Market Integrity Update - Issue 94 - June 2018
- Be wary of end of financial year 'window dressing'
- New external dispute resolution scheme to start in November
- ASIC's 2018-19 priorities outlined at SAFAA conference
- Best execution practices
- Changes to reporting for CFDs and equity derivatives
- Significant financial benchmarks
- Wilsons Advisory pays infringement notice penalties
Be wary of end of financial year ‘window dressing’
As we near the end of the financial year, we’d like to remind the market to be alert to unusual trading that may affect share price valuations and end of financial year performance figures. This activity is known as 'window dressing'.
Window dressing is a form of market manipulation conducted by parties who have a financial incentive to influence share prices around key reporting dates. These parties include directors, large shareholders and fund managers who periodically report to clients about investment performance.
Market participants should take active steps to identify possible misconduct through system controls and pre-trade filters, as well as through post-trade reviews of abnormal trading behaviour. You must notify ASIC if you identify or suspect ‘window dressing’. This can be done through Form M57 Suspicious Activity Report (SARs) on the market entity compliance system (MECS) portal, or by emailing SARs at markets@asic.gov.au.
We’ll continue to monitor unusual price movements that may be indicative of market manipulation. If we identify any trading that we believe should have been reported to ASIC, but wasn’t, we’ll contact you for an explanation.
See RG 265 Guidance on ASIC market integrity rules for participants of securities markets and RG 266 Guidance on ASIC market integrity rules for participants of futures markets for more information about SARs.
New external dispute resolution scheme to start in November
A new external body to hear complaints from your retail clients will start on 1 November 2018. The Australian Financial Complaints Authority (AFCA) will replace the two existing ASIC-approved external dispute schemes - the Financial Ombudsman Scheme (FOS) and the Credit and Investments Ombudsman (CIO) - and the statutory Superannuation Complaints Tribunal (SCT).
All financial firms that are required to have a dispute resolution system to deal with complaints from consumers and small businesses must become members of AFCA by 21 September 2018. Firms must also maintain their membership of the FOS or CIO scheme and pay required membership fees until further notice.
AFCA will deal with complaints about financial firms including banks, credit providers, insurance companies and brokers, financial advisers, stockbrokers, managed investment schemes and superannuation trustees. ASIC retains its oversight role of the financial services dispute resolution framework and will receive reports from AFCA about systemic issues and serious contraventions by financial firms.
Consumers can lodge complaints with FOS, CIO and SCT up to and including 31 October 2018. Complaints can only be lodged with AFCA from 1 November 2018. Those already lodged but unresolved by 1 November will be transferred to AFCA and dealt with under the relevant scheme’s terms of reference and rules that applied when the complaint was made.
Firms will need to update their customer disclosure documents and periodic statements with AFCA’s contact details. We expect this to occur as soon as possible but have allowed a transition period until 1 July 2019.
The SCT will continue to operate after 1 November 2018 to resolve complaints lodged before 1 November 2018.
ASIC's 2018-19 priorities outlined at SAFAA conference
ASIC Commissioner, Cathie Armour, outlined some of ASIC’s priorities for its regulation of stockbroking and financial advice firms at the annual Stockbrokers and Financial Advisers Association (SAFAA) conference in Melbourne last month.
Cathie's speech covered a range of work that we are undertaking, including the importance of professionalism in the financial services industry in improving the confidence of investors to obtain financial advice. We remain focused on technology and operational risk and emphasise the importance of data integrity in investor protection. We also encourage firms to familiarise themselves with our recent report on the cyber resilience of financial services firms (Report 555).
Cathie referred to our updated regulatory guidance in relation to sell-side research, which takes effect from 1 July 2018 (RG 264), and our current work on allocations in capital raisings. She also discussed our plans to retest our previous work on market cleanliness and high frequency trading.
Our surveillance activities will incorporate more on-site inspections and we continue to expand our work into the fixed income, currency and commodities (FICC) markets and retail over-the-counter (OTC) activities.
Cathie's full speech is available on our website.
Best execution practices
Market participants must take reasonable steps to obtain the best outcome for their clients. We recently looked at some market participants’ best execution arrangements to determine if they were meeting their obligations.
Our review indicated that market participants may not be considering the matters relevant to best execution (see Table 6 of RG 265 Guidance on ASIC market integrity rules for participants of securities markets) and addressing them in their policies and procedures.
Participants in the listed equity markets must have adequate policies and procedures to ensure they obtain best execution for its clients. These policies and procedures must not only be established, documented and implemented, they must also be complied with.
We’re also concerned that market participants may not be regularly monitoring:
- whether they comply with their best execution arrangements
- the continued effectiveness of those arrangements in meeting their best execution obligation (e.g. whether they’ve taken reasonable steps to obtain the best outcome for clients).
For transactions done on an order book, market participants should consider the respective merits of all the order books of licensed markets. If a market participant is connected to only one market, it should be actively assessing whether connecting to additional markets will deliver better outcomes for its clients. The nature of the assessment will vary with the size and complexity of the participant’s business. If the assessment indicates that accessing the additional market consistently deliver better outcomes at a reasonable cost, we expect market participants to:
- implement appropriate systems and arrangements to access the additional market
- amend their best execution policies and procedures
- inform their clients about the change.
We enforce the requirements for best execution and expect market participants to consistently monitor their compliance.
Changes to reporting for CFDs and equity derivatives
We are proposing changes to the way transactions in contracts for difference (CFDs), margin FX and equity derivatives must be reported. The changes would require these types of transactions to be reported to derivative trade repositories on a ‘life cycle’ method, rather than an end-of-day ‘snapshot’ method. The proposal would provide better reporting to ASIC to help it monitor market misconduct.
We indicated that we may require more granular life cycle reporting for shorter-term trades that are opened and closed within a day. We’ve monitored whether this reporting would be appropriate and have concluded that for CFDs, margin FX and equity derivatives, life cycle reporting would support the detection and prevention of market abuse in these products.
Determinations about changes to reporting can be made when we believe that it’s desirable to enhance the transparency of transaction information available to relevant authorities and the public, promote financial stability, or support the detection and prevention of market abuse.
It’s our intention to finalise our position in August 2018, and if life cycle reporting is to be required, the effective date is expected to be in November 2018.
Market participants can provide feedback on this proposal by emailing otcd@asic.gov.au by Friday 6 July 2018.
Significant financial benchmarks
The final stage in a new comprehensive regulatory regime for financial benchmarks occurred this month when we finalised benchmarks rules, made a significant benchmarks declaration, and issued an associated regulatory guide.
This follows the implementation of new BBSW methodology in May, with the benchmark now calculated directly from market transactions during a longer rate-set window and involving a larger number of participants.
The actions taken by ASIC include:
- declaring certain financial benchmarks to be significant
- writing rules to support the implementation of a licensing regime for the administrators of significant benchmarks
- allowing ASIC to, by written notice, require the continued administration of a significant benchmark or compel submissions to a significant benchmark.
The measures are also important in aligning financial benchmarks in the Australian economy with the IOSCO Principles for Financial Benchmarks. The rules are also expected to facilitate equivalence assessments under overseas regimes, including the European Benchmarks Regulation.
The rules, declaration and regulatory guide are available on our website.
Wilsons Advisory pays infringement notice penalties
Wilsons Advisory and Stockbroking Limited (Wilsons) has paid a penalty of $35,000 to comply with an infringement notice given to it by the Markets Disciplinary Panel (MDP).
The MDP found that Wilsons contravened ASIC Market Integrity Rules (Competition in Exchange Markets) 2011 (the Rules) relating to the provision of regulatory data.
The Rules required a market participant, acting as an agent for a client, to provide a unique reference to the market operator, used to identify the person who provided instructions that resulted in either an order being submitted or a transaction executed. The provision of regulatory data significantly improves the efficiency of ASIC’s surveillance function as it reduces the number of requests for trading information that are sent to market participants.
The MDP found no evidence of a deliberate attempt by Wilsons to conceal information from ASIC about the origin of orders and transactions.
The compliance with the infringement notice is not an admission of guilt or liability, and Wilsons is not taken to have contravened subsection 798H(1) of the Act.