Market Integrity Update - Issue 90 - February 2018
Issue 90, February 2018
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- ASIC commences civil penalty proceedings against CBA for BBSW conduct
- Interactive Brokers LLC pays $250,000 infringement notice penalty
- ASIC releases guidance on sell-side research
- New guidelines on exchange traded products for market licensees
- Risk management systems of responsible entities
- Underwriter obligations reminder
- Stories from the beat
ASIC commences civil penalty proceedings against CBA for BBSW conduct
We have commenced legal proceedings in the Federal Court in Melbourne against the Commonwealth Bank of Australia (CBA) for unconscionable conduct and market manipulation in relation to CBA’s involvement in setting the bank bill swap reference rate (BBSW) between 31 January 2012 and October 2012.
The BBSW is the primary interest rate benchmark used in Australian financial markets and was administered by the Australian Financial Markets Association (AFMA) during the relevant period.
At the time CBA had a large number of products that were priced or valued off the BBSW. We allege that on three specific occasions CBA traded with the intention of affecting the level at which the BBSW was set to maximise its profits or minimise its losses to the detriment of those holding opposite positions to CBA’s.
We allege it was unconscionable for CBA to trade in this way, and to enter into products priced off the BBSW, without disclosing its trading practices to its customers and counterparties. We also allege that CBA’s trading created an artificial price and a false appearance with respect to the market for some of these products.
Interactive Brokers LLC pays $250,000 infringement notice penalty
Interactive Brokers LLC (Interactive) has paid a $250,000 infringement notice penalty issued by the Markets Disciplinary Panel (MDP) for breaches of the ASIC Market Integrity Rules (Chi-X Australia Market) 2011.
A client of Interactive indirectly held a significant stake in Altona Mining Limited. The client placed a series of bids for shares in Altona through Interactive's automated order processing system. The majority of these bids were of very low value and created increases in the price of the shares.
The MDP found:
- the bids were consistent with an intention to support the share price of the company because they were timed to create a price impact at minimal cost
- the bids were inconsistent with the actions of a genuine purchaser seeking to acquire shares at the best possible price because the resulting trades consumed a very small proportion of the shares on offer at the bid prices
- the client had an interest in supporting the share price of the company, given the client’s significant indirect holding.
Interactive was unaware of the suspicious trading by the client until we detected it and brought the matter to the attention of Interactive.
The MDP found that although Interactive had some systems in place that were intended to prevent or minimise manipulative trading, Interactive’s compliance framework lacked sophistication and its management lacked the required level of focus to ensure compliance with the market integrity rules.
Interactive has subsequently undertaken significant steps to prevent a recurrence of the conduct, including by restructuring its Australian business into a dedicated Australian subsidiary to service Australian market activity, implementing further training and guidance to its senior trading desk staff, increasing its Asia-Pacific compliance resources and providing greater levels of oversight and monitoring of its clients’ trading activities.
Compliance with the infringement notice is not an admission of guilt or liability, and Interactive is not taken to have contravened subsection 798H(1) of the Corporations Act.
ASIC releases guidance on sell-side research
We have released regulatory guidance to help Australian financial services (AFS) licensees that provide sell-side research to better manage conflicts of interest and inside information.
Regulatory Guide 264 Sell-side research (RG 264)looks at the key stages of a capital raising transaction and provides specific guidelines on how conflicts of interest should be managed during each of these stages, including the preparation and production of investor education reports. RG 264 also provides general guidance for AFS licensees on the identification and handling of inside information by research analysts, and about the structure and funding of sell-side research teams.
The guidance addresses uneven market practice that developed since the publication of Regulatory Guide 79 Research report providers: Improving the quality of investment research (RG 79) in 2004. It also responds to industry requests for more detailed guidance on sell-side research and supplements guidance in RG 79.
While RG 264 does not extend the regulatory framework in RG 79, we will give industry six months to 1 July 2018 to make sure their compliance measures conform to the expectations set out in this guide.
New guidelines on exchange traded products for market licensees
We have published new guidance for licensed exchanges seeking to admit exchange traded products (ETPs) to their market. Information Sheet 230 Exchange traded products: Admission guidelines (INFO 230) largely reflects our existing expectations and current market practice and sets out clear and consistent standards for the admission of exchange traded products, including managed funds, exchange traded funds and structured products.
ASIC and ASX have also agreed an admission process for ETPs on ASX – with ASX taking full responsibility for the day-to-day admission process.
To help Australian exchanges manage ETPs and issuers, INFO 230 also outlines our expectations of their ongoing supervision of ETPs and issuers. For example, licensed exchanges are expected to proactively monitor, on an ongoing basis, that:
- continuous disclosure and other disclosure obligations are being met by issuers
- agreed liquidity/spreads are being complied with by market makers
- issuers adhere to the ETP’s intended derivative limits, and
- the market is operating with integrity and there is adequate protection for retail investors.
Some elements of INFO 230 may need to be adjusted over time as the market continues to grow and innovate.
Risk management systems of responsible entities
Responsible entities have an ongoing obligation to have adequate risk management systems in place. In March 2017 we released guidance on what is required to comply with this obligation: see Regulatory Guide 259 Risk management systems of responsible entities (RG 259). The guidance is also relevant to operators of managed discretionary accounts, investor directed portfolio services and unregistered managed investment schemes.
Since the release of RG 259 we have engaged with industry and received positive feedback that the guidance is assisting boards and compliance functions to ensure adequate risk management systems are in place.
We have recently released a podcast responding to some frequently asked questions. The podcast also highlights the fast approaching March 2018 cut-off for our facilitative approach to compliance with RG 259.
We expect responsible entities to have been making genuine efforts to ensure their risk management systems comply with RG 259 by March 2018. We encourage you to approach ASIC if you have any queries or issues with compliance.
Underwriter obligations reminder
Underwriters play an important role in our capital markets. Although underwriters' obligations are primarily contractual, they must also be mindful of obligations under the Corporations Act. We recently identified several instances where the underwriter for a fundraising offer was not authorised under an Australian financial services (AFS) licence to provide underwriting services. This resulted in underwriting being removed from those offers.
If you provide underwriting as part of a financial services business you will need to either hold an AFS licence that expressly includes the authorisation to underwrite or act as an authorised representative. AFS licensees must comply with conditions under the licence and other statutory obligations. Regulatory Guide 6 Takeovers: Exceptions to the general prohibition (RG 6) at RG 6.141–142.
Finally, you must play an active role in the preparation of disclosure documents and ensure that proper due diligence is undertaken. The extent of an underwriter’s liability for defective disclosure is the same as that of the company making the offer and its directors.
Stories from the beat
After receiving a number of participant queries and suspicious activity reports, we recently conducted a review of trading activity in exchange traded funds (ETFs) on ASX and Chi-X. The review uncovered confusion among stakeholders about naked short selling of ETFs.
Naked short selling is the practice of selling certain financial products without having (or believing on reasonable grounds that you have) a ‘presently exercisable and unconditional right to vest the products in the buyer’ at the time of sale. We remind you that naked short selling is prohibited under section 1020B(2) of the Corporations Act.
There are some exemptions to the naked short selling prohibition: see Regulatory Guide 196 Short selling (RG 196) at RG 196.42. It is important that you familiarise yourself with this information so that you do not engage in conduct that might breach the prohibition.
One exemption applies to market makers that have been formally appointed – by either the ASX or the responsible entity of the ETF – to make a market in certain ETF products. To qualify for the exemption, the market maker will require no-action relief from ASIC permitting it to naked short sell these products in the course of making a market: see RG 196.64. ETF market makers require this relief if, in the course of market making, they need to ‘naked’ short sell ETF units before applying for the creation of equivalent ETF units to fulfil settlement obligations. The no-action relief is subject to conditions.
Additionally, those wishing to sell CHESS Depositary Interests (CDIs) before conversion will also require no-action relief from ASIC: see RG 196.67.
Later this year, we will consult on granting class relief from the prohibition for formally appointed ETF market makers who engage in naked short selling in the course of making a market. The relief will be subject to conditions. Until then, market makers must submit an application for individual no-action relief.