20 July, 2012
Legal News & Analysis – Asia Pacific – Australia – Regulatory & Compliance
In brief
On 28 June 2012, Australian Securities and Investments Commission ("ASIC") released Consultation Paper 179 – Australian Market Structure: Draft market integrity rules and guidance ("CP 179"). CP 179 marks the next stage of ASIC's consultation process with industry on issues relevant to Australian market structure. In CP 179, ASIC proposes to amend various Rules and guidance to address the following matters:
- automated trading environment;
- extreme price movements;
- enhanced data for market surveillance;
- best execution obligation;
- pre-trade transparency and price formation; and
- post-trade transparency. Responses to CP 168 are due by 6 August 2012. ASIC expects to release revised regulatory guidance and amended market integrity rules in October 2012.
Background In November 2010, ASIC released Consultation Paper 145 – Australian equity market structure: Proposals ("CP 145") to consult on market integrity rules to facilitate the introduction of competition in trading services in equity market products.
In October 2011, ASIC released Consultation Paper 168 – Australian equity market structure: Further proposals ("CP 168") with refined proposals on wider market structure issues, including pre-trade transparency, best execution obligations, algorithmic trading and direct electronic access and volatility controls.
On 3 April 2012, ASIC issued Media Release (12-61 MR) ASIC provides direction on market structure reforms, setting out a general overview of the feedback received on CP 168 and ASIC's proposed direction and timetable for implementing those proposals.
CP 179 takes the feedback received on CP 168 into account and sets out the draft market integrity rules and associated guidance, together with implementation timeframes.
Overview of key proposals
The proposals will involve amendments to the ASIC Market Integrity Rules (ASX Market) 2010 ("ASX MIR"), ASIC Market Integrity Rules (Chi-X Australia Market) 2011 ("Chi-X MIR") and ASIC Market Integrity Rules (Competition in Exchange Markets) 2011 ("Competition MIR") (together "ASIC MIR"). Regulatory Guide 223 Guidance on ASIC market integrity rules for competition in exchange markets ("RG 223") and Regulatory Guide 172 Australian market licences: Australian operators ("RG 172") will also be updated.
The following table summarises some of the key amendments to the ASIC MIR and guidance proposed in CP 179.
| TOPIC | ROPOSAL IN CP 168 | PROPOSAL IN CP 179 | TIMING |
| AUTOMATED TRADING ENVIRONMENT |
Testing of systems In CP 168, ASIC proposed a new market integrity rule to require a market participant to ensure that client algorithms were tested to ensure they would function in compliance with the ASIC MIR and all applicable market operating rules. |
ASIC no longer proposes to make a new rule on algorithm testing. Instead ASIC proposes to issue an Addendum to Regulatory Guide 172: Supplementary guidance on market licensee systems and controls ("Supplementary RG 172") to provide guidance as to ASIC's expectations for testing of systems, filters and controls and managing automated trading. | Draft rules and guidance to be released in Q3, 2012. |
|
Control over messages and monitoring In CP 168, ASIC proposed a new market integrity rule to require a market participant to have direct and immediate control over all trading messages submitted through a market participant's system, including pre-trade controls, real-time monitoring and post-trade analysis. |
ASIC proposes to make a new rule requiring direct control over filters and the ability to disable order flow (ie a "kill switch"). ASIC does not propose a new rule for real-time monitoring and post-trade analysis. Rather, ASIC intends to publish guidance clarifying its expectation for trading system controls in Supplementary RG 172. | Draft rules and guidance to be released in Q3, 2012. | |
|
Business continuity planning In CP 168, ASIC proposed a new market integrity rule to require a market participant that uses its system for AOP to have in place adequate business continuity arrangements. ASIC also proposed an annual attestation by market participants and the removal of the requirement for ASIC to have a role in acknowledging a market participant's certifications and confirmations. |
ASIC did not proceed with a new rule on business continuity arrangements. ASIC intends to publish guidance clarifying its expectations for adequate business continuity arrangements. ASIC propose to remove the requirement for notification to ASIC following material changes to AOP systems, and to introduce a new market integrity rule requiring an annual AOP system notification to be submitted to ASIC to demonstrate that an internal review has been conducted. | Draft rules and guidance to be released in Q3, 2012. | |
|
Direct electronic access In CP 168, ASIC proposed minimum standards to require market participants to understand the nature of their AOP clients' businesses, ensure AOP clients have adequate financial resources and ensure AOP clients' order management systems are tested before use. |
ASIC did not proceed with a new rule for additional minimum standards for direct electronic access. ASIC intends to publish proposed guidance making it clear that, among other things, "sponsored access" is not permitted. [We assume the reference to “sponsored access” is a reference to “naked access”, where the client connects directly to the trading platform without messages passing through the participant’s systems and controls.] | Draft rules and guidance to be released in Q3, 2012. | |
| EXTREME PRICE MOVEMENTS |
Controls for extreme price movements in equities In CP 168, ASIC proposed a new market integrity rule to require a market operator to have an automated limit up-limit down volatility control that would prevent trades from occurring in any equities product outside a specified price band when there is a significant price movement over a short period of time. |
ASIC did not proceed with the limit up-limit down proposal. ASIC proposes to amend existing rules on anomalous order thresholds and the extreme cancellation range to require that market operators should effectively minimise the incidence of transactions executing in this range. The ASIC MIR now refer to "extreme trade range" rather than "extreme cancellation range" and the new process may trigger a 10 minute pause to align with that already used for price sensitive announcements. | Implement following this consultation round |
| BEST EXECUTION OBLIGATION |
Expansion to other products In CP 168, ASIC proposed to extend the scope of the best execution obligations to apply to ASX-quoted interest rate securities, options, warrants and AQUA products.
|
ASIC will not proceed with this proposal at this stage. | No further action |
|
Public reporting on order routing and execution policy In CP 168, ASIC sought feedback on whether there were any benefits for execution venues and market participants publishing additional best execution data on order execution and handling, or the quality of execution.
|
ASIC does not intend to require best execution public reporting at this stage. | No further action | |
| PRE-TRADE TRANSPARENCY AND PRICE FORMATION |
Meaningful price improvement In CP 168, ASIC proposed to modify the "at or within the spread" exception to pre-trade price transparency to require that market participants obtain meaningful price improvements for non-disclosed orders.
|
ASIC intends to replace the "at or within the spread" exception with a requirement to obtain price improvement of one tick size or mid-point. The reference price will be the top-of-book national best and bid offer ("NBBO"). | Implement following this consultation period |
|
Minimum size for dark orders In CP 168, ASIC proposed to increase the minimum size threshold for passive dark orders from A$0 to A$50,000 if the value of dark liquidity below block size increases by 50% or more within three years from July 2011.
|
ASIC will not proceed with this proposal at this stage. | No further action | |
|
Block trades In CP 168, ASIC proposed to change the existing static A$1 million threshold for block trades with a tiered block trade regime. |
ASIC intends to proceed with the change as proposed. ASIC intends to calculate the average daily value and allocate stocks to tiers on a quarterly basis. Based on the average daily value traded for the 12 months to 30 April 2012, the A$1 million tier would have 22 stocks, the A$500,000 tier 23 stocks and the A$200,000 tier all other stocks. | Implement following this consultation period | |
|
Other pre-trade transparency exceptions In CP 168, ASIC proposed to withdraw the relevant pre-trade transparency exception waivers for certain ASX order types which ASIC considers to be rarely used or redundant, extend relevant waivers for transactions that were frequently used and introduce a new market integrity rule to confirm that primary market transactions and stock lending are not subject to the pre-trade transparency obligation.
|
ASIC intends to retain waivers for orders on the VolumeMatch book, ETF special trades and crossing of derivatives/cash combinations and make a new market integrity rule confirming that primary market and stock lending transactions are not subject to the pre-trade transparency rules. | Implement following this consultation period | |
|
Record keeping In CP 168, ASIC proposed a new market integrity rule to require a market participant to keep, for a period of seven years, records that enable the participant to demonstrate compliance with pre-trade transparency exceptions. |
ASIC intends to introduce a new market integrity rule as originally proposed. | Implement following this consultation period | |
| POST-TRADE TRANSPARENCY |
Validation of delayed reported off-order book trades In CP 168, ASIC proposed a new market integrity rule to confirm ASIC's expectation that market participants and market operators must have systems and controls in place to verify and validate that trades reported by them or to them, based on a pre-trade transparency exception, actually meet the criteria for the relevant exception. |
ASIC proposes to introduce new market integrity rules as previously proposed, expanded to include verification and validation of trades entitled to delayed publication. | Implement following this consultation period |
| Market operator's obligation to make available trading information | ASIC proposes to amend Competition MIR 5.1.6 to clarify the trading information that a market operator must make available on a website on a delayed basis of no more than 20 minutes. | Implement following this consultation period |
Suspicious activity reporting and short sale tagging
ASIC also intends to make new market integrity rules for suspicious activity reporting and short sale tagging requirements. ASIC will publish these rules and guidance shortly. The rules will not commence until January 2013 and March 2014 respectively.
Consultation process
Comments on CP 179 are due on 6 August 2012. There are a small number of areas where ASIC will continue to consult with industry with a view to publishing further draft rules and guidance soon, including draft rules and guidance on automated trading participant controls and on the format of section 912E reports. For more information about the consultation process view the ASIC website.
For further information, please contact:
Jonathan Gordon, Partner, Ashurst
Don Maloney, Partner, Ashurst