MIU - Issue 137 - May 2022
This Market Integrity Update contains the following articles:
Court finds RI Advice failed to adequately manage cybersecurity risks
In an Australian first, the Federal Court has found Australian financial services licensee, RI Advice, breached its licence obligations to act efficiently and fairly when it failed to have adequate risk management systems to manage its cybersecurity risks.
The finding comes after a significant number of cyber incidents occurred at authorised representatives of RI Advice between June 2014 and May 2020. In one of the incidents, an unknown malicious agent obtained, through a brute force attack, unauthorised access to an authorised representative’s file server from December 2017 to April 2018 before being detected, resulting in the potential compromise of confidential and sensitive personal information of several thousand clients and other persons.
RI Advice has taken steps to address cybersecurity risk across its authorised representative network. In addition to the declaration of contravention, the Court ordered RI Advice to engage a cybersecurity expert to identify and implement what, if any, further measures are necessary to adequately manage cybersecurity risks across RI Advice’s authorised representative network.
When handing down the judgment, Her Honour Justice Rofe made it clear that cybersecurity should be front of mind for all licensees, stating, ‘Cybersecurity risk forms a significant risk connected with the conduct of the business and provision of financial services. It is not possible to reduce cybersecurity risk to zero, but it is possible to materially reduce cybersecurity risk through adequate cybersecurity documentation and controls to an acceptable level.’
RI Advice has been ordered to pay $750,000 towards ASIC’s costs.
The orders were made by consent after ASIC and RI Advice agreed to resolve the proceedings.
- Read the media release
Proposal to extend the binary options product intervention order
We’ve released Consultation Paper 362 Extension of the binary options product intervention order (CP 362), seeking feedback on our proposal to extend the product intervention order banning the issue and distribution of binary options to retail clients, until it is revoked or sunsets on 1 October 2031.
We banned the sale of binary options to retail clients, with effect from 3 May 2021, after finding that binary options had resulted in and were likely to result in significant detriment to retail clients. The product intervention order will expire on 7 October 2022 unless it is extended with the approval of the Minister.
CP 362 highlights our analysis of the impact of the product intervention order and its view that the ban has been effective in reducing the risk of significant detriment to retail clients resulting from binary options.
In the 13 months before the ban:
- between 74% and 77% of active retail clients lost money trading binary options
- loss-making retail client accounts made net losses totalling $15.7 million compared with $1.7 million total net profits of profit-making retail client accounts.
As expected, retail clients have not made any losses (or profits) from trading binary options with licensed issuers since the product intervention order took effect. By comparison, 68% of wholesale clients lost money trading binary options in that period as the product intervention order does not apply to them.
We’ll continue to monitor for scams and prohibited offers of binary options in this jurisdiction and take disruptive action as appropriate.
We welcome feedback on CP 362 by 20 June 2022.
- Read the media release
Simplifying OTC derivative transaction reporting
We’ve released our second consultation package outlining the key changes to the ASIC Derivative Transaction Rules (Reporting) 2013 (the Rules).
The second consultation package includes:
- Consultation Paper 361 Proposed changes to simplify the ASIC Derivative Transaction Rules (Reporting): Second consultation (CP 361)
- Attachment 1 to CP 361: Draft remade ASIC Rules (as ASIC Derivative Transaction Rules (Reporting) 2022 with effect from 1 October 2023)
- Attachment 2 to CP 361: Draft amended ASIC Rules (as ASIC Derivative Transaction Rules (Reporting) 2022 with effect from 1 April 2024)
We’ve updated the Upcoming Rules and Exemptions changes section of the Derivative transaction reporting page on our website to include the second consultation package.
The second consultation package follows Consultation Paper 334 Proposed changes to simplify the ASIC Derivative Transaction Rules (Reporting): First consultation (CP 334), which was released in November 2020. CP 361 includes our response to submissions received on CP 334.
The key changes focus on implementing reporting requirements that are in line with international standards (e.g. UTI, UPI, LEI, CDE, and ISO 20022 elements). CP 361 also aims to ensure the Rules are current, consolidated and fit for purpose.
Our indicative timeline to implement changes to the Rules is:
- Consultation round two – 16 May 2022 to 8 July 2022
- Rules made – Q4 2022
- Remade Rules in force – Q4 2023
- Amended Rules in force – Q2 2024
During the consultation period, we encourage engagement with interested stakeholders, which may be via industry associations or as otherwise proposed by stakeholders. Register your interest by emailing otcd@asic.gov.au.
We welcome your feedback on CP 361 by 8 July 2022. Email otcd@asic.gov.au if you wish to make a submission.
Mandatory clearing rule amendments to reflect benchmark reforms
We’ve made amendments to the ASIC Derivative Transaction Rules (Clearing) 2015 (Clearing Rules) to reflect ongoing reforms of interest rate benchmarks.
The amendments, as outlined in Consultation Paper 353 Proposed amendments to the ASIC Derivative Transaction Rules (Clearing) 2015, proposed to:
- remove contracts referencing interest rate benchmarks which have now either ceased or are no longer representative
- replace these with overnight index swap contracts referencing the replacement (near) risk-free rate selected for each currency.
We’ve also released Report 726 Response to submissions on CP 353 Proposed amendments to the ASIC Derivative Transaction Rules (Clearing) 2015. The report summarises the key issues raised in submissions to CP 353 and details our responses to those issues, including the change we made to one of the replacement contract classes based on stakeholder feedback.
While we expect market participants subject to the Clearing Rules are already clearing trades in the replacement products, there is a three-month transition period to implement the amendments. The transition period will allow industry time to prepare for the technical commencement of the clearing requirements for these contracts.
Review of trades with price improvement
Our review of trades with price improvement (TWPIs) that are executed off-order book by participants, and subsequently reported to a market, has found that several participants are executing a significant number of their TWPIs without price improvement.
Rule 6.1.1 of the ASIC Market Integrity Rules (Securities Markets) 2017 (MIR) requires trades in equity market products to be matched on an order book of a market and have pre-trade transparency, unless the trade is able to rely on a specified exception. TWPIs are a specified exception. MIR 6.2.3 specifies that TWPIs need to be executed at a price that is higher than the best available bid and lower than the best available ask by one or more price steps, or at the midpoint of these prices.
Trades that arise from displayed orders on-market, unless specified exceptions apply, foster competition that promotes liquidity and price formation, which benefits all investors. TWPIs are a specified exception to this requirement because they provide a significantly better price for investors to trade than what is available on-market.
Participants should review their compliance with the requirements for TWPIs. They are responsible for ensuring that their trade reports comply with the MIR and should not rely on market operators to reject non-compliant trade reports. We may take action in relation to any non-compliance with the MIR.