ASIC's priorities for supervision of market intermediaries in 2019–20

• To realise ASIC’s vision for a fair, strong and efficient financial system for all Australians, seven principal strategic priorities were developed by ASIC for the year 2019–20.
• This letter outlines how we are implementing these strategic priorities in our supervision of market intermediaries.
• Plan for the year ahead by assessing your governance framework against these priorities.

In our supervision of market intermediaries, we have focussed on three of these strategic priorities:

• High-deterrence enforcement action
• Improving governance and accountability
• Protecting vulnerable consumers.

While the projects outlined below are not an exhaustive list of what we plan to do, they represent the most significant pieces of work that we will undertake in supervising market intermediaries to achieve our strategic priorities.

Summary 

• Discrepancies exist in the practices of FICC market participants and market operators across supervision and surveillance, risk controls, governance, conflict management and culture.
• Our FICC strategy addresses threats to these markets, which may cause harms to the real economy and consumers.
• We’re expanding our oversight of these markets through proactive surveillance, enhancing standards and driving behavioural change.

Background

Fixed income, commodities and currency (FICC) markets are global, directly link to the real economy, and are considerably larger than exchange traded markets. These are wholesale markets, but many of the transactions are to fund or manage risk for businesses and superannuation funds.

Fixed income markets generally have lower transparency than their equity equivalents. Low visibility of the pricing and dealing mechanisms used by market professionals means that investors can’t proactively validate the effectiveness of the organisation’s controls, which are used by firms to maximise opportunities for their clients.

Activities

• Targeted transaction reviews – We’re continuing our program of targeted reviews of large transactions to assess if the intermediaries are complying with the law, are fit for purpose, and are delivered fairly and honestly.
• Enhanced oversight of bank bill markets – Following the implementation of the new regulatory framework for benchmarks, we’re increasing our focus on the bank bill market and the formation of the Bank Bill Swap Rate (BBSW).
• Continue expanding our program of onsite reviews – We’ll continue to undertake onsite reviews of a selection of intermediaries’ fixed income businesses, and also undertake reviews of intermediaries’ conflicts of interest arrangements. We’ll use these to assess non-compliance with the law and improve behaviours in the market.
• Foreign Exchange (FX) and BBSW Court Enforceable Undertakings – We’ll continue to monitor compliance with FX and BBSW court enforceable undertakings and court orders.
• Review allocation practices for debt capital markets (DCM) transactions - Building on our findings in REP 605 Allocations in equity raising transactions, we’re undertaking a review of market practice for allocations in DCM transactions and co-leading work with international peers through the International Organization of Securities Commissions (IOSCO).
• Monitor impact of global LIBOR transition – We’re undertaking work to understand and monitor intermediaries’ management of contracts that currently reference LIBOR and need amending to a new reference rate.
• OTC trade reporting – We’re continuing work to improve existing data quality and address non-compliance by reporting entities.

Summary

• We’re continuing to embed and expand our enhanced supervision model for the most high-risk and complex entities.
• We’re also tailoring our proactive and reactive supervision approach for intermediaries assessed as medium and low risk.
• We expect all firms to have a professional and robust approach to conduct – to operate with integrity and to act in the best interest of their clients.

Background

We’ll continue to implement our enhanced supervision model for market intermediaries. Firms that have the most significant market presence, or pose the greatest risk to our priorities, should expect a more intensive level of supervision across all areas of their business. We’ll test that market intermediaries meet their regulatory requirements and require remediation of non-compliance.

We’ll continue to undertake thematic and sector reviews to inform future surveillance work and the establishment of regulatory expectations. We also expect firms to have a professional and robust approach to conduct, including:

• proactively identifying conduct risks
• encouraging accountability for conduct across all areas of the firm
• supporting staff to improve conduct
• board and executive oversight of conduct, and a focus on the conduct implications of the decisions that they make.

We’ll periodically test these themes and we expect firms to demonstrate how they have addressed them.

Activities 

Culture and conduct – We’ll assess the strategy, culture and behavioural drivers of conduct of market intermediaries, including through our conduct review themes.

Breach reporting – We’ll test compliance with breach reporting obligations.

Technology and operational risk management – We’ll undertake reviews to check that risk management is embedded in planning, project management and performance management in technology, and other operational risk areas.

Coordination with global regulatory authorities – We work closely with our regulatory colleges around the world to achieve consistent regulatory outcomes and to identify emerging regulatory concerns. We also participate in international and domestic supervisory colleges to inform our supervisory approaches for major banking and financial groups.

Summary

• Certain OTC derivatives products are aggressively marketed to retail investors, resulting in significant investor losses.
• We’ll test that providers of retail OTC derivatives products comply with their regulatory requirements, including when providing services outside Australia.
• We’ll also consider using the range of our regulatory and enforcement powers where there are retail OTC derivatives products, issuers or marketing that is causing consumer harm.

Background

OTC derivatives are highly risky for most retail investors, often resulting in significant investor losses. There have also been several recent instances of retail OTC derivatives providers not complying with their regulatory requirements.

We’re seeking to protect retail investors by educating them about the risks of trading these products, holding individuals and licensees to account for poor conduct, and raising industry standards.

Activities

• Industry benchmarking – We will examine and benchmark the size and nature of the Australian market, and the extent of investor losses and other harms.
• Onsite surveillance – We’ll undertake onsite surveillances of product issuers, with a focus on cold calling and pressure selling tactics, licensees acting outside the scope of their license, and misleading and deceptive conduct.
• Improve industry standards – We’ll seek to raise standards in the retail OTC derivatives industry, including by consulting on implementing the IOSCO Regulatory toolkit to enhance conduct standards.
• Consider use of a range of our regulatory and enforcement powers – Where we see that products or practices in this sector have resulted in, or are likely to result in, significant consumer harm then we will consider which of the range of powers available to us should be used to address this harm and we will also address past misconduct.
• Remind retail OTC derivatives providers to comply with foreign law – Following the April publication of ASIC 19-088MR Some AFS licensees may be breaking overseas laws, we’ll continue to test with firms that they comply with foreign regulatory requirements, and we may act against firms that do not.

• Safeguarding retail client money – We’ll test market intermediaries’ compliance with client money requirements, including as part of our enhanced supervision under item 2. We’ll undertake a review of practices and provide practical guidance where needed.
• Suspicious activity reporting – We want to improve the quality and quantity of suspicious activity reports to ASIC, particularly in wholesale FICC markets. These reports are a valuable source of information, and their improved use will strongly contribute to our ability to identify and action market misconduct.
• Checking intermediaries are prepared for ASX CHESS replacement - ASX is replacing the CHESS cash equities clearing and settlement system with a platform based on a private permissioned distributed ledger. Market intermediaries should be planning now and making the necessary arrangements for the implementation of the replacement system to facilitate a smooth industry transition. We’ll be monitoring this process. We will also be supervising ASX’s implementation of the system against its clearing and settlement facility licence obligations.
• Intermediary resilience and capital adequacy – We’ll consider whether any changes are needed to our approach for early detection of the potential failure of market intermediaries and the steps we and they take to mitigate client losses. The protection of client assets is our priority, in addition to the potential impact of failures on market integrity.
• Financial advice by stockbrokers – We’ll continue to consider the application of financial advice laws to stockbrokers and review the appropriateness of advice and control frameworks for the provision of advice by market intermediaries.
• Improving governance, accountability and compliance – We’ll assess the compliance and broader non-financial risk management models across a sample of intermediaries (including those subject to enhanced supervision – item 2) and market operators and determine if changes are needed to industry standards or our supervisory approach.
• Equity capital raising allocations and sell-side research – We’ll test market intermediaries’ implementation of Regulatory Guide 264 Sell-side research, to check compliance and to better understand how the arrangements are applied in practice.
• Trade surveillance – We’ll continue to rigorously pursue market misconduct, including market manipulation and insider trading.