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13-365MR ASIC accepts enforceable undertaking from National Australia Bank
ASIC today accepted an enforceable undertaking (EU) from National Australia Bank (NAB) following an investigation into the 18 October 2012 share price spike of the ASX 200.
The EU relates specifically to NAB’s responsibility for potential market misconduct undertaken by the trading personnel of a contractor which led to the spike.
NAB has agreed to adopt specific monitoring and control systems for its direct market access trading and ASIC will supervise the certification of those systems for the next three years.
NAB will also make a voluntary contribution of $2 million to fund independent financial literacy projects in Australia.
ASIC Commissioner Cathie Armour said: ‘It is imperative that entities have adequate monitoring and control systems in place to ensure this type of activity does not occur.
‘The EU is a timely, effective way to ensure there is genuine change to monitoring and control systems. ASIC will closely monitor the implementation of these changes to ensure they meet our expectations’, Ms Armour said.
NAB's review under the EU will address ASIC’s concerns about the inadequacy of its systems and controls in relation to its use of direct market access.
ASIC’s investigation of the contractor and its trading personnel continues.
The market orders which led to the share price spike were placed for NAB, as principal, by personnel (Contractor’s Trading Personnel) of a contractor which conducted NAB’s index arbitrage trading. This contractor has not been named for legal reasons.
By 18 October 2012, following their decision to take an existing arbitrage position to expiry (which involved closing out a negative shares position), the Contractor’s Trading Personnel arranged to buy 197 of the shares in the S&P/ASX 200 Index (ASX200) from one of NAB’s brokers, Goldman Sachs Australia, at the prices at which those shares matched in the ASX opening auction that morning.
On 18 October 2012, before the market opened, the Contractor’s Trading Personnel entered on to the ASX, by direct market access through UBS Securities Australia, large volume sell orders for 197 of the shares in the ASX200 (valued about $200 million) as one limb of further arbitrage trading against December 2012 ASX SPI 200 Index Futures (December SPI), which the Contractor’s Trading Personnel intended to begin buying at 9:55 am that same morning.
For their December SPI arbitrage to be hedged, the Contractor’s Trading Personnel needed to buy about 471 December SPI contracts by the first rotation of the opening auction on ASX (that takes place from 9:59:45 to 10:00:15 am), to match their open sell orders that would trade in that first rotation, through UBS. However, by 9:59:38 am the Contractor’s Trading Personnel had bought just 100 December SPI contracts, resulting in a potential imbalance between the two limbs of their December SPI arbitrage.
At 9:59:41 am, the Contractor’s Trading Personnel responded to this potential imbalance by reducing, by about 70%, the volume of sell orders that were about to trade through UBS in the first rotation of the ASX opening auction. The withdrawal of those orders caused the shares to trade at higher prices in the first rotation.
In the EU, NAB acknowledged ASIC’s concerns that:
for the order and trading activity on 18 October 2012, the Contractor’s Trading Personnel may have breached s1041A and/or 1041B(1) of the Corporations Act by:
placing the sell orders in a larger volume than they intended to trade in the opening auction for the purpose of reducing the price of December SPI contracts so they could buy them more cheaply for NAB
reducing the volume of the sell orders prior to each rotation of the opening auction on 18 October 2012 for the purpose of increasing the match price of the shares in the opening auction so that they could sell the shares at higher prices for NAB;
the Contractor’s Trading Personnel may have engaged in similar order and trading activity before 18 October 2012
NAB is vicariously responsible for the conduct of the Contractor’s Trading Personnel, and
NAB failed to adequately control the conduct of the Contractor’s Trading Personnel so as to prevent and detect the entry, amendment and/or trading of orders by NAB, or by others on behalf of NAB, in a way that contravened the Corporations Act's market misconduct provisions.
ASIC acknowledges NAB's cooperative approach on this matter.