Jurisdiction - Australia
Reports and Analysis
Australia – ASX mFund Settlement Service: New Requirements For Market Participants.

6 March, 2014

 

Legal News & Analysis – Asia Pacific – Australia – Capital Markets

 

What You Need To Know

 

  • ASX has developed a new service, called “mFund”, which enables investors to buy and sell units in unlisted managed funds through ASX participants.
  • Amendments to the ASX Operating Rules and the ASX Settlement Operating Rules to facilitate the introduction of mFund will become effective on 21 March 2014. However, the actual launch date of mFund has not been announced.
 

What You Need To Do

 

  • ASX Settlement Participants

 

To participate in the mFund Settlement Service, an ASX Settlement Participant must:

    • obtain technical accreditation (under new ASX Settlement Operating Rule 18.11);
    • update all existing Sponsorship Agreements to incorporate the updated minimum terms; and
    • establish two additional Payment Facilities (ie in addition to its existing Payment Facility – one is required for mFund applications and one for mFund redemptions) for the mFund Settlement Service (as required under updated ASX Settlement Operating Rule 4.13.1).

 

  • ASX Trading Participants

 

To participate in the mFund Settlement Service, an ASX Trading Participant must have arrangements in place with an appropriately accredited Settlement Participant, and must certify that it has designed and implemented procedures to ensure that applications are not submitted via the service until the Trading Participant has:

 

    • complied with the obligations in Part 2 of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) in relation to the client;
    • given the client a current version of the PDS and a copy of the mFund Settlement Service Investor Fact Sheet;
    • obtained an acknowledgement from the client (in writing or in electronic form) that the client has been given these documents; and
    • where an application has been received through an intermediary, received a representation from the intermediary that the client has received the relevant PDS and a copy of the mFund Settlement Service Investor Fact Sheet.
 

The mFund Settlement Service


After detailed consultation over the past 2 years, ASX has recently announced its new mFund Settlement Service (mFund), which enables investors to buy and sell units in unlisted registered managed investment schemes (funds) through ASX participants.
Under mFund:

 

  • ASX Trading Participants will receive an investor’s instruction to buy (ie apply for) or sell (ie redeem) interests in a participating fund;
  • application forms will be completed electronically on the Clearing House Electronic Sub-register System (CHESS) which automatically transmits the information to the responsible entity of the relevant fund (fund issuer); and
  • investors’ holdings in these funds will be held electronically and linked to the same HIN used to hold other investments transacted through ASX (eg shares).
 

The holding of an investor’s investment in these participating funds under the same HIN as the investor’s quoted investments should result in portfolio and administrative efficiencies for investors and their brokers.


The settlement of transactions through the mFund Settlement Service are governed by Rule 18 of the ASX Settlement Operating Rules.


The issue of interests in a participating fund through the service is settled on a “payment then delivery” basis. The redemption of interests in a participating fund through the service is settled on a “delivery then payment” basis.


It is also possible for an investor to switch through the service between different participating funds of the same fund issuer.


mFund transactions will settle directly with fund issuers via an ASX Settlement Participant.


Products Not Able To Be “Traded”


The mFund Settlement Service does not facilitate the purchase and sale of units in participating funds between investors in the way that ASX quoted financial products can be traded. Rather, mFund uses CHESS to automate and track the process of applying for and redeeming units in unlisted funds. Transactions through mFund can be characterised as primary market transactions rather than as transactions which result from secondary market trading. Accordingly, mFund products are not subject to many of the ASX Operating Rules which apply to AQUA Products admitted to Trading Status or the AQUA Quote Display Board.


Unit Pricing And Announcements


The current price of a participating fund’s units will be available at “www.mfund.com.au”. ASX also expects stockbrokers to make pricing information available through their own portfolio management systems.


Announcements relating to mFund products will be released through ASX’s regular market announcements service. Investors will also receive communications directly from participating fund issuers with information such as details of distributions.


Whenever there is a change in the number of units an investor holds in a participating fund, ASX settlement will issue a CHESS statement confirming the changed unit holding balance. These statements are issued at the end of each month. This is similar to the process of issuing statements in regard to CHESS holdings of ASX quoted financial products.


New Rules, Procedures And Exemptions


The following changes have been made to implement mFund:

 

  • ASX has amended the ASX Operating Rules and ASX Settlement Operating Rules, which will become effective on 21 March 2014. ASX has made copies of the Rule amendments and related Procedure amendments available on its website;

 

  • the Australian Securities and Investments Commission (ASIC) has made Class Order [CO 13/1621] to permit the use of electronic application forms and electronic confirmations that a Product Disclosure Statement (PDS) has been given; and

 

 

ASX Settlement Participant Obligations


Initial Requirements


Before an ASX Settlement Participant can participate in the mFund Settlement Service on behalf of eligible investors, it must:

 

  • obtain technical accreditation (under new ASX Settlement Operating Rule 18.11);
  • update existing Sponsorship Agreements to incorporate the updated minimum terms (discussed below); and
  • establish two additional Payment Facilities (ie in addition to its existing Payment Facility – one is required for mFund applications and one for mFund redemptions) for the mFund Settlement Service (as required under updated ASX Settlement Operating Rule 4.13.1).
 

ASX Settlement Participants should also consider whether their Financial Services Guide and any other client agreements need amendment if they are to participate in the mFund Settlement Service.


Ongoing Obligations


ASX Settlement will not accept a notice of change of controlling participant (under updated ASX Settlement Operating Rule 8.17.1) where any of the holdings comprise mFund products and the new controlling participant is not accredited in accordance with Section 18 of the ASX Settlement Operating Rules to facilitate the transfer of those products.


If any holdings to be transferred to the new controlling participant include mFund products and the new controlling participant is not so accredited, those holdings of mFund products must first be converted to issuer sponsored holdings before ASX Settlement will effect the change of controlling participant.

 

ASX Trading Participant Obligations


Initial Requirements


Before an ASX Trading Participant can participate in the mFund Settlement Service on behalf of eligible investors, it must:

 

  • have arrangements with an ASX Settlement Participant that is appropriately accredited to facilitate the settlement of “AQUA Products” (which includes mFund products). This means that where the ASX Trading Participant settles its own trades, it will need to be accredited with ASX Settlement for the mFund Settlement Service; and
  • complete the certification prescribed under ASX Operating Rule Procedure 4655(b)(i). This certification must be repeated annually as well.
 

Ongoing Obligations


Generally, ASX Trading Participants must design and implement procedures to ensure that applications are not submitted via the mFund Settlement Service until:

 

  • the ASX Trading Participant has complied with the obligations in Part 2 of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) in relation to the client;
  • it has given the client a current version of the relevant PDS;
  • it has given the client a copy of the mFund Settlement Service Investor Fact Sheet;
  • it has obtained an acknowledgement from the client (in writing or in electronic form) that the client has been given these documents;
  • where an application has been received through an intermediary, the ASX Trading Participant has received a representation from the intermediary that the client has received the relevant PDS and a copy of the mFund Settlement Service Investor Fact Sheet (which may be found on the ASX website).
 

These documents may be given to the client electronically in a way that complies with the requirements of Corporations Regulations 7.9.02A and 7.9.02B. We expect that the Fact Sheet need only be given once, and if the client has previously been given the relevant PDS, it need not be given again if the client wishes to invest in the relevant fund again.
For a fund to be admitted to participate in the mFund Settlement Service, the fund must be one which provides disclosure in the form of a shorter PDS in accordance with Part 7.9 Division 4 Subdivision 4.2C of the Corporations Regulations.


ASX Trading Participants should also consider whether their Financial Services Guide and any client agreements need amendment if they are to participate in the mFund Settlement Service.


Participants Using An Online Broker Interface


ASX Trading Participants that use an online broker interface must:

 

  • prominently display information to clients which discloses that mFund products are not traded on an open market or exchange and that clients cannot sell to or buy units from other investors on the market, and directs clients to where further information about mFund products may be obtained (prescribed under ASX Operating Rule Procedure 4655(d)); and
  • certify to ASX their compliance with the requirements in ASX Operating Rule Procedure 4655(b)(iii) in the form and manner specified by ASX within 10 business days of any material modification to the online broking interface.
 

Updating Participant Sponsorship Agreements


ASX Settlement has amended some of the ASX Settlement Operating Rules relating to the content of Sponsorship Agreements. These amendments include:

 

  • a mandatory new provision (ASX Settlement Operating Rule 7.2.2(h)) with the effect that ASX Settlement will not accept a notice of change of controlling participant (under updated ASX Settlement Operating Rule 8.17.1) where any of the holdings comprise mFund products and the new controlling participant is not accredited in accordance with Section 18 of the ASX Settlement Operating Rules to facilitate the transfer of those products; and
  • replacement of “ASX” with the term “Approved Market Operator” and other related changes. These amendments are to reflect the fact that there are Approved Market Operators other than ASX Limited (such as Chi X, APX and NSX), which use the ASX Settlement/CHESS System. They also ensure that Sponsorship Agreements contemplate the different compensation arrangements of the different Approved Market Operators.

 

Amendments to the Pro Forma Participant Sponsorship Agreement are set out in the Appendix to this document.


The changes apply from 21 March 2014. Under ASX Settlement Operating Rule 7.1.3(b) participants are required to vary the provisions of any existing Sponsorship Agreements to the extent that they are “inconsistent” with the rules (to the extent necessary in the Sponsoring Participant’s reasonable opinion). At least in relation to the first amendment mentioned above (which relates to ASX Settlement Operating Rule 7.2.2(h)), it is arguable that an existing Sponsorship Agreement will not be inconsistent with the rules where the controlling participant is not accredited to participate in the mFund Settlement Service.


To vary existing Sponsorship Agreements, ASX Settlement Participants must notify existing sponsored clients of the changes – notification should be in the manner allowed for in the Sponsorship Agreement. Clients should be given at least 7 business days notice before the amendment is to take effect.


ASX Settlement Participants should be updating their Sponsorship Agreements to include the amended minimum terms now for use for new clients.


Other Matters Relating To The mFund Settlement Service


The mFund Settlement Service is not a licensed market. The participating funds will not be listed on ASX, and interests in the funds will not be quoted or admitted to quotation or be able to be traded on mFund or ASX. Instead, funds will be “admitted to participate” in mFund by ASX.


Accordingly, participating funds are not subject to the ASX Listing Rules, and the disclosure of information by the funds is regulated by the Corporations Act 2001 (Cth) and not the continuous and periodic disclosure rules in the ASX Listing Rules.


ASX operates a compensation fund called the National Guarantee Fund. This fund covers investors in certain cases of broker misconduct, where the investor bought shares and some other investment products on ASX. As with other investments not traded on ASX, the National Guarantee Fund does not cover investments in mFund products.


Division 4 of Part 7.11 of the Corporations Act contains a number of statutory warranties which operate to provide protections in relation to transfers of financial products on a stock exchange. These statutory warranties do not apply to transactions effected through the mFund Settlement Service.

 

Ashurst Logo

 

For further information, please contact:

 

Don Maloney, Partner, Ashurst
don.maloney@ashurst.com


Con Tzerefos, Partner, Ashurst
con.tzerefos@ashurst.com


Lisa Simmons, Partner, Ashurst
lisa.simmons@ashurst.com


Michael Ryland, Partner, Ashurst
michael.ryland@ashurst.com


Sarah Galloway, Ashurst
sarah.galloway@ashurst.com


Vince Battaglia, Ashurst
vince.battaglia@ashurst.com


Matt Vitale, Ashurst
matt.vitale@ashurst.com

 

Ashurst Captial Markets Practice Profile in Australia

 

Homegrown Capital Markets Law Firms in Australia

 

Comments are closed.