Priorities for 2023-24

ASIC’s continuing strategic priorities, announced last year and detailed in ASIC’s Corporate Plan 2023–27, target the most significant threats and harms in our regulatory environment: product design and distribution, sustainable finance, retirement outcomes and technology risks.

To deliver on these priorities, ASIC will focus on six core strategic projects.

Supporting ASIC’s priorities and core strategic projects, our key areas of regulatory focus for market intermediaries in 2023–24 are:

1. Fair and orderly markets
2. Cyber, technology and operational resilience
3. Product design and distribution
4. Governance, accountability, sustainability and risk management
5. Implementation of law reform.

Fair and orderly financial markets are essential to ongoing trust, confidence and participation in our financial system. Our supervisory work and enduring enforcement priorities include actions to address misconduct that harms market integrity.

• We continue real-time and post-trade surveillance of trading on Australia’s domestic licensed markets to identify insider trading, market manipulation, disorderly trading and misinformed markets. New tools are being developed and used to increase our detection of complex and novel market abuse matters, market microstructure manipulation and breaches of the market integrity rules. We continue to focus on short sale reporting and regulatory data compliance.
• As gatekeepers, market participants play an important role to lead standards of conduct. We are reviewing participants’ arrangements to prevent and detect misconduct. This includes the adequacy of order filters and controls, governance arrangements including order and trade surveillance alerts, assessment and escalation arrangements and compliance with pre-trade transparency and suspicious activity reporting obligations.
• We continue to review the trade surveillance systems used by market participants in the fixed income, currency and commodity (FICC) markets. We will focus on surveillance alerts for identifying key conduct risks, their assessment and escalation, arrangements for monitoring business communications and deterring misuse of unauthorised devices and apps, and identification of trade surveillance outages and reporting errors.
• We are leveraging our FICC market surveillance system and data analytics to identify market manipulation and other forms of misconduct in FICC markets. We are monitoring commodity derivatives markets with a focus on potential misconduct in gas and electricity markets.
• Use of our new bond surveillance capabilities will inform our surveillance of sustainable finance-related bond issuance, syndicated issues and trading in government, semi-government and corporate bonds.
• We continue to build our oversight of bond markets and consider whether public post-trade transparency would improve liquidity, market efficiency and resilience.
• We monitor the overall health of our financial markets through macro-level market quality measures such as market cleanliness, market liquidity and efficiency statistics.
• We are working to identify and take down investment scams and phishing websites. We are also working with other agencies to coordinate disruption strategies, including our joint leadership of the National Anti-Scam Centre (NASC) investment scam fusion cell with the Australian Competition and Consumer Commission. We continue to expand our communications, including through social media, to help consumers detect and avoid investment scams.

We will continue to supervise and engage with market intermediaries to encourage ongoing and timely management of operational risks, and continuous improvement of cyber and operational resilience practices.

• We will be reporting on our cross-industry cyber pulse survey to benchmark market intermediaries’ cyber resilience and develop sectoral insights.
• We are engaging with market intermediaries to promote good practices and support initiatives that enhance cyber resilience, including by leveraging insights from the cyber pulse survey results and heeding international warnings about account intrusions. We will take enforcement action where there are serious failures to mitigate the risks of cyber-attacks and governance failures relating to cyber resilience.
• We are partnering with other financial regulators to support whole-of-government cyber-resilience initiatives and incident responses, where appropriate.
• We are testing compliance with ASIC market integrity rules on technological and operational resilience and will continue to monitor the final steps in market participants’ and market operators’ implementation of the recommendations in Report 708 ASIC’s expectations for industry in responding to a market outage.

We will continue to pursue targeted, risk-based surveillance and take action to address poor design and distribution of retail financial products. The design and distribution obligations are intended to help consumers obtain appropriate financial products by requiring issuers and distributors to have a consumer-centric approach to designing and distributing products.

• In September 2023, we reported on our review of how retail OTC derivative issuers are meeting the design and distribution obligations to provide product issuers and distributors with practical observations about making a target market determination and meeting the reasonable steps and review obligations: see Report770 Design and distribution obligations: Retail OTC derivatives.
• We are conducting further targeted surveillance of market intermediaries’ financial product design and distribution practices, increasing our surveillance focus on compliance with the ‘reasonable steps’ obligations.
• We are continuing to examine market intermediaries’ use of digital engagement practices (DEPs) in the marketing and distribution of financial products to identify and address poor industry practice and harmful influences on consumer behaviour and outcomes. Focus areas include gamification, notifications in trading apps, advertising and inducements (including social media), algorithmic trading and social trading features such as copy trading and leader boards.
• We are supporting the development of an effective regulatory framework for crypto-assets focused on consumer protection and market integrity, following the consultation by Treasury.
• We will take action to protect consumers from misconduct associated with crypto-assets within our remit, including those that mimic traditional products but seek to circumvent regulation. We will continue to raise public awareness of the risks of crypto-assets and decentralised finance (DeFi).
• We will take action against market intermediaries who promote and supply unsuitable structured or high-risk products to small businesses.

We support market integrity through proactive supervision and enforcement of governance, transparency and disclosure standards. We will also continue to support effective climate and sustainability governance and disclosure.

• Together with the Reserve Bank of Australia, we are closely supervising ASX’s CHESS replacement We are seeking assurances that any gaps or deficiencies are addressed, and stakeholder concerns considered, before ASX pushes forward on its new solution and any other future programs. We will use all currently available measures to ensure that ASX meets regulatory expectations and complies with its obligations under the Corporations Act.
• We will continue to undertake frontline supervision and proactive engagement with market participants, investment banks, securities dealers and issuers of complex products to drive better practices and identify issues early. We conduct risk-based, proactive and reactive surveillance of market intermediaries’ conduct and compliance with financial services laws.
• We will continue to monitor the practices, business structures and product offerings of new and growing online trading providers. We will continue to take action where our expectations have not been met, including in relation to the supervision of authorised representatives, high-risk offers, the use of misleading and deceptive statements and client money handling practices.
• We will continue to monitor the development of artificial intelligence, data analytics and machine learning to understand the threats and opportunities for regulated entities and markets.
• We will continue to actively monitor the progress and effective completion of market intermediaries’ remediation plans and independent expert reviews (e.g. court enforceable undertakings, licence conditions and court orders).
• We continually monitor the financial strength of market intermediaries, including through testing compliance with capital and financial resource requirements using enhanced risk indicators and risk-based surveillance. We will also conduct targeted surveillance of arrangements for handling client money and safeguarding client assets.
• We will monitor sustainability-related disclosure and governance practices of our regulated populations, including listed companies, managed funds, service providers and sustainable finance bonds. We will take action against serious misconduct, including greenwashing and other false or misleading statements.
• We will continue our frontline supervision of market operators, including new product offerings (e.g. proposed equity listings on Cboe Australia). We will ensure that market operators meet regulatory expectations by promoting competition and fair, orderly and transparent markets.

We will support market intermediaries’ implementation of law reform. We will continue to provide guidance to industry about how we plan to administer and enforce the law – especially for new obligations.

• We will continue to work with market intermediaries to ensure the objectives of the reportable situations regime are met, including by implementing solutions that will improve the consistency and quality of reporting practices and conducting targeted surveillance of entities with relatively low numbers of reportable situations. We will develop and implement a framework for ongoing publication of information about the reports received.
• We will continue to work with APRA to implement the Financial Accountability Regime by providing guidance, engaging with industry and developing effective registration and other processes.
• We have extended until 31 March 2025 transitional relief for foreign financial service providers (FFSPs) from the requirement to hold an Australian financial services (AFS) licence when providing financial services to Australian wholesale clients. We will support Treasury as it settles its policy following consultation on exposure draft legislation to provide AFS licensing exemptions for certain FFSPs.
• We will consult on automated order processing rules for futures market participants and on minor amendments to false or misleading appearance rules for securities and futures market participants.
• We are aligning the over-the-counter (OTC) derivatives trade reporting requirements in Australia with international requirements, including the unique transaction identifier, the unique product identifier and critical data elements, in preparation for the new requirements due to commence on 21 October 2024.
• We will continue to promote the development of international standards and better practices through our participation in IOSCO working groups and liaison with other local and international regulatory agencies. Areas of focus include sustainability-related financial disclosure standards, carbon markets, pre-hedging practices, retail market conduct, DEPs, crypto assets and DeFi, vulnerabilities in markets for leveraged loans and collateralised debt obligations and emerging retail market conduct issues.
• We will continue to publish a six-monthly regulatory developments timetable with expected timeframes for ASIC’s regulatory work. To stay informed about regulatory developments and issues affecting market intermediaries, we also recommend subscribing to our monthly newsletter and participating in our quarterly Market Liaison Meetings.

Conclusion

We encourage you to use these priorities as a reference tool for your compliance, supervisory and risk management programs, and to prepare for your interactions with ASIC.

We remain committed to using the full range of ASIC’s powers, including enforcement action, to preserve the integrity of the Australian financial markets. Our updated enforcement priorities for 2024 will be published later in the year to align with the changing economic conditions and emerging trends and risks outlined in ASIC’s corporate plan.

Priorities for 2022-23

ASIC’s strategic priorities are detailed in ASIC’s Corporate Plan 2022–26.

Our external priorities target the most significant threats and harms in our regulatory environment. To deliver on these external strategic priorities, ASIC will focus on eight core strategic projects. (Click image to enlarge)

Supporting ASIC’s priorities and core strategic projects, our most significant planned activities for supervision of market intermediaries in 2022–23 is focused on:

1. Cyber, technology and operational resilience
2. Fair and orderly markets
3. Product design and governance
4. Governance, accountability, sustainability and risk management
5. Implementation of law reform

Cyber and operational resilience among market intermediaries minimises the risk of disruption from cyber attacks and operational failures and promotes confidence in markets.

• We are implementing a cross-industry self-assessment to benchmark market intermediaries’ cyber resilience and develop sectoral insights.
• We will conduct risk-based reviews of cyber and operational resilience among market intermediaries, including reviews of supervisory controls for remote working arrangements, and compliance with new market integrity rules on technological and operational resilience that apply from March 2023.
• We will monitor market participants’ and market operators’ implementation of the recommendations set out in Report 708 ASIC’s expectations for industry in responding to a market outage.
• We will engage with market intermediaries on their preparedness for and implementation of exchange trading platform upgrades.
• We are closely supervising ASX’s Clearing House Electronic Subregister System (CHESS) replacement project so that it will continue to provide reliable clearing and settlement services for the Australian cash equity market. For market intermediaries, we will oversee their preparation for the new CHESS system, focusing on testing arrangements to limit downstream issues and any implications for clients.

The efficient operation of fair and orderly financial markets is the cornerstone of our economy – and is essential to ongoing trust and confidence in our financial system.

• We are undertaking real-time and post-trade surveillance of trading on Australia’s domestic licensed markets to identify insider trading, market manipulation, disorderly trading, and misinformed markets. We are applying new tools to increase our detection of complex and novel market abuse matters.
• We are reviewing market participants’ arrangements to prevent and detect misconduct as part of their important role as gatekeepers. This includes consideration of the adequacy of order filters and controls, related governance around order and trade surveillance alerts (including their assessment and escalation) and compliance with suspicious activity reporting obligations.
• We will review market intermediaries’ trade surveillance systems with a view to releasing guidance on better practices.
• We are conducting surveillance of carbon and energy derivative markets and are implementing a new memorandum of understanding with the Australian Energy Regulator to address concerns about misconduct in gas and electricity markets.
• We are further enhancing our fixed income, currency and commodity (FICC) market surveillance system and data analytics. We are using our new bond surveillance capabilities, with a focus on green bonds, syndicated issues and secondary trading in government, semi-government and corporate bonds.
• We are undertaking a thematic review of artificial intelligence/machine learning (AI/ML) practices and associated risks and controls among market intermediaries and buy-side firms, including the implementation of AI/ML guidance issued by the International Organization of Securities Commissions (IOSCO).
• We will consider whether the automated order processing market integrity rules should be extended to futures market participants, and whether the rules should be updated to reflect developments since they were made.
• We are conducting proactive surveillance of debt capital markets issuance to test against our expectations for conduct and controls in Report 668 Allocations in debt capital market transactions.We continue to monitor and test allocation practices for selected equity raising transactions.
• We will align the over-the-counter (OTC) derivatives trade reporting requirements in Australia with international requirements, including the Unique Transaction Identifier, the Unique Product Identifier and Critical Data Elements.
• We are enhancing how we identify, quantify and disrupt scams through a data-informed approach. We are working with other regulators and law enforcement agencies, both domestic and overseas, to disrupt scams and coordinate enforcement strategies. We are improving our communications and consumer education, including through social media, to help consumers be more aware of scams and how to identify them.

The design and distribution obligations came into effect on 5 October 2021. These obligations require financial product issuers to design products that meet the needs of consumers and are targeted to the right consumers.

• We are conducting risk-based surveillance of market intermediaries’ financial product design and distribution practices, including:
• design and approval of new products
• issuers’ reviews of target market determinations (TMD) and distribution arrangements
• notifications of significant dealings inconsistent with TMDs
• supervision of authorised representatives
• marketing governance (including social media)
• assessment of client outcomes by distribution channels.
• We are reviewing market intermediaries’ use of digital engagement practices in trading apps and their potential influence on consumer behaviour and outcomes, including algorithmic and copy trading, leader boards, gamification, inducements and other behavioural levers.
• We are undertaking surveillance of crypto-asset offerings by market intermediaries that fall in our remit (e.g. derivatives, managed funds and debentures) for potential misleading or deceptive conduct that may result in consumer harm. We will also raise public awareness of the risks of crypto-assets and decentralised finance (DeFi).
• We are implementing and monitoring the regulatory model for exchange traded products with underlying crypto-asset exposures.
• We will take enforcement action to address poor product design and distribution practices that result in consumer harm, including misleading, predatory or hawking tactics.

We support market integrity through proactive supervision and enforcement of governance, transparency and disclosure standards.

• We will continue to undertake frontline supervision and proactive engagement with market participants, investment banks and securities dealers to drive better practices and early identification of issues. We conduct proactive and reactive surveillance of market intermediaries, securities dealers and corporate authorised representatives.
• We will increase our engagement with new and growing market intermediaries and undertake thematic reviews of identified risks (e.g. client money handling, new product approval processes and marketing governance).
• We are actively monitoring the progress and effective completion of market intermediaries’ remediation plans and independent expert reviews (e.g. court enforceable undertakings, licence conditions and court orders).
• We are monitoring the financial strength of market intermediaries, including through testing compliance with capital requirements using enhanced risk indicators and risk-based surveillance. We are also reviewing arrangements for handling client money and safeguarding client assets.
• We will monitor sustainability-related disclosure and governance practices of listed companies, managed funds and green bonds and take enforcement action against misconduct, including misleading marketing and greenwashing.
• We willpublishreports on better and poorer practicesobserved in ourreviews of wholesale market intermediaries’ management of conflicts of interest and fixed income market practices. We will continue toengage with industry bodiesto promote development of good industry standards.
• We will contribute to IOSCO’s work on sustainable finance, hidden leverage, collateralised loan obligations and leveraged loans, OTC trade reporting, operational resilience and retail market conduct.
• We will continue our reviews of whistleblower programs, corporate finance transactions and the LIBOR transition.

We will support market intermediaries’ implementation of recent and upcoming law reform. We will continue to provide guidance to industry about how we plan to administer and enforce the law – especially for new obligations.

• We are aware the new reportable situations regime has been challenging to implement. We continue to closely monitor the operation of the new regime to support industry with the practical implementation of the new obligations. We will work with AFS licensees to implement solutions to improve the consistency and quality of reporting practices.
• We have updated our market integrity rule guidance following recent rule amendments, including to the technological and operational resilience rules and capital rules.
• Subject to the passage of legislation, we will work with APRA to facilitate a smooth implementation of the Financial Accountability Regime, including implementing a coordinated, risk-based approach to registration activities under the regime.
• We are supporting the Government’s development of Foreign Financial Service Provider regulation and transitional arrangements.
• We will support the development of a regulatory framework for crypto-assets and work with domestic and international peers to monitor risks, develop coordinated responses to issues and develop international policy regarding crypto-assets and DeFi.
• We will promote the development of international standards and better practices through our participation in IOSCO working groups and liaison with other local and international regulatory agencies.
• We will seek your feedback on ways we can improve regulatory efficiency and reduce red tape. We will continue to provide relief, where appropriate, to participants in capital markets and the financial services industry to facilitate business, promote innovation and support the Australian economy.

Conclusion

We encourage you to use this letter as a reference tool for your compliance, supervisory and risk management programs, and to prepare for your interactions with ASIC. To stay informed of regulatory developments and issues affecting market intermediaries, we recommend subscribing to our monthly newsletter and participating in our quarterly Market Liaison Meetings.

Priorities for 2021-22

We recognise that market intermediaries are currently facing many challenges, including from the impacts of the COVID-19 pandemic and several important legislative reforms taking effect this financial year. We are adapting our work program to reduce the number of reviews of market intermediaries and providing regulatory relief where appropriate. While we are focused on supporting business and the economic recovery, we will take enforcement action where there is evidence of misconduct and it is in the public interest to do so.

The projects outlined below represent the most significant pieces of work relating to ASIC’s supervision of market intermediaries and is not an exhaustive list.

Our work in 2021-22 is focussed on four main areas:

1. Reducing risk of harm to consumers
2. Supporting enhanced cyber and operational resilience
3. Maintaining high industry standards
4. Enhancing our market surveillance and data analytics

Historically low interest rates and the ongoing search for yield have inflated retail investor risk appetite and stimulated scam activity. While we seek to quickly identifying and shut down scams, we encourage market intermediaries to raise awareness among their clients of the heightened risk environment.

Assessing the evolution of retail products and distribution strategies

• We are working to better understand the extent to which trading apps are gamifying trading or encouraging excessive trading by retail investors.
• We are consulting on proposals to enhance the application of market integrity rules for payment for order flow practices through CP 347.
• We are reviewing market practices in relation to copy trading, including its outcomes for investors and the application of financial services laws.
• We are reviewing the adequacy of monitoring and supervision arrangements licensees have for their corporate authorised representatives.
• We will seek to improve disclosure about the risk of pooling of client cash and security holdings using omnibus Holder Identification Numbers, and the structure and risks associated with fractional share offerings.

Embedding strategies to monitor social media advice and influence on retail investment decisions

• We are engaging with social media platforms, forum moderators and financial influencers or ‘finfluencers’ to consider market practices, the application of financial services laws and drive behavioural change.
• We are embedding tools and undertaking reviews of social media to detect unlicensed advice to retail investors.
• We are developing educational content for retail investors, including through social media to connect with investors and disseminate real-time warnings.
• We are enhancing our social media monitoring and network analytics capability to identify more connections, as well as coordinated activity that may harm market integrity or contribute to market manipulation.

Product Intervention Orders

• In 2021, Product Intervention Orders came into effect for Contracts for difference (CFDs) and binary options.
  • From 29 March 2021, ASIC’s product intervention order relating to CFDs (CFD PIO) strengthened protections for retail clients by restricting CFD leverage to reduce the size and speed of losses, standardising margin close-out arrangements, protecting against negative account balances and prohibiting the offer of certain inducements to retail clients.
  • ASIC made a product intervention order banning the issue and distribution of binary options to retail clients, with effect from 3 May 2021.
• We are closely monitoring these markets to ensure compliance with these orders and collecting data to consider whether these product intervention orders should be extended or made permanent.

Cyber resilience

• We are supporting enhanced cyber resilience and cyber security among ASIC’s regulated population, in line with the whole-of-government commitment to mitigating cyber security risks, including to raise awareness of cyber issues.
• We are probing and assessing the cyber resilience of our regulated population. We take a risk-based approach to target entities for assessment utilising our cyber risk rating framework.

Operational resilience

• We are assessing and monitoring the operational resilience of market intermediaries, with a focus on:
  • the changing operating environment through the COVID-19 pandemic and increase in remote and hybrid working
  • preparedness to respond to any future market infrastructure outages or incidents
  • industry’s readiness for LIBOR transition and CHESS replacement
  • ongoing monitoring of the technology and operational risk governance practices of market intermediaries and undertaking on-site reviews as appropriate.
• We are also looking to finalise and implement new market integrity rules for market participants and operators focussed on systems and controls.

Industry readiness and compliance with standards set by law reform taking effect in October 2021

• We are engaging with market intermediaries on their preparedness and implementation of reforms taking effect in October 2021. The reforms include:
  • design and distribution obligations
  • breach reporting to ASIC
  • restrictions on the unsolicited selling of financial products (hawking)
  • how disputes are managed internally in firms
  • reference checking and information sharing requirements for financial advisers and brokers.
• ASIC will take a reasonable approach in the early stages of these reforms provided industry participants are using their best efforts to comply (see 21-213MR).
• We will undertake risk-based reviews of compliance with the new obligations around the second half of the financial year, including to test whether Target Market Determinations and frameworks for review of product design and distribution are satisfactory.

Setting and testing standards in other areas

• We are preparing for the implementation of the Financial Accountability Regime in 2022.
• We are monitoring the financial strength of market intermediaries, including through safeguarding retail client monies and implementation of new capital adequacy requirements.
• We will continue to review the appropriateness of advice and control frameworks for the provision of advice by market intermediaries and may provide guidance to raise standards.
• We are seeking to improve and align Australia’s reporting of OTC derivative transactions with international standards by consulting on harmonised trade reporting rules.
• We are also undertaking supervisory activities that address key themes such as technology and systems, operational resilience and internal audit, including use of targeted onsite reviews when appropriate.

Equity and Debt Capital Market raisings

• We are continuing to test the management of conflicts of interest by market intermediaries providing research and corporate work, as well as any potential conflicts in making allocations in equity and debt raisings. We do this through ongoing monitoring of transaction activity, media commentary and complaints relating to capital raising transactions.

Fixed Interest, Currency and Commodity (FICC) market surveillance and data analytics

• We are enhancing our FICC market surveillance capability, by ingesting and interrogating a broader range of data, to keep abreast of changing market dynamics and indicators of poor conduct.
• We have a focus on emerging harms from the search for yield in the low yield environment, as well as insider trading and possible manipulation of lower/sub investment grade bonds.
• We are also seeking to identify poor behaviour in short term money markets, domestic/cross currency swap and futures markets.

Securities market: real-time and post-trade surveillance

• ASIC undertakes real-time surveillance of trading on Australia's domestic licensed markets. This includes identifying and taking action against insider trading, market manipulation, disorderly trading and misinformed securities markets. This financial year, we are focussed on:
  • strategies that artificially move prices and induce other investors to trade at artificial levels. This includes momentum ignition, ramping and pump and dump. We are especially focused on the role of social media influence
  • activist short selling and short squeezes, with a key focus on maintaining market integrity, an informed market and addressing information asymmetry
  • cross-market and product manipulation and insider trading (e.g. trading across shares, CFDs and swaps)
  • suspicious activity reporting and improving the number and quality of these important sources of intelligence.

Conclusion

We encourage you to use this letter as a reference tool for your compliance, supervisory and risk management programs, and to prepare for your interactions with us. We also recommend you subscribe to our free monthly Market Integrity Update, to stay informed of regulatory developments and issues affecting market intermediaries.

Priorities for 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.