REP 501 Market integrity report: January to August 2016

Mir Jan Aug 2016

The market integrity report consists of a short video and this webpage.

The Market Integrity Group undertakes an enormous range of activities. We set standards, educate, change behaviour and take enforcement action in the most serious instances.

This report highlights some of the activities we undertook and results we achieved between January and August 2016. We also outline our key priorities for the 2016–17 financial year.

Deterrence

Bank Bill Swap Rate (BBSW)

In March, April and June 2016, we commenced civil penalty proceedings against Australian and New Zealand Banking Group Limited, Westpac Banking Corporation and National Australia Bank Limited, respectively, alleging market manipulation and unconscionable conduct in setting the BBSW in the period 2010–12.

The BBSW is the primary interest rate benchmark used in Australian financial markets. We have alleged that each bank traded in a manner intended to create an artificial price in bank bills on a number of occasions in the relevant period. These matters are currently before the courts.

Insider trading

Insider trading is a serious crime that is increasingly likely to be detected. We continue to investigate and successfully prosecute those engaging in this form of market misconduct.

Hui Xiao

Former Hanlong Mining managing director, Hui Xiao, was sentenced to imprisonment for a total of eight years and three months on insider trading charges, with a non-parole period of five-and-a-half years. Mr Xiao had previously pleaded guilty to two ‘rolled up’ charges of insider trading, and formally admitted a third ‘rolled up’ charge, involving a total of 102 illegal trades in the financial products of Sundance Resources Limited and Bannerman Resources Limited.

Michael Hull

In June of this year, Michael Hull was sentenced to 17 months’ imprisonment for insider trading, after previously pleading guilty to insider trading charges. This followed an ASIC investigation into his trading in the shares of Mac Services Limited, Giralia Resources NL and Jabiru Metals Limited while in possession of inside information.

The inside information was allegedly conveyed to Mr Hull by a close friend who was employed in the investment banking department of a global financial services company that worked on major corporate transactions involving those companies.

Oliver Curtis

Former banker, Oliver Curtis, was sentenced to two years’ imprisonment after being found guilty of conspiring to commit insider trading with his former best friend, John Hartman. The court ordered that Mr Curtis be released after serving 12 months upon entering into a recognisance to be of good behaviour for 12 months.

Mr Curtis has appealed his conviction.

Markets Disciplinary Panel

The Markets Disciplinary Panel (MDP) is a peer-review body that exercises ASIC’s power to issue infringement notices or accept enforceable undertakings for alleged breaches of the ASIC market integrity rules. For example, in June 2016 Macquarie Securities (Australia) Limited (Macquarie Securities) complied with an infringement notice issued by the MDP.

In complying with the infringement notice, Macquarie Securities paid a penalty of $120,000 for failing to:

  • prevent entry of an erroneous order into the Chi-X trading platform that resulted in the market for an equity market product not being fair and orderly on two occasions, and
  • have in place appropriate automated filters to ensure the use of the automated order processing system did not interfere with the efficiency and integrity of the Chi-X market.

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Standards and education

In March 2016, we assessed the cyber resilience of ASX Group and Chi-X Australia Pty Ltd (Chi-X). We concluded that ASX and Chi-X have, up to this point in time, met their statutory obligations to have sufficient resources for the management of cyber resilience. The results of our review were published in Report 468 Cyber resilience assessment: ASX Group and Chi-X Australia Pty Ltd (REP 468).

REP 468 presents a number of emerging 'good practices' used by financial services entities operating in Australia which were identified through in-depth information-sharing discussions. These good practices enabled ASIC to make comparisons between peer entities and against the cyber resilience profiles of ASX Group and Chi-X to inform the assessment process.

REP 468 also provides a list of key questions directors and/or board members should ask about their cyber resilience. Since its release, the report has been widely cited in online publications and continues to influence industry practices.

Post-trade market structure reforms

During 2015–16, we worked closely with the Council of Financial Regulators (CFR) and the Australian Competition and Consumer Commission (ACCC) to advise the Government on competition in the clearing of Australian cash equities.

As a result, in March 2016 the Government endorsed the CFR’s recommendations to implement a flexible legislative framework comprising rule-making and arbitration powers to facilitate safe and effective competition in clearing; and to deal with the continued monopoly provision of cash equity clearing and settlement (CS) facility services until competition emerged.

Global OTC derivatives reforms

Delivering on its Group of Twenty (G20) commitments, Australia has implemented rules that commenced in April 2016 requiring mandatory central clearing of interest rate derivatives denominated in US dollars, euros, British pounds and Japanese yen (G4 interest rate derivatives), and Australian dollars (AUD interest rate derivatives).

The final stage of the over-the-counter (OTC) derivative transaction reporting regime for Phase 3B reporting entities commenced in June 2016.

ASX assessment report

In June 2016, we released an assessment report on ASX’s listing standards and administration. We concluded that ASX had met its statutory obligations for its listing standards. In reaching this conclusion, we were informed by our own surveillance of ASX’s equities market and our ongoing oversight of ASX and its surveillance practices. We also engaged extensively with ASX and regulators in the United Kingdom, United States, Canada, Singapore, Hong Kong and New Zealand: see Report 480 Assessment of ASX Limited’s listing standards for equities (REP 480).

Delegation of powers: Reducing red tape

In April 2016, the Government delegated specific powers to ASIC for market and CS facilities. This included powers to issue, suspend or cancel a market or CS facility licence, as well as powers relating to operating rules and compensation arrangements.

The objective of this delegation is to reduce red tape and better facilitate innovation and competition by enabling industry to bring services and products to market quickly. Ten matters have already been determined under delegation in 2015–16, with a median timeframe of three-and-a-half days from formal lodgement of the application to delegate decision.

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Behavioural change

Achieving behavioural change is an important part of our role. Through early intervention we may be able to prevent risky conduct and potential breaches (and investor losses) before they occur.

Managing confidential information and conflicts of interest

During 2015–16, our market teams undertook a surveillance of the management of confidential information and conflicts of interest by the research and corporate advisory functions within investment banks and other market participants. This surveillance focused on the independence of research, staff trading and share allocations.

The project involved a thematic review of policies, procedures and practices – as well as meetings with overseas regulators, investment banks, independent corporate advisers and independent research houses.

We identified a number of areas of concern and asked firms to review their policies and procedures to ensure they meet regulatory requirements. The outcomes of the review were published in Report 486 Sell-side research and corporate advisory: Confidential information and conflicts of interest (REP 486).

Listed equity market cleanliness

We also conducted a review of the 'cleanliness' of the Australian listed equity market. Market cleanliness measures market integrity with a focus on possible insider trading and information leakage ahead of material, price-sensitive announcements. This is an important measure of market integrity, one of ASIC's strategic priorities.

Using our advanced data analytics we looked for anomalous trading ahead of material announcements. We found that 95% of material announcements exhibited no (or negligible) anomalous trading patterns ahead of an announcement in the period 1 November 2014 to 31 October 2015. The results suggest that possible information leakage and insider information ahead of material announcements has declined over the past 10 years: see Report 487 Review of Australian equity market cleanliness (REP 487).

Crackdown on unlicensed retail OTC derivative providers

We identified an increase in unlicensed conduct by retail OTC derivative providers seeking to expand their market in complex and risky products (e.g. binary options and margin foreign exchange) to new customers. These providers were using online platforms or websites to offer financial services to retail investors without the appropriate Australian financial services licence or authorisation to operate in Australia.

The increase in unlicensed conduct, and the provision of very complex and risky products to Australian investors, was of real concern to ASIC. We have issued a number of public warnings to investors and contacted providers to implement remedial actions, including:

  • removing references to Australia on their websites
  • ceasing marketing campaigns directed at Australian investors
  • adding appropriate disclaimers to websites and mobile apps
  • blocking sign-up access to Australian investors
  • educating introducing brokers and affiliates to cease targeting Australian investors
  • closing down existing Australian accounts, and
  • informing Australian investors that the entity is not appropriately licensed in Australia.

Our findings are set out in Report 482 Compliance review of the retail OTC derivatives sector (REP 482).

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Ongoing areas of focus

Our Market Supervision team has identified regulatory priorities for 2016–17. These are:

  • Cyber resilience and technology disruption: Cyber threats have become a global risk to business and financial market stability. We are actively encouraging entities to improve cyber resilience practices: see Report 429 Cyber resilience Health check (REP 429) and REP 468. We will continue to:
    • provide cyber resilience self-assessment questionnaires to select groups of market participants each quarter
    • conduct cyber resilience health checks with participants, and
    • provide information to participants on common areas of improvement.
  • Firm culture and conduct: Culture is a set of shared values and assumptions within an organisation. We want culture and conduct risk to be ‘front of mind’ for licensees so that they make changes that lift standards and disrupt and address problems early. This year we will be introducing more cultural indicators into our risk-based surveillances and, where we think there may be a problem, looking more closely to uncover problems and address them. In particular, we are reviewing attitudes to conduct risk, sound remuneration policies, management of confidential information and conflicts of interest, and supervisory frameworks and risk management.
  • Handling of confidential information and managing conflicts of interest in research and corporate advisory: The leakage of material, non-public information about a listed entity harms investor confidence and increases the risk of insider trading. We have identified a number of risk areas relating to how firms treat confidential information and conflicts of interest in sell-side research and corporate advisory: see REP 486. Regular review of controls (including policies, procedures, training and monitoring) will assist in ensuring you are appropriately managing risks.

Additional areas of focus for ASIC in 2016–17

  • Ensuring client money is appropriately handled
  • Ensuring financial stability and capital review
  • Ensuring supervisory frameworks, risk management and controls are in place
  • Ensuring appropriate product distribution for retail OTC derivatives and complex products
  • Participant suspicious activity reporting.

We encourage you to consider these priorities when reviewing your risk management framework and focus your compliance, supervisory and risk management efforts to ensure compliance with our regulatory requirements.

What you should do:

  • consider these regulatory priorities in your planning
  • use the ASIC resources available, and
  • review your business to ensure compliance and good practice.

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Key statistics (for the period January to June 2016)

  • 15 enforcement outcomes (six criminal and eight administrative)
  • 22,874 trading alerts
  • One enforceable undertaking
  • 103 market surveillance inquiries
  • 32 market participant compliance reviews.†

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Last updated: 29/06/2017 08:26