ASIC today released its assessment of each of the licensees of the Australian Securities Exchange (the ASX group).
The report covers the period 1 July 2006 to 30 March 2008. Ordinarily, ASIC’s assessment period is a calendar year with ASIC’s report issued about May the following year. For this report, the assessment period was extended to cover ASX group’s supervision of the market during a significant turnaround in market performance and sentiment since December 2007. Hence, the later than usual delivery of the report to the Minister.
ASIC’s task is to assess if, over the period in question, ASX had adequate arrangements in place to supervise its markets (including to manage its conflicts of interest) and its clearing and settlement facilities under ss792A(c) and 821A(c) of the Corporations Act.
ASIC’s assessment concluded that:
- both ASX and SFE have adequate arrangements to:
- supervise their respective markets, including arrangements for handling conflicts between commercial interests and the need for licensees to ensure that the market is fair, orderly and transparent;
- monitor the conduct of participants in the market;
- enforce compliance with the markets rules;
- the provision of supervisory services by the ASX and SFE is adequately resourced;
- each of ACH, ASTC, SFECC and Austraclear have adequate arrangements:
- to supervise their respective clearing and settlement facilities, including arrangements for handling conflicts between commercial interests and the need for licensees to ensure that the facility services are provided in a fair and effective way;
- for enforcing compliance with the facility’s operating rules; and
- the provision of supervisory services by ACH, ASTC, SFECC and Austraclear is adequately resourced.
During the assessment, ASIC identified areas for improvement to assist ASX in ensuring its supervisory arrangements remain adequate. Following discussions with ASIC, ASX has agreed to take 10 actions which ASIC believes will improve the supervision arrangements for the future, including its arrangements to manage conflicts.
These Agreed Actions are detailed in the report and fall under these headings:
- Role of ASX Markets Supervision Pty Limited (ASXMS) board and Licence Compliance – agreement to formally clarify roles of Licence Compliance and ASXMS in certain respects
- Role of the Policy Committee – agreement to clarify role and constitution of the Policy Committee
- Human, financial and technological resources – agreement to continue to monitor supervision resources, particularly for special projects
- Reporting of staffing for non-ASXMS supervisory activities – agreement to revise the quarterly report of the Group Executive Operations to cover the division’s supervisory resources
- Assurance about total cost of supervision – agreement to provide additional certification of supervisory expenditure
- ASXMS funding levels – agreement to provide additional certification of sufficiency of budget to meet supervision obligations
- SYCOM upgrade process – agreement to review SYCOM upgrade process
- Benchmark measures – ASIC and ASX to cooperate on developing benchmarks for market supervision
- Error resolution – agreement of SFE to revise certain procedures for Error Resolution Policy applications
- ASTC settlement process – agreement to revise certain ASTC settlement processes in light of Tricom related delays experienced in February.
While there are matters for improvement, ASIC’s view is that nevertheless, ASX had adequate arrangements in place for the review period and with these Agreed Actions, should continue to have adequate arrangements.
In prior years, ASIC provided recommendations to ASX. In this report, as ASX agrees to the actions, they are presented as ‘Agreed Actions’ between ASX and ASIC.
Background
ASX Group
The ASX Group comprises ASX Limited (ASX), Australian Clearing House Pty Ltd (ACH), ASX Settlement and Transfer Corporation Pty Limited (ASTC), Sydney Futures Exchange Limited (SFE), SFE Clearing Corporation Pty Ltd (SFECC) and Austraclear Limited (Austraclear).
Conflicts of interest
Under s792A(c)(i) and s821A(c)(i) of the Corporations Act, ASX must have adequate arrangements to handle its conflicts of interests. This is, in effect, an obligation to ensure that its commercial interests do not prevail over the requirement to ensure that the market is fair, orderly and transparent or that clearing and settlement services are provided in a fair and effective way. In ASIC’s report, ASIC makes two points by way of clarification of the existing legislative framework because there have been concerns in the market during recent volatility over ASX’s role as a market operator and supervisor of its markets:
- First, the regulatory regime under which ASX operates does not preclude the existence of conflicts of interest for ASX. There is no per se prohibition on ASX having conflicts of interest but ASX must manage its conflicts so as not to allow its commercial interests to prevail over its supervisory role. Whether or not (e.g. through separation of ASX’s supervisory function from its commercial role or otherwise) there should be such a per se prohibition is a policy matter for Government. ASIC’s role is to conduct the assessment (for an earlier period and not in real time) within the existing legislative framework.
- Secondly, the statutory standard on ASX is that it adequately manages its conflicts (i.e. that its management processes are adequate to ensure that ASX’s commercial interests do not prevail over its supervisory function). ASIC’s role is to assess if ASX has adequate arrangements in place. In the last five reports, and in this report, ASIC has concluded that ASX’s arrangements for managing conflicts are adequate (i.e. meet the statutory standard).
Separate roles of ASX and ASIC – ASIC’s cooperation with ASX
Under the existing legislative framework, both ASX and ASIC have separate roles in the supervision of the markets and of market participants. In addition, ASIC supervises ASX. ASX and ASIC co-operate extensively with each other, under the umbrella of a Memorandum of Understanding between the two organisations, that notes their complementary roles.
ASIC and ASX meet formally each month to discuss supervisory issues, relating to both listed entities and market participants. In recent months, there have been joint supervisory reviews of market participants. The surveillance of short selling and possibly illegal trading activity that started in March 2008 was also a joint activity.
ASIC is in the process of refocussing its MarketWatch and markets enforcement teams that deal with referrals from ASX on insider trading and market manipulation, to enhance its capabilities. In addition, ASIC recently announced that it would add more resources to the oversight of brokers and market participants. They will add to the total resources of both organisations available for market surveillance. These additional resources should also assist in reducing potential risks inherent from the fact that ASX and ASIC are separate organisations (particularly for areas such as insider trading where speed from possible detection to investigation is imperative).