Market Integrity Update - Issue 70 - April 2016
- ASIC commences proceedings against ANZ and Westpac for BBSW conduct
-
Have you reviewed your principal trading and facilitation practices?
-
Issues to consider when appointing experts to review control transactions
-
Council of Financial Regulators consults on financial benchmarks regulatory reform
- Stories from the beat
ASIC commences proceedings against ANZ and Westpac for BBSW conduct
ASIC has commenced separate legal proceedings in the Federal Court of Australia against the Australia and New Zealand Banking Group Limited (ANZ) and Westpac Banking Corporation (Westpac) for unconscionable conduct and market manipulation in relation to their involvement in setting the bank bill swap reference rate (BBSW).
The BBSW is the primary interest rate benchmark used in Australian financial markets, administered by the Australian Financial Markets Association.
ANZ
ASIC alleges that ANZ traded in a manner intended to create an artificial price for bank bills on 44 separate days during the period 9 March 2010 to 25 May 2012.
ASIC alleges that on these days ANZ had a large number of products that were priced or valued off BBSW and that it traded in the bank bill market with the intention of moving the BBSW higher or lower. ASIC alleges that ANZ was seeking to maximise its profit or minimise its loss to the detriment of those holding opposite positions to ANZ.
Westpac
ASIC alleges that Westpac traded in a manner intended to create an artificial price for bank bills on 16 occasions during the period of 6 April 2010 and 6 June 2012.
ASIC alleges that on these days Westpac had a large number of products that were priced or valued off BBSW and that it traded in the bank bill market with the intention of moving the BBSW higher or lower. ASIC alleges that Westpac was seeking to maximise its profit or minimise its loss to the detriment of those holding opposite positions to Westpac.
Have you reviewed your principal trading and facilitation practices?
In October 2015, ASIC released Report 452 Review of high-frequency trading and dark liquidity. Report 452 summarised industry practice and set out our expectations regarding the structure and conduct of principal trading and facilitation activities (see paragraphs 253–269), including that:
‘Market participants should review their arrangements and ensure that:
(a) order information and trading intentions are effectively protected;
(b) conflicts of interest are adequately managed through disclosure, controls or avoidance, where appropriate;
(c) internal compliance and supervision arrangements are adequate, including in relation to insider trading; and
(d) remuneration arrangements are structured so as not to incentivise inappropriate behaviour.’
In the report, we stated that we expect participants to review their existing practices for principal trading and facilitation activities, and implement any necessary changes by 30 June 2016. We have had discussions with some participants regarding changes that they are implementing to meet ASIC's expectations in this area.
Changes being implemented to ensure that confidential information is adequately protected include:
- moving the seating locations of principal traders away from agency traders and others with access to client order flow
- principal traders ceasing to undertake agency business (i.e. removing dual roles)
- changes to technological systems, and
- non-attendance by principal traders at meetings where client orders are discussed.
Participants should consider the time required to implement changes, in particular to technological systems.
Please contact your ASIC relationship manager if you consider, or have concerns, that you may not be able to meet this timetable.
Issues to consider when appointing experts to review control transactions
Commissioning parties should consider the independence and qualification of experts before they are appointed to review control transactions.
We recently reviewed a situation in which the same expert was appointed to report to separate groups of shareholders on either side of a friendly transaction. We were concerned that this could give rise to a conflict of interest, particularly if a rival bidder emerged.
Independent directors should carefully consider whether the cost involved in appointing separate experts is outweighed by the need for the independent board’s recommendation to be based on (indisputably) independent advice.
We have also recently seen expert reports prepared by entities with limited previous involvement preparing reports for public control transactions. In our experience, these reports are more likely to be deficient.
Situations like these necessitate closer scrutiny by ASIC. To the extent that changes are required, they may result in considerable delays to the transaction and further expense for the commissioning party.
Report 469 ASIC regulation of corporate finance: July to December 2015 discusses potential issues involving the appointment and independence of experts to review control transactions. Regulatory Guide 112 Independence of experts provides further guidance for any person who commissions, issues or uses an expert report.
Market integrity report available in video format
ASIC has released its six-monthly report on market integrity. Report 475 Market Integrity Report: July to December 2015 focuses on three areas:
- deterrence
- standards and education, and
- behavioural change.
Report 475 highlights the impact of market misconduct on Australian investors:
‘Put simply, if you don't trust that our markets are operating fairly, you won't invest your money in them. If lots of people feel and act this way, market liquidity (that is, the ease of trading shares) will decrease.
Conversely, trust and confidence encourages investor participation, which increases liquidity. This makes it easier for companies to raise money, which enables thcem to grow. This in turn creates jobs and economic growth.’
This reinforces the importance of the work undertaken by ASIC's Market Integrity Group. Key statistics from the report include:
- 96 matters under investigation at any one time (on average)
- 14 significant enforcement outcomes
- two enforceable undertakings
- 21,350 trading alerts
- 102 market surveillance inquiries
- 118 industry meetings
- 32 compliance surveillances, and
- 11 risk-based assessments.
Report 475 consists of a short webpage and a three minute video. Market intermediaries are encouraged to circulate the video and webpage to their staff and clients to increase awareness of ASIC's actions and ongoing areas of focus.
ASIC’s latest enforcement report and podcast
ASIC has released its enforcement report for the period 1 July 2015 to 31 December 2015. A podcast featuring ASIC Commissioner Greg Tanzer discussing the report has also been posted online.
Over the six-month period we achieved:
- 105 investigations commenced
- 86 investigations completed
- 27 individuals removed from financial services
- $149 million in compensation/remediation
- six persons charged in criminal proceedings
- 42 criminal charges laid
- 20 infringement notices issued
- $969,200 infringement notices paid.
Report 476 ASIC enforcement outcomes: July to December 2015 summarises key enforcement results by misconduct type.
Report 476 describes our areas of focus for the rest of 2016. Conduct risk and the integrity of financial market benchmarks remain a high enforcement priority, as do disclosure obligations and preventing market abuse.
Council of Financial Regulators consults on financial benchmarks regulatory reform
The Council of Financial Regulators (CFR) has released a consultation paper on financial benchmarks regulatory reform.
Financial benchmarks are critically important to a wide range of users in financial markets and throughout the broader economy. They are indices or indicators used as reference prices for financial instruments or contracts, or to measure the performance of investment funds.
CFR is consulting on regulatory reform proposals relating to the administration of significant benchmarks, submission to significant benchmarks and offences applying to benchmark misconduct. The consultation seeks to ensure the robustness and reliability of financial benchmarks in the Australian economy and to promote continued confidence in Australia's financial markets.
The proposals outlined in the consultation paper are guided by the International Organization of Securities Commissions (IOSCO) Principles for financial benchmarks and the recommendations of the Financial Stability Board for foreign exchange benchmarks and interest rate benchmarks. They are also informed by reforms proposed or implemented in key foreign jurisdictions.
The closing date for submissions is 29 April 2016.
ASIC and FCA sign agreement to support innovative fintechs
Under a world-first agreement, innovative financial technology (fintech) businesses in Australia and the United Kingdom will have more support from ASIC and the UK's Financial Conduct Authority (FCA) when they attempt to enter each other's market. Assistance will include expert support to eligible fintechs before, during and after authorisation to help reduce regulatory uncertainty and time to market.
ASIC Chairman Greg Medcraft said:
'ASIC is committed to encouraging innovation that has the potential to benefit financial consumers and investors. Since ASIC launched its Innovation Hub last year we have seen a surge in requests by fintech start-ups seeking assistance about how to navigate the regulatory requirements. In particular we have dealt with robo or digital advice, crowd-sourced equity funding, payments, marketplace lending and blockchain business models. It is very exciting to observe and clearly some business ideas will want to scale up internationally. We believe this agreement with the FCA will help break down barriers to entry both here and in the UK.'
The fintech industries in the United Kingdom and Australia are estimated to have revenues of around $12.5 billion (£6.6 billion) and $1.3 billion (£0.7 billion) a year, with both growing rapidly.
The agreement follows the creation of Innovation Hubs at ASIC and the FCA. The hubs were set up to help businesses with innovative ideas navigate financial regulation, support them through the authorisation process and engage with the regulator. To date, the FCA’s Innovation Hub has supported over 200 businesses, including the authorisation of 18 businesses. Likewise, ASIC has dealt with over 75 innovative start-ups, including the granting of 10 Australian financial services (AFS) licences.
Digital advice
ASIC's robo-advice taskforce proactively deals with digital advice issues, and has already liaised with 20 entities that have, or will be, launching a digital advice offering. Digital advice (also known as 'robo-advice' or 'automated advice') is the provision of automated financial product advice using algorithms and technology and without the direct involvement of a human adviser.
ASIC has recently published Consultation Paper 254 Regulating digital financial advice, with an attached draft regulatory guide on regulating digital advice, and is currently seeking your feedback on the proposals contained within it.
ASIC's proposed regulatory guide builds on existing ASIC guidance and covers some of the issues that providers of digital advice to retail clients need to consider when operating in Australia – from obtaining an AFS licence through to compliance with the best interests duty when providing scaled advice. The guidance also covers some of the issues unique to digital advice, including the competence and training standards that apply in a digital advice context and the ways in which digital advice licensees should monitor and test algorithms.
This story first appeared in the ASIC Wealth and Funds Management Update, which was launched in March 2016.
Recording of robo-advice session now available
A recording of a session from the ASIC Annual Forum 2016 on robo-advice has been made available to the public.
The session covers the following issues:
- How does robo-advice sit alongside traditional financial advice?
- Where does robo-advice cause the most disruption?
- How does the current regulatory framework apply to robo-advice?
- What are the issues that are unique to robo-advice?
The podcast also discusses Consultation Paper 254 and the attached draft Regulatory Guide 000 Providing digital financial product advice to retail clients.
Speakers include ASIC's Joanna Bird and Louise Macaulay, Senior Executive Leaders of the Financial Advisers team, as well as a panel discussion from:
- Greg Miller, Executive General Manager, Wealth Advice, NAB
- Chris Brycki, Founder and Chief Executive Officer, Stockspot
- Kate Jackson-Maynes, Partner, King & Wood Mallesons
- Dr June Smith, Lead Ombudsman, Investment and Advice, Financial Ombudsman Service Australia.
- Listen to the recording (35 mins)
Changes to internet addresses affect trading participants
A new article on the impact of changes to internet addresses on trading participants has been added to our catalogue of markets articles by ASIC.
Stories from the beat
The majority of the market integrity outcomes we achieve are not reported by the media, but this does not detract from their importance. Every day, ASIC officers work hard to ensure our markets are fair, orderly and transparent. These are their stories.
A participant undertaking spot checks of employee communications uncovered suspicious emails to external individuals containing order flow information for several stocks. The information communicated by the employee included data relating to stock identity, trade execution, trade volume and trade price.
The employee's actions were a potential breach of the insider trading provisions of the Corporations Act 2001 and the requirement to protect order flow information under the ASIC Market Integrity Rules (Competition in Exchange Markets) 2011.The participant promptly lodged a breach report with ASIC.
Upon analysing trade activity ASIC found there was insufficient evidence to suggest insider trading had occurred. The participant decided to terminate the employee over the incident; however, they resigned before this could occur.
This incident serves as a reminder of the importance of having a robust monitoring and escalation system in place which includes the monitoring of staff communications, and having effective and adequate compliance procedures in place.