIC Market Integrity Rules (Securities Markets) 2017 (legislation.gov.au) (the Rules). You must then provide an annual notification to ASIC under Rule 5.6.8B by 15 November 2022.

When referring to relevant documentation, we remind participants that to maintain ongoing compliance, system testing and change management is a key function of the operation of all AOP systems.

AOP system annual notifications should now be submitted through the ASIC Regulatory Portal (the Portal), as for other notifications required under the Rules. The Portal allows you to:

  • confirm details for existing AOP systems
  • update details for existing AOP systems
  • indicate if an AOP system has been decommissioned
  • download, sign and attach a pre-filled notification document containing:
    • the full legal name of the trading participant
    • the name and version number of the AOP system or systems to which the notification relates.

Contact your ASIC Intermediary Supervisor if you have any questions about lodging your AOP system annual notification through the Portal.

For more information, see:

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'Sunsetting' class order on financial requirements for retail OTC derivative issuers remade

We’ve remade class order [CO 12/752] Financial requirements for retail OTC derivative issuers which was due to sunset on 1 October 2022.

The new instrument, ASIC Corporations (Financial Requirements for Issuers of Retail OTC Derivatives) Instrument 2022/705, sets out the financial requirements for issuers of over-the-counter (OTC) derivatives to retail clients. The instrument will remain in place for five years.

Under the instrument, retail OTC derivative issuers must:

  • meet a net tangible asset (NTA) requirement where the licensee must hold the greater of $1,000,000 or 10% of average revenue
  • prepare, each quarter, projections of cash flows over a 12-month period based on their reasonable estimate of revenues and expenses over that term
  • meet an NTA liquidity requirement where the licensee must hold 50% of the required NTA in cash or cash equivalents and 50% in liquid assets
  • comply with financial trigger point reporting obligations if licensees fail to hold the required NTA.

The instrument was made following public consultation through Consultation Paper 363Remaking ASIC class order on financial requirements for retail OTC derivative issuers  (CP 363) which was released in June 2022. We received one submission in response to CP 363, which was supportive of the proposal to remake [CO 12/752] without significant changes.

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Relief extended for OTC derivative transaction reporting

We’ve extended conditional relief from certain requirements of the ASIC Derivative Transaction Rules (Reporting) 2013 (the Rules) and introduced new relief for spot settlement transactions.

ASIC Corporations (Derivative Transaction Reporting Exemption) Instrument 2015/844 (the principal instrument) provides transitional time-limited relief from requirements of the Rules to all reporting entities.

From 6 September 2022, ASIC Corporations (Amendment) Instrument 2022/775 extends the conditional relief provided in the principal instrument by a further year from 30 September 2022 to 30 September 2023 in relation to:

  • exchange-traded derivatives
  • name information
  • trade identifiers
  • foreign exchange security conversion transactions.

We’ve also introduced a new exemption to exclude spot settlement transactions from the scope of reporting requirements in the Rules.

Consultation Paper 361 Proposed changes to simplify the ASIC Derivative Transaction Rules (Reporting): Second consultation discussed our proposal to consolidate all relevant exemptions within the revised reporting requirements as part of broader changes to implement internationally standardised reporting requirements.

For more information, read the Explanatory Statement and visit our derivative transaction reporting webpage.

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Quality of advice review

The Government’s Quality of Advice Review is considering whether changes should be made to the regulatory framework applying to financial advice, to improve its accessibility and affordability.

On 29 August 2022, Treasury released a consultation paper with proposals for reform. The proposals will help inform the Government’s further discussion with industry.

Access to quality advice is important and we support the independent reviewer’s objective to make it more accessible to consumers, while reducing the regulatory complexity for advice providers. Similarly, we consider it important that appropriate consumer protections remain in place.

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Last updated: 21/09/2022 03:30