MIU - Issue 143 - November 2022

CommSec and AUSIEX to pay penalty of over $27 million for systemic compliance failures

The Federal Court has ordered Commonwealth Securities Limited (CommSec) and Australian Investment Exchange Limited (AUSIEX) to pay a penalty of $20 million and $7.12 million respectively for breaches of the market integrity rules, Corporations Act and ASIC Act (CommSec only) for systemic compliance failures, including overcharging brokerage fees to CommSec customers on 120,933 occasions, totalling over $4.3 million.

The penalty is the largest ever penalty handed down for breaches of the market integrity rules.

In addition to the penalties, the court ordered an independent review and assessment of all systems and controls relating to the provision of financial services by CommSec and AUSIEX, along with a review of the remediation undertaken by the entities. The review is critical given the failures in broader systems and controls at CommSec and AUSIEX and is designed to examine significant aspects of their businesses.

The court declared that CommSec and AUSIEX contravened the market integrity rules on multiple occasions, including when:

CommSec overcharged brokerage fees to customers on 120,933 occasions, totalling over $4.3 million
CommSec and AUSIEX failed to comply with client money reconciliation requirements
CommSec and AUSIEX did not provide accurate confirmations to customers for certain market transactions
CommSec did not have appropriate system filters to detect possible trades where there would be no change of beneficial owner (known as wash trading)
CommSec and AUSIEX failed to comply with their best execution policies and procedures
CommSec failed to enter into the required warrant agreement forms with clients and provide an explanatory booklet before accepting an order from a client to purchase a warrant on the market for the first time
CommSec and AUSIEX failed to include the required intermediary identification in regulatory data submitted to relevant market operators.

The court also held that CommSec made a false or misleading representation by stating that it considered ASX CentrePoint (ASXCP) as an execution venue for those customers who submitted orders via the ASB Securities Limited (ASB) trading platform, when it did not consider ASXCP as an execution venue for those orders. This meant customers who placed certain orders via the ASB trading platform were excluded from trading on ASXCP, despite being advised that their orders could be traded there.

The court also declared that CommSec and AUSIEX failed to do all things necessary to ensure their financial services were provided efficiently, honestly and fairly.

Read the media release

Enforcement Priorities for 2023 announced

Our Enforcement Priorities for 2023 focus on the need to protect consumers from financial harm and uphold the integrity of Australia’s financial markets.

This is the first time we’ve identified particular areas of enforcement focus, which we now expect to do on an annual basis. These priorities communicate our intent to industry and our stakeholders and give a clear indication of where we will direct our resources and expertise.

While our specific areas to target will change from year to year, in keeping with shifting economic factors and the volatile risk environment, five enduring priorities will remain:

misconduct damaging to market integrity including insider trading, continuous disclosure failures and market manipulation
misconduct impacting First Nations people
misconduct involving a high risk of significant consumer harm, particularly conduct targeting financially vulnerable consumers
systemic compliance failures by large financial institutions resulting in widespread consumer harm
new or emerging conduct risks within the financial system.

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Joint statement on ASX CHESS replacement program

Together with the Reserve Bank of Australia (RBA) (the regulators), we note ASX’s announcement on the CHESS replacement program. ASX’s announcement marks a significant setback to the replacement of critical national infrastructure for Australia’s cash equity markets and now brings into sharp focus the longevity of the existing CHESS platform.

As a result of ASX’s announcement and release of the independent report, the regulators have provided ASX with a joint letter of regulatory expectations to highlight what is required of ASX Clear Pty Ltd (ASX Clear) and ASX Settlement Pty Ltd (ASX Settlement). The regulators expect that:

the current CHESS is supported and maintained to ensure its stability, resilience and longevity so that it can continue to service the market reliably
ASX improves its program delivery capabilities
the replacement program is brought back on track after the solution design has been completed so ASX’s commitment to deliver safe and reliable clearing and settlement (CS) infrastructure is fulfilled.

ASX must now carefully evaluate and select the most appropriate and timely way forward to replace CHESS.

The regulators will continue to closely monitor ASX’s compliance with its CS facility licence obligations, including the additional licence conditions imposed in November 2021, as well as ASX’s observance against the relevant Financial Stability Standards – and take action if required.

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Former responsible manager of Sirius Financial Markets handed eight-year ban

We’ve banned Mark Bringans, the former responsible manager of over-the-counter derivatives provider Sirius Financial Markets Pty Ltd (Sirius Financial), for eight years.

Mr Bringans’ banning follows our investigation into Sirius Financial (trading as ‘Trade360’), which found that Sirius Financial acted unconscionably and breached its Australian financial services (AFS) licence obligations when it failed to address the conduct of Toyga Media Ltd (Toyga), an off-shore call centre it hired to source clients to trade in its high-risk contracts-for-difference and margin foreign exchange contracts.

Our investigation found that Toyga engaged in pressure selling tactics and provided personal advice on behalf of Sirius Financial when it was unlicensed to do so.

In banning Mr Bringans, we found that he is not adequately trained and competent, that he is not a fit and proper person to provide financial services, and that he ignored one of his key duties as a responsible manager, which was to ensure that Sirius Financial complied with the financial services laws.

We also determined that Mr Bringans was a disinterested, disengaged responsible manager who did little more than attend monthly compliance committee meetings.

Mr Bringans’ banning is recorded on ASIC’s Banned and Disqualified Persons Register.

Mr Bringans has applied to the Administrative Appeals Tribunal (AAT) for a review of our decision. His application for a stay of the implementation of the banning order was refused by the AAT.

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S.A.M. Financial Group (Australia) Pty Ltd’s AFS licence cancelled

We’ve cancelled the Australian financial services (AFS) licence of Sydney-based retail over-the-counter (OTC) derivatives issuer S.A.M Financial Group (Australia) Pty Ltd (Samtrade).

We cancelled Samtrade’s licence on 17 October 2022, following the court-ordered appointment on 7 October 2022 of Geoffrey Trent Hancock of HM Advisory Pty Ltd as Samtrade’s liquidator.

Samtrade had 28 days from the date of cancellation to apply to the Administrative Appeals Tribunal for a review of our decision.

FTX Australia’s AFS licence suspended

We’ve suspended the Australian financial services (AFS) licence of FTX Australia Pty Ltd until 15 May 2023, after it was placed into voluntary administration on 11 November 2022.

Until 19 December 2022, FTX Australia can continue to provide limited financial services that relate to the termination of existing derivatives with clients.

On 11 November 2022, KordaMentha were appointed as voluntary administrators of FTX Australia and its subsidiary FTX Express Pty Ltd, which operates a digital currency exchange that is not regulated by ASIC.

On the same day, FTX Trading Limited, West Realm Shires Services Inc (trading as FTX US) and certain other affiliated companies commenced voluntary proceedings under Chapter 11 of the United States Bankruptcy Code. FTX Trading Limited became the ultimate holding company of FTX Australia on 23 September 2021.

Prior to the suspension, FTX Australia’s licence permitted it to deal in, make a market for and provide general advice relating to derivatives and foreign exchange contracts to retail and wholesale clients.

We’re monitoring this situation closely and speaking regularly with international regulators and the external administrators.

We encourage clients of FTX Australia to carefully monitor the situation and look out for updates by the FTX Group, as well as from FTX Australia’s administrators on the KordaMentha website.

FTX Australia may apply to the Administrative Appeals Tribunal for a review of our decision.

Read the media release

Updated guidance on naming conventions for ETPs

We’ve released Report 750 Response to submissions on CP 356 ETP naming conventions: Updates to INFO 230, and updated the guidance in Information Sheet 230 Exchange-traded products: Admission guidelines (INFO 230), on naming conventions for licensed Australian exchanges that admit exchange traded products (ETPs).

We’ve adopted our proposals from Consultation Paper 356 ETP naming conventions: Updates to INFO 230 (CP 356) to divide the naming conventions into two levels of labelling:

primary labels (‘ETF’ and ‘Structured Product’) based on product type
secondary labels (‘Active’ and ‘Complex’) for products with specific risks or strategies.

Respondents to CP 356 supported ASIC continuing to provide guidance on ETP naming conventions. The key issues raised by respondents related to the detailed definitions for some of the labels, and the need to ensure consistency in interpretation by licensed exchanges. We’ve revised the definitions of ‘Active’ and ‘Complex’ and included more detailed guidance for licensed exchanges in INFO 230 to reflect this feedback.

The industry transition to updated ETP naming conventions will be overseen by licensed exchanges. We understand that the exchanges need time to develop plans for the transition in detail, including identification of any areas where further consultation with industry or work with data vendors is required. We expect the exchanges to provide updates to the market about expected timeframes as they progress this work.

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Second industry consultation on market resilience welcomed

We welcome market operator ASX’s latest industry consultation on improving market resilience.

ASX has released its second consultation paper in response to Report 708 ASIC’s expectation for industry in responding to a market outage. This covers potential future ASX capabilities to enhance market resilience, and submissions will close in early December 2022. The third and final consultation, on participant’s system testing requirements, is scheduled for early next year.

Market participants are making good progress. A survey of participants representing about 90% of equity market trading shows most now either meet all our expectations or are progressing the necessary changes. The balance are scoping the required work, some reliant on the capabilities provided by third-party vendors.

This work coincides with other important changes in the industry, including Cboe’s technology upgrade and the implementation of new market integrity rules (which come into effect on 10 March 2023).

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Relief extended to NSXA and SSX operators and participants

We’ve extended relief to the operators and participants of the National Stock Exchange of Australia (NSXA) and Sydney Stock Exchange (SSX) markets by consolidating three expiring waivers into one, comprehensive class waiver.

ASIC Market Integrity Rules (Securities Markets) NSXA and SSX Markets (Operators and Participants) Class Waiver 2022/881 (CW 2022/881) commenced on 17 November 2022. It remade ASIC Market Integrity Rules (Securities Markets) Class Waiver 2018/258, ASIC Waiver 18/260 and ASIC Waiver 18/261, each of which expired on 16 November 2022.

CW 2022/881 expires on 16 November 2024. This will give ASIC time to review, consult on and consider how the ASIC Market Integrity Rules (Securities Markets) 2017 (Securities Markets Rules) should apply to smaller securities markets and consider relevant amendments to the Securities Markets Rules, if required, having regard to the size and operation of these securities markets. It will also give participants of NSXA and SSX markets time to make appropriate system, organisational and technological changes to comply with the Securities Markets Rules (including any amendments following consultation).

Takeovers – Disclosing the buy price in Rule 5.13.1 announcements

Rule 5.13.1 of the ASIC Market Integrity Rules (Securities Markets) 2017 prohibits a participant (acting on behalf of a bidder) from offering (on behalf of the bidder) to buy the target securities on-market at a price that varies from the consideration offered under the relevant takeover bid, unless and until an announcement has been made to the market.

Generally, market practice is to either:

state in a Rule 5.13.1 announcement that the participant (on behalf of the bidder) will buy on-market at a price which is at or below the consideration offered under the relevant takeover bid, or
if the buy price is higher than the consideration offered, the bidder will usually vary their takeover bid first and then, if applicable, a Rule 5.13.1 announcement is made as described above.

Those practices are compliant with Rule 5.13.1.

However, where a takeover bid is not varied before a Rule 5.13.1 announcement is made, and the participant (on behalf of the bidder) is offering to buy at a price which is above the consideration offered, we expect a Rule 5.13.1 announcement to be a statement of the actual price at which the participant is offering to buy. This ensures that the market remains fully informed during a takeover bid.

An announcement of a varied takeover bid would typically result in a short trading suspension of the target securities by the market operator. A Rule 5.13.1 announcement (disclosing the higher buy price) would also likely result in a short trading suspension. This allows time for the higher buy price information to disseminate and for the market to respond accordingly.

We intend to consult in future on a proposal to amend Rule 5.13.1 to ensure our expectations for these announcements are clear to all participants.

Marketing of capital notes

We note recent capital raising activity involving the issue of capital notes by prudentially regulated entities.

Participants involved in the distribution of capital notes should be aware of APRA’s letter (letter) of 1 November 2022 to prudentially regulated entities.

In the letter, APRA referred to global credit spreads widening significantly over the past 12 months and the increased possibility of new capital instruments being issued at higher credit spreads than equivalent outstanding instruments. APRA referred to seeing more requests to make ‘uneconomic calls’ and reinforced that under prudential standards, entities should generally not call an Additional Tier 1 (AT1) or Tier 2 (AT2) instrument and replace it with an instrument with a higher credit spread or that is otherwise more expensive. APRA noted there may be exceptions if certain circumstances set out in the letter are met.

Participants involved in the distribution of capital notes should review the materials and communications they provide to potential investors in capital notes so they:

do not create an expectation with potential investors about when redemption may occur
should summarise the position in the letter about APRA's expectations that potential investors should not expect redemption to occur on any call date and the factors that APRA considers when deciding whether to allow an early redemption to occur
explain to potential investors the potential implications for them if redemption does not occur on the first call date which may include an impact on the market price of the capital note.

ASIC