MIU - Issue 138 - June 2022

Responding to recent market volatility

In periods of heightened market volatility, like we’re currently experiencing, we remind market participants of the importance of maintaining robust monitoring and supervision controls.

Times of stress are when we see some of the worst market conduct. Market participants are the gatekeepers to Australian markets, and they have a duty to detect and deter this activity quickly to support the integrity of markets and to provide financial services efficiently, honestly and fairly.

Market participants should, for example:

• protect client money
• monitor client and house positions, the build-up of risk and signs of distress
• be well prepared for margin calls
• consider system capacity issues and the robustness of IT systems, including of third parties and other dependencies
• monitor client trading activity that may have the effect of manipulating prices
• monitor the use of trading algorithms to avoid aberrant trading or contributing to market movements
• monitor the build-up of short positions, ensuring that short positions are covered and that they are appropriately reported.

It’s also important that trade surveillance teams are vigilant, responsive, and equipped to manage the high volume of activity and pay due attention to the larger number of trade alerts. We’re seeing up to six times the volume of alerts triggered by our trade surveillance system. While many have legitimate explanations, we’re also seeing more potentially manipulative trades across a range of markets. As a proactive step, market participants should check that their trade surveillance alerts are fit for purpose and operating as intended.

If you see suspicious activity, you must report it quickly to ASIC or AUSTRAC. If we contact you about concerning conduct, we expect you to act immediately. You can also contact our Market Surveillance team directly at markets@asic.gov.au or through your Intermediary Supervisor.

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Calling on industry to continue to improve resilience during market outages

We’re calling on market operators and participants to continue to implement our expectations to improve the resilience of the Australian equity market during outages, including by facilitating trading on alternative markets.

We released Report 708 ASIC’s expectations for industry in responding to a market outage in response to the ASX equity market outage in November 2020. Market operators and participants are required to implement the expectations to maintain compliance with their obligations under the law and to ensure they can continue to service their clients during a market outage.

While progress has been reasonable given the industry is balancing other significant market system changes and volatile trading conditions, there is considerably more to do.

There have been some delays for market participants due to uncertainty about how the market operators may respond, and the services they will provide during an outage. ASX’s consultation paper (the first of three) on its proposed improvements should help to address some of this uncertainty.

Our expectations on market outages coincide with other important changes in the industry, including CHESS replacement, Cboe’s technology upgrade and implementation of new market integrity rules. While these are important competing priorities, they have become interrelated and market operators and participants should plan to implement these initiatives in a reasonable timeframe.

By early to mid-2023, we anticipate that all market participants will have arrangements for at least new orders to trade on an alternative market during an outage, and that market operators will support this outcome.

We’re pleased that large institutional investors, who are key users of Australia’s financial markets, have actively engaged on market outage protocols. We expect market gatekeepers (market operators and participants) to continue to facilitate trading during market outages.

For details on market operators and participants progress against the expectations, refer to the media release below.

• Read the media release

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Caloundra man sentenced for insider trading 

Mr Jin Xi Li, of Caloundra, Queensland, has been sentenced to nine months imprisonment for insider trading. The Court ordered Mr Li be released forthwith on recognisance upon the condition that he be of good behaviour for a period of two years.

Mr Li traded in contracts for difference (CFD) of PanAust Limited (ASX: PNA) while he was in possession of inside information regarding a takeover bid for PanAust by Guangdong Rising H.K (Holding) Limited (GRAM). He made $343,000 profit as a result of his criminal conduct.

In sentencing, Judge Rinaudo said Mr Li ‘took an unfair advantage when trading, and having regard to the principles of general and specific deterrence, a term of imprisonment is the appropriate sentence.’

In April 2014, GRAM made a takeover bid for PanAust which did not eventuate. Less than a year later, Mr Li contacted an acquaintance in China to assist him to determine whether it was possible GRAM would make another takeover bid for PanAust. The contact confirmed that loan documents were being prepared for GRAM to obtain finance for another takeover bid and later confirmed a contract would be signed.

Prior to the announcement made by PanAust on 30 March 2015 regarding the takeover bid, Mr Li:

• acquired 390,000 PanAust CFDs between 19 March 2015 and 26 March 2015
• procured his wife to acquire 265,000 PanAust CFDs between 22 March 2015 and 26 March 2015.

Mr Li had previously pleaded guilty to the two insider trading charges: see Media Release (22-010MR) Caloundra man pleads guilty to insider trading.

• Read the media release

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Gabriel Govinda pleads guilty to market manipulation

On 6 June 2022, Mr Gabriel Govinda (known online as ‘Fibonarchery’) pleaded guilty to 23 charges of manipulation of listed stocks on the Australian Securities Exchange and 19 charges of illegal dissemination of information relating to the manipulation.

Between September 2014 to July 2015, Mr Govinda used 13 different share trading accounts, held in the names of friends and relatives, to manipulate the share price of 20 different listed stocks. Mr Govinda manipulated the market, contrary to s1041B of the Corporations Act 2001 (Corporations Act), by:

• trading between the accounts he controlled (wash trading)
• using fake, ‘prop’, or ‘dummy’ bids to falsely increase the perceived demand, and ultimate price, for listed stocks.

Mr Govinda’s guilty plea to charges under s1041D of the Corporations Act were in relation to his online posts on HotCopper in which he illegally disseminated information about his wash trades and dummy bids. He was seeking to increase (or pump) the share price, then selling (or dumping) the listed stocks at a higher price. This is often referred to as ‘pump and dump’.

In one HotCopper post, Mr Govinda stated “dummy bids are all part of the fun and games and cat and mouse of the stockmarket!". This is the first time a person has been convicted of charges under s1041D of the Corporations Act.

We’ve previously warned about social media led ‘pump and dump’ campaigns and continue to act against this form of market manipulation that threatens the integrity of markets. Posting on social media to coordinate ‘pump and dump’ activity in listed stocks is an offence under the Corporations Act.

This matter has been adjourned part-heard to 29 July 2022 for a mention hearing.

Mr Govinda faces a maximum penalty for each charge of 10 years' imprisonment or a fine of up to $765,000, or both. In March 2019, the maximum penalty for these offences was increased to 15 years imprisonment.

• Read the media release

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What a Federal Court ruling on cybersecurity means for AFS licensees

The recent Federal Court ruling against RI Advice has highlighted several considerations for Australian financial services (AFS) licensees.

We expect AFS licensees to:

• be aware of the potential consumer harms that arise from cybersecurity shortcomings
• adopt good cybersecurity risk management practices to reduce potential harm to consumers
• actively manage cyber risks and continuously improve cybersecurity, including assessing cyber incident preparedness and reviewing incident response and business continuity plans
• act quickly in the event of a cyber incident to minimise the risk of ongoing harm
• report cyber incidents to the ACSC, as well as considering if any obligation arises to report the incident to ASIC.

It is important to note that dual regulated AFS licensees will also have obligations to comply with the standards of other regulators, such as APRA.

What does this decision mean for your organisation?

This decision confirms that AFS licensees must have adequate technological systems, policies and procedures to ensure sensitive consumer information is protected. This will minimise the risk of consumer harm.  

If an AFS licensee fails to meet its obligations as a result of similar conduct or omissions we may take enforcement action, as we did with RI Advice, which can result in significant penalties.

Where can I find out more about my obligations?

Visit our website for more resources on cyber resilience, including cyber resilience good practices and key questions for boards of directors.

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New requirements for participants and market operators

We’ve made several amendments to the ASIC market integrity rules for securities and futures markets, which streamline requirements across both rule books and address certain regulatory gaps.

The amendments, which commenced on 10 June 2022:

• extend the payment for order flow prohibition for securities market participants to cover when a participant sells client order flow, and payment for order flow that occurs among other market intermediaries
• introduce a ‘good fame and character’ test for securities and futures market operators and for futures participants
• introduce suspicious activity reporting obligations for futures participants.

These market integrity rules were made in March 2022 with a three-month transition period following earlier consultation with industry.

We’re updating our regulatory guides to assist participants and market operators with these new requirements. We’re also including guidance on our new technological and operational resilience rules which commence in March 2023.

For more information, refer to the following feedback reports for guidance on these new requirements:

• Report 720 Response to submissions on CP 342 Proposed amendments to the ASIC market integrity rules and other ASIC-made rules 
• Report 721 Response to submissions on CP 347 Proposed amendments to the prohibition on order incentives in the ASIC market integrity rules

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Market-making authorisation required to issue retail OTC derivatives

We’ve observed that some Australian financial services licensees that have started issuing over-the-counter (OTC) derivatives to retail investors, like contracts for difference (CFDs) may not hold the appropriate market-making authorisation for this activity.

Typically, CFD issuers require a market making authorisation. This is the case even when they trade on prices set by a third party. Issuers without this authorisation should review their operations. If they have contravened the Corporations Act 2001 (Corporations Act), they should cease offering CFDs and notify ASIC.  

Under section 766D(1) of the Corporations Act, a person (other than a market licensee) makes a market for a financial product where they regularly state the prices at which they propose to acquire or dispose of the products on their own behalf, and other persons have a reasonable expectation that they will be able to regularly trade at the stated prices.

This means a market-making authorisation is required for a CFD issuer where:

• the issuer quotes prices that it will trade with clients. This includes where the issuer uses the prices set by a third-party such as a liquidity provider
• the issuer enters into the CFD transactions with clients on its own behalf
• clients have a reasonable expectation that they will be able to regularly effect trades at the quoted prices.

We'll continue to monitor existing and new offerings to ensure licensees hold the appropriate authorisation and we will take action for breaches of the law where appropriate.

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Have you applied for your director ID?

We remind market intermediaries that all company directors are required to apply for a director identification number (director ID).

A director ID is a unique identifier which will help prevent the use of false or fraudulent director identities. All directors of a company, registered Australian body, registered foreign company or Aboriginal and Torres Strait Islander corporation will need a director ID.

More than 600,000 directors have already obtained their director ID.

Australian Business Registry Services (ABRS) is responsible for delivering the director ID initiative. ASIC is responsible for enforcing director ID offences set out in the Corporations Act 2001. It’s a criminal offence if directors do not apply on time and penalties may apply.

When people must apply for their director ID depends on when they first become a director:

• Directors appointed before 1 November 2021 have until 30 November 2022 to apply.
• New directors appointed for the first time between 1 November 2021 and 4 April 2022 had 28 days from their appointment to apply.
• From 5 April 2022, intending new directors must apply before being appointed.

Visit the ABRS website for more information and to apply.

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