Commonwealth of Australia Explanatory Memoranda Commonwealth of Australia Explanatory Memoranda[Index] [Search] [Download] [Bill] [Help]
2008-2009-2010
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
corporations amendment (financial market supervision) bill 2010
CORPORATIONS (FEES) AMENDMENT BILL 2010
EXPLANATORY MEMORANDUM
(Circulated by the authority of the Minister for Financial Services,
Superannuation and Corporate Law, the Hon Chris Bowen MP)
Table of contents
Glossary 1
General outline and financial impact 3
Chapter 1 Amendment of obligations on operators of licensed markets 5
Chapter 2 ASIC supervision and market integrity rules 9
Chapter 3 Regulation impact statement 17
Index 27
Do not remove section break.
The following abbreviations and acronyms are used throughout this
explanatory memorandum.
|Abbreviation |Definition |
|AAT |Administrative Appeals |
| |Tribunal |
|Act |Corporations Act 2001 |
|AFMA |Australian Financial Markets |
| |Association |
|ASIC |Australian Securities and |
| |Investments Commission |
|ASX |Australian Securities |
| |Exchange |
|Bill |Corporations Amendment |
| |(Financial Market |
| |Supervision) Bill 2010 |
|Fees Bill |Corporations (Fees) Amendment|
| |Bill 2010 |
|IOSCO |International Organization of|
| |Securities Commissions |
General outline and financial impact
Outline
The Corporations Amendment (Financial Market Supervision) Bill 2010
(the Bill) amends the Corporations Act 2001 (the Act) to provide
for the Australian Securities and Investment Commission (ASIC) to
supervise trading on financial markets with a domestic Australian
market licence. The Bill contains three key measures:
. The Bill removes the obligation on Australian market
licensees to supervise their markets, replacing it with an
obligation to monitor and enforce compliance with the
markets' operating rules.
. The Bill provides ASIC with the function of supervising
domestic Australian market licensees.
. The Bill provides ASIC with additional powers including
the power to make rules with respect to trading on such
markets and additional powers to enforce such rules.
The Corporations (Fees) Amendment Bill 2010 (the Fees Bill) is a
supporting Bill which contains amendments regarding chargeable
matters in support of the measures in the main Bill. This is
required to be in a separate Bill for constitutional reasons.
Date of effect: The Bill commences on a single day fixed by
Proclamation. If commencement does not take place within 12 months
of the day the Act receives Royal Assent, then the provisions are
repealed. Commencement of the Fees Bill takes place on the date
the main Bill commences.
Proposal announced: The measures are based on proposals announced
by the Government in a media release on 24 August 2009, and
included in an exposure draft and consultation paper released on 2
December 2009.
Financial impact: Nil. The Government will incur capital costs of
approximately $6 million associated with the acquisition of the
relevant market supervision software and fitout requirements. The
total operating costs associated with ASIC's new responsibility are
expected to be $53.5 million over the five years to 2013-14. The
costs associated with preparing ASIC for the performance of the
supervisory function and the ongoing performance of supervision by
ASIC will be fully recoverable by ASIC over the forward estimates
via a levy on market operators.
Compliance cost impact: The Bill will have a compliance cost
impact on market operators and participants who will be required to
comply with the new ASIC-set market integrity rules. The amount of
compliance cost impact will depend on the rules to be set by ASIC.
As such, it is not possible to quantify the costs until the rules
are made. Also, there will be levies applied to market operators
under the Fees Bill, the details of which will be set out in the
Regulations. The cost as a result of this levy will to some degree
be offset by the fact that market operators will have lower
operational costs as a result of the removal of the obligation on
market operators to supervise trading on their markets.
Summary of regulation impact statement
Regulation impact on business
Impact: The amendments will have an ongoing regulatory impact on
market operators and participants in Australia's financial markets.
Main points:
. Supervision by ASIC will consolidate the current
individual supervisory responsibilities into one entity,
streamlining supervision and enforcement, and providing
unified supervision of trading on the market. ASIC's role
as a whole-of-market supervisor is expected to enhance the
stability and integrity of the market.
. The amendments will remove the regulatory obligation
currently imposed on market operators to supervise their
markets.
. The amendments will require market operators and
participants to comply with the ASIC-set 'market integrity
rules'.
. The amendments provide for ASIC to levy market operators
to recover the cost of supervision.
Chapter 1
Amendment of obligations on operators of licensed markets
Outline of chapter
1. The Corporations Amendment (Financial Market Supervision) Bill 2010
(the Bill) amends the obligations imposed on operators of licensed
markets, and prospective market licensees, under the Corporations
Act 2001 (the Act) with respect to supervision of their markets.
Context of amendments
2. The amendments contained in the Bill give effect to a decision of
the Government to transfer the responsibility for supervising
participants in markets from market operators to Australian
Securities and Investments Commission (ASIC) as announced jointly
by the Treasurer and the Minister for Financial Services,
Superannuation and Corporation Law on 24 August 2009
(Media Release No.093).
3. To this end, the Bill amends the obligations on Australian market
licence holders and prospective licence holders.
Summary of new law
4. The Bill amends the obligations on operators of licensed markets
with respect to supervision of their markets as set out in section
792A of the Act.
5. The Bill also amends the factors to be taken into account when the
Minister decides whether to grant a domestic Australian market
licence as set out in subsection 795B(1) of the Act.
Comparison of key features of new law and current law
|New law |Current law |
|Obligation to have |Obligation to have |
|adequate arrangements for|adequate arrangements for|
|operating the market. |supervising the market. |
|Removal of the |Obligation to have |
|obligation. |adequate arrangements to |
| |monitor the conduct of |
| |participants on or in |
| |relation to the market. |
|Obligation to have |Obligation to have |
|adequate arrangements for|adequate arrangements for|
|monitoring and enforcing |enforcing compliance with|
|compliance with the |the market's operating |
|market's operating rules.|rules. |
Detailed explanation of new law
6. The Bill amends the obligations on market licensees to reflect that
ASIC will now have primary responsibility for supervising
Australia's financial markets.
7. Under the current law, Australian market licence holders are
required to have arrangements for supervising their markets,
including monitoring the conduct of participants. Australian
market licensees are also required to have sufficient resources to,
amongst other things, supervise their market.
8. The Bill changes these obligations. The Bill instead provides for
market licensees to have adequate arrangements for operating their
market, including for monitoring and enforcing compliance with the
market's operating rules. Market licensees will still need
sufficient resources for operating the market. [Schedule 1, items
7 and 9]
9. This change reflects the decision of the Government to have ASIC
take over responsibility for the supervision of domestic licensed
financial markets. However, market operators will retain the
responsibility for making sure participants admitted to their
market comply with the operating rules. The Bill requires market
operators to monitor and enforce compliance with the market's
operating rules. Operating rules include the listing rules set by
markets, responsibility for the supervision of which has not been
transferred to ASIC. [Schedule 1, item 8]
10. The Bill extends the changes to the obligations on market operators
to the circumstances which are to be considered by the Minister
when deciding whether to grant a domestic Australian market licence
under subsection 795B(1) of the Act. Specifically, the Bill
requires the Minister to consider whether the applicant has
adequate arrangements for operating the market, and for monitoring
and enforcing compliance with the market's operating rules.
[Schedule 1, Item 12] , [Schedule 1, Item 13]
11. Changes were not made to subsection 795B(2) of the Act, relating to
any application for an Australian market licence in respect of an
overseas market, as such operators will be subject to the changes
by implication. The Act already provides that an overseas market
can only be granted a licence where the Minister is satisfied that
the regulatory regime the market is subject to is sufficiently
equivalent to Australia's.
Application and transitional provisions
12. All provisions in the Bill, including the ones altering the
obligations on market operators and applicants, will take effect on
a date fixed by Proclamation. If commencement does not take place
within 12 months of the day the Act receives Royal Assent, then the
provisions are repealed. Commencement of the Corporations (Fees)
Amendment Bill 2010 (the Fees Bill) takes place on the date the
main Bill commences. [Schedule 1, Item 34, section 1511]
13. The 12 month time period for commencement is necessary, as there is
a considerable amount of transitional work to be done in order for
ASIC to be capable of performing the supervisory functions,
including acquiring the necessary systems. This has the potential
to take a significant amount of time and possibly longer than six
months but less than a year. It is appropriate that the provisions
be repealed if the Bill does not commence within a year, as it is
not appropriate to have the obligations on market operators amended
without ASIC taking over responsibility for supervision.
14. The provisions applying to market licence applications apply in
relation to applications made before the commencement of the Act,
but not yet decided on when the Act takes effect. [Schedule 1,
item 34, section 1512]
Consequential amendments
15. The Bill makes consequential amendments to the qualified privilege
sections of the Act to reflect that markets will now be responsible
for operating not supervising their markets. [Schedule 1, items 17
and 18]
Chapter 2
ASIC supervision and market integrity rules
Outline of chapter
16. The Corporations Amendment (Financial Market Supervision) Bill 2010
(the Bill) inserts a new Part 7.2A into the Corporations Act 2001
(the Act) relating to Australia Securities and Investments
Commission's (ASIC's) new function of supervisor of domestic
licensed financial markets in Australia.
Context of amendments
17. At present Australian market licensees are primarily responsible
for setting rules in relation to behaviour on Australia's financial
markets. This is done through the market's operating rules.
18. As part of the decision to transfer supervisory responsibility to
ASIC, ASIC will be given the ability to set rules in relation to
Australia's financial markets and additional powers to enforce
these rules.
19. These amendments were part of an exposure draft and consultation
paper which was released for public consultation on 2 December
2009.
Summary of new law
20. The amendments confer on ASIC the function of supervising
Australia's domestic licensed financial markets.
21. The amendments establish a regime whereby ASIC can set rules in
relation to domestic licensed financial markets, and provide ASIC
with additional methods for enforcing compliance with the rules.
22. The Bill makes consequential amendments to other provisions in the
Act to reflect the establishment of a new rule making regime, and
to extend other provisions to include these rules.
Comparison of key features of new law and current law
|New law |Current law |
|Conferral of supervision |No current law. |
|functions on ASIC. | |
|Creation of market |No current law. |
|integrity rules by ASIC. | |
|Breach of market |No current law. |
|integrity rule is | |
|contravention of a civil | |
|penalty provision. | |
|Alternatives to civil |No current law. |
|proceedings. | |
Detailed explanation of new law
23. The Bill contains a variety of amendments to provide ASIC with the
tools necessary to perform supervisory functions in relation to
domestic licensed financial markets.
ASIC and financial market supervision
24. The Bill confers on ASIC the function of supervising domestic
licensed financial markets. This function involves ASIC utilising
systems to monitor the trading of financial products on domestic
licensed financial markets. Having this function will allow ASIC
to more easily detect and enforce the market misconduct provisions
in the Act as well as enforce the new rules which it will make.
[Schedule 1, item 14, section 798F]
25. A decision was made not to require ASIC to directly supervise
overseas financial markets which are licensed to operate in
Australia as the Act allows such markets to operate in Australia on
the basis of sufficiently equivalent regulation.
Market integrity rules
26. The Bill provides for ASIC to make market integrity rules. These
market integrity rules can deal with the activities and conduct of
licensed markets, and of persons in relation to licensed markets
and financial products traded on licensed markets. [Schedule 1,
item 14, subsection 798G(1)]
27. ASIC intends to consult with stakeholders regarding the
introduction of the proposed market integrity rules. In cases
where it is not possible to consult prior to the introduction of a
market integrity rule, ASIC intends to subsequently review
implementation arrangements relating to the rule.
28. These rules do not apply in relation to overseas markets with an
Australian market licence. This is because operators of such
markets are expected to be subject to the changes by implication.
The Act provides that an operator of an overseas market can only be
granted a licence where the Minister is satisfied that the
regulatory regime the market is subject to is sufficiently
equivalent to Australia's. In the future this would include taking
into consideration the new regulatory framework applying to
domestic Australian market licence holders. [Schedule 1, item 14,
subsection 798H(2)]
29. The Bill allows ASIC to make market integrity rules in a wide range
of areas. The current law already allows markets to make operating
rules, which also cover a wide range of areas. Operating rules and
market integrity rules will operate together, but to the extent of
any inconsistency the market integrity rule will prevail and the
operating rule will have no effect. The regime is designed to be
flexible and to allow ASIC to make rules to cover new and emerging
issues as the market adapts and innovates, while also recognising
that every market is different and needs operating rules tailored
to the specifics of that market. [Schedule 1, items 11 and 14,
subsection 798G(1)]
30. A breach of a market integrity rule will be a breach of a civil
penalty provision of the Act, and subject to a pecuniary penalty of
up to $1 million. ASIC will set a penalty amount for the breach of
a market integrity rule where it is appropriate to do so. This
reflects the broad range of matters which the market integrity
rules are expected to cover. Some rules will relate to minor and
technical or procedural matters and it will be appropriate that a
lower penalty level, or no penalty, attach to those rules.
[Schedule 1, items 14, 25 to 27, subsections 798G(2) and 798H(1)]
31. Before ASIC can make a market integrity rule, ASIC must have the
written consent of the Minister. The Bill does provide for ASIC to
be able to make a market integrity rule without the prior approval
of the Minister in emergency situations. If ASIC does so, on the
following day it must justify to the Minister in writing the need
for the rule, and revoke or amend the rule in accordance with any
written direction of the Minister. These provisions are included
to ensure that ASIC has the capacity to respond instantly to
serious emerging market situations, while also ensuring that the
role of the Minister is maintained. It is expected that ASIC will
make rules without seeking the Minister's prior consent only in
limited situations where ASIC needs to respond swiftly to a
situation and there is insufficient time to get the prior written
approval of the Minister. [Schedule 1, item 14, subsections
798G(3) to (5)]
32. The Bill states that the consent provided by the Minister for the
making of a market integrity rule, and a direction by the Minister
to ASIC to vary or revoke a rule, are not legislative instruments.
This provision clarifies that these instruments are not legislative
instruments as such documents are only interim steps in the rule
making process. The market integrity rule, when made, will be a
legislative instrument and subject to parliamentary scrutiny.
[Schedule 1, item 14, subsection 798G(6)]
33. Market integrity rules will be enforceable against operators of,
and participants in, licensed markets. The Bill also provides a
regulation making power allowing for the regulations to specify
other entities that the rules may be enforced against. This
regulation making power is needed to allow the framework to develop
to meet innovations and new players in the market. The financial
market is by nature fluid and often involves complex and changing
financial arrangements. It may be necessary to apply these rules
to additional entities. If it becomes clear that this is
necessary, the rules may need to be applied swiftly to ensure the
integrity of the market is maintained. The regulation making power
will allow the framework to adapt quickly to developments in the
market. [Schedule 1, item 14, section 798H]
Enforcement of the market integrity rules
34. The Bill provides that a breach of a market integrity rule will be
a breach of a civil penalty provision [Schedule 1, item 27]. This
enables a Court to order a person to pay a pecuniary penalty to the
Commonwealth if a declaration of contravention has been made.
However the maximum that a Court can order a person to pay for
contravention of the rule will be the amount set by ASIC in the
market integrity rule. The maximum penalty amount that ASIC can
set for breach of a market integrity rule is $1 million. This
reflects that the market integrity rules will cover a variety of
areas, and the penalties will range in severity in line with the
nature of the rule. [Schedule 1, item 28]
35. The Bill also provides for compensation orders to be made by a
Court where damage has resulted from the contravention of a market
integrity rule. The Bill does not provide for compensation orders
to be made against market operators. This is because market
operators are at the centre of the financial system, and therefore
are potentially open to claims from all participants in financial
markets for a breach of a market integrity rule. There would be
systemic risks in opening markets up to claims for compensation of
an indeterminate liability. For this reason market operators have
been excluded from the compensation provision. [Schedule 1, item
29]
36. The Bill also establishes a framework, to be developed in
regulations, for there to be alternatives to civil proceedings. It
is important that ASIC has a wide range of options at its disposal
for enforcing the market integrity rules. Currently markets have
the ability to deal with breaches of their operating rule
expeditiously and efficiently, with penalties ranging from fines,
suspension of participation and enforcing the establishment of
education and compliance programs. The Bill allows ASIC to deal
with breaches of the market integrity rules expeditiously by
providing for a person to make a payment and/or undertaking to do
something, such as instituting remedial measures or entering into
an enforceable undertaking as an alternative to civil proceedings.
If a person decides to enter into an alternative to civil
proceedings the monetary amount payable cannot exceed three-fifths
of the maximum that a court could require payment of. [Schedule 1,
item 14, section 798K]
37. The details of the alternatives to proceedings will be established
in the regulations. The regulations will establish an
infringement notice and enforceable undertaking framework under
this provision.
38. The alternatives to civil proceedings work on the basis that
persons who are alleged to have contravened a market integrity
rule, which in turn will be a breach of a civil penalty provision,
can opt to enter into an infringement notice or enforceable
undertaking with ASIC, as an alternative to ASIC pursuing the
matter in Court. Such remedies are vital to the ongoing success of
the market integrity rule framework as they provide ASIC with a
fast and effective remedy, akin to the remedies available to
markets under the current operating rule framework.
39. The regulations will also set out things such as the detailed
requirements for the issue and service of a notice, matters to be
included in the notice or undertaking, effect of the issue and
compliance with a notice or undertaking, the effect of failure to
comply with a notice or undertaking, the compliance period for a
notice or undertaking, the withdrawal of a notice or undertaking,
and the publication of the notice or undertaking. It is
appropriate that such details are set out in the regulations as
they are technical and procedural in nature.
40. The Bill provides ASIC with a power to issue directions in relation
to entities dealing in financial products, or a class of financial
products, or in relation to such dealings. This directions power
is necessary so ASIC can intervene to halt dealings in a financial
product in order to protect people and thereby ensure the integrity
of the market. For example, ASIC could direct a broker to stop
trading in a product where the dealings would lead to contravention
of the Act or a market integrity rule, or would impact on the
integrity of the market. Such directions will be enforceable by
the Court. [Schedule 1, item 14, section 798J]
Application and transitional provisions
41. All provisions in the Bill, will take effect on a date fixed by
Proclamation. If commencement does not take place within 12 months
of the day the Act receives Royal Assent, then the provisions are
repealed. Commencement of the Fees Bill takes place on the date
the main Bill commences. [Schedule 1, item 34, section 1512]
42. The Bill provides for regulations to be able to make exemptions
from and modify the legislation. Provisions which allow similar
exemption and modification are spread throughout the Act.
Including such a provision in this new Part is in line with the
construction of the Act and similar provisions applying in respect
of existing Parts. This regulation making power is needed to allow
the framework to develop to meet innovations in the market. The
financial market is by nature fluid and it may be necessary to
apply the rules differently to different entities. If it becomes
clear that this is necessary, the rules may need to be modified
swiftly to ensure the integrity of the market is maintained. The
regulation making power will allow the framework to adapt quickly
to developments in the market. [Schedule 1, item 14, section 798L]
43. In addition, the Bill allows regulations to provide for
transitional arrangements. This will allow arrangements of a
transitional nature to be implemented if it is determined that they
are required. This will be important if practical issues arise
over the coming months with the transfer of responsibility for
supervision from market operators to ASIC. [Schedule 1, item 34,
section 1513]
Consequential amendments
44. The Bill proposes a number of consequential amendments to other
provisions in the Act to reflect the new functions of ASIC.
45. The Bill updates provisions to refer to the new form of civil
penalty and new directions power. [Schedule 1, items 1 to 4 and
15]
46. The Bill extends the application of qualified privilege provisions
to the giving of information to ASIC in relation to a contravention
or suspected contravention of a market integrity rule. This is
important to ensure concerns about breaching confidentiality do not
prevent ASIC from being able to perform its functions. [Schedule
1, item 16]
47. The Bill amends the court order provisions of the Act to apply to
contraventions of market integrity rules. This ensures that a
Court has wide powers to issue orders which the Court deems
necessary when hearing a case concerning the contravention of a
market integrity rule. [Schedule 1, items 19 to 23 and 30 to 33]
48. The Bill also excludes certain decisions from review of the
Administrative Appeals Tribunal (AAT). This is done to remove any
doubt and to confirm that such decisions are not subject to AAT
review. It is appropriate that such decisions are not subject to
review by the AAT, as the decisions excluded are more akin to
policy and rule-making decisions and should not be subject to merit
review. [Schedule 1, item 24]
Supporting amendments
49. The Bill confers new functions and responsibilities on ASIC. The
Wallis Inquiry, which reported in 1997, made a recommendation that
regulatory agencies should collect enough revenue from the
financial entities which they regulate to fund themselves. The
principle is that for reasons of equity and efficiency, the costs
of financial regulation should be borne by those who benefit from
it.
50. In line with this principle, the Fees Bill provides ASIC with the
ability to impose a fee on market operators in relation to the
functions it will be performing under the Bill. The Regulations
will specify how the fee will be calculated and when it will be
imposed. [Schedule 1, items 1 and 5 of the Corporations (Fees)
Amendment Bill 2010]
51. The Bill places no cap on the amount that ASIC can charge in
relation to the performance of its supervisory functions [Schedule
1, item 3 of the Corporations (Fees) Amendment Bill 2010]. This is
because the amount it will cost to supervise the market, and
therefore also the amount it will be necessary for ASIC to recover,
will change dramatically as financial markets enter and leave
Australia, and as the amount of trades executed on markets in
Australia fluctuate in response to market conditions. The formula
for calculation of the levy on market operators will be set out in
the Regulations and will be consulted upon with industry before
being introduced. [Schedule 1, item 4 of the Corporations (Fees)
Amendment Bill 2010]
52. The commencement of the Fees Bill is linked to the commencement of
the main Bill as the two bills are connected. The Fees Bill will
come into effect on the same date that the Bill does. Do not
remove section break.
Chapter 3
Regulation impact statement
Assessing the Problem
Conflict of interest issues
53. Under section 795B of the Corporations Act 2001 (the Act), an
Australian market licence may be granted to an applicant if the
Minister is satisfied that, among other things, the applicant has
adequate arrangements for supervising the market, including
arrangements for handling its commercial conflicts of interest,
monitoring the conduct of participants, and enforcing compliance
with the market's operating rules. The Act also requires that
market operators ensure their markets are fair, orderly and
transparent.
54. At present, there are 16 licensed financial markets operating
in Australia, five of these being licensed overseas markets. The
largest of these is the Australian Securities Exchange (ASX) which
as at 30 June 2009 had a domestic market capitalisation of AUD
$1.09 trillion. For the month of December 2009 there were
9,349,000 equity trades on the ASX market.
55. Australian Securities and Investments Commission (ASIC) annually
assesses market licensees' compliance with their supervisory
obligations, including their conflict of interest arrangements.
Failure to adequately supervise a market can result in the Minister
directing the market licensee to do specified things to promote
compliance, suspension of the licence or cancellation of the
licence.
56. Australian market licensees work closely with ASIC, which is
responsible for enforcing the corporations legislation. Market
operators are obliged under the Act to notify ASIC of certain
matters, including suspected contraventions of the market's
operating rules or the Act and matters that may adversely affect
the ability of a participant to meet its obligations as a financial
services licensee. As such, market operators are effectively the
primary identifiers and referrers of instances of on-market trading
misconduct to ASIC. ASX and ASIC have a Memorandum of
Understanding which provides guidance on the referral of
supervisory matters from ASX to ASIC.
57. Market operators are also the primary determiners of acceptable
conduct by participants on Australia's financial markets, as market
operators are responsible for setting and enforcing their own
operating rules. Operating rules cover areas such as client-
participant relations and rules regarding the preventing of
manipulative trading.
58. There has been strong public criticism recently that market
operators have an inherent conflict of interest between their
supervisory obligations and the operation of their market. Some
have stated that the commercial interests of market operators may
encourage them to maximise transaction volumes without due regard
for market integrity. Commentary has included:
. Professor Clarke from the University of Technology Sydney
stated in The Australian on 12 March 2008 that ASX had
done a good job with compliance, but 'the time had come
for the ASX to end its conflict of interest by spinning
out its regulatory and supervisory division'.
. Commonwealth Bank of Australia chief executive
Mr Ralph Norris on the front page of the Australian
Financial Review on 22 April 2008 stated that the ASX has
failed to properly regulate the stock market because it
cannot overcome an inherent conflict in its interest as
both the market regulator and listed, profit seeking
company. He added, 'I don't believe the ASX can be both
market participant and a regulator'.
. An article by Adele Ferguson in The Australian in June
2009 stated that 'As a listed entity, the ASX is one of
the few exchanges in the world that has been allowed to
keep all its supervisory powers intact and continue to
police its own customers. As one market watcher once
said: "Having this dual role is like the police force
being allowed by law to operate a money making business
alongside its regulatory duties. The obvious conflict of
interest would undermine law enforcers' capacity to
perform their duties efficiently" '.
59. Confidence in the integrity of the financial system is central to
its operation. Perceptions of conflicts of interests in market
operators supervising themselves remain, despite the significant
improvements in conflict handling arrangements made by markets such
as the ASX. The continued perception of the presence of conflicts
of interests could result in decreased confidence in the integrity
of the market by market participants, which in turn could lead to
individuals being unwilling to invest in the market for fear of
market misconduct, potentially affecting the liquidity and
stability of the market. Confidence is particularly important in
times of global market uncertainty such as those recently
experienced.
Current arrangements preclude competition between market operators
60. In addition, the current regulatory arrangements effectively
preclude the consideration of competition in the same listed
securities between market operators in Australia. In the last
three years, three organisations have lodged Australian market
licence applications for trading in ASX listed securities with
ASIC. While well established in some other major jurisdictions,
allowing multiple venues to trade in the same securities is a new
development for Australia. An environment where multiple markets
trade in ASX listed securities would raise market supervision and
surveillance concerns never before confronted in Australia.
61. For example, the shareholders in AXE ECN Pty Ltd, one of the
companies which has made an application for a market licence to
trade in ASX listed securities, are large investment banks and
brokers. Five of these shareholders are also participants on the
ASX market and are among the ten largest participants in terms of
volume and value of market turnover. If a market licence was given
to AXE ECN Pty Limited these banks and brokers would individually
trade on the AXE market and also the ASX market, while also partly
owning a direct competitor to the ASX. Under the current
regulation market operators are required to supervise trades on
their market, take disciplinary action where breaches of the market
rules occur and notify ASIC of any misconduct on the market. The
potential would arise for ASX to perform their supervisory
functions, including investigation and disciplining, against the
substantial shareholders of a competing market operator. This
would create a serious conflict of interest which would be
difficult to adequately manage. At the very least, there would be
a perception that ASX was not exercising its powers impartially,
but in a way that would damage those brokers with a stake in its
competitor, or who are major users of a competitor's market. This
would have a chilling effect on competition. Similarly there would
be concerns about the impartiality of an operator supervising a
participant that is also a major shareholder in the operator.
62. Issues also arise concerning the detecting of market misconduct
when trading in the same securities takes place on multiple
markets. If a person can trade the same securities on different
markets which are supervised independently of each other, it is
easier to conceal market misconduct. Market misconduct may involve
trading activities on more than one market.
63. For example, the offence of market manipulation can involve
creating the false or misleading appearance of active trading of a
financial product on a financial market. The 'false or misleading
appearance' aspect arises where a person trades with themselves or
an associate in an attempt to create a false impression of demand
for a financial product, and consequently increase the price for
the financial product. Where there are multiple markets trading in
the one security this sort of misconduct would be more difficult to
detect. It would be possible for an individual seeking to make a
false or misleading impression of demand for a product to trade
with themselves on multiple markets. As the conduct would be
dispersed across different markets, the actions being performed on
each of those individual markets may seem innocuous. It would
require a whole-of-market view to pick up the offensive behaviour.
64. As this example shows it may not be possible to identify potential
misconduct only by observing what occurs on one market; and
intervention to prevent or take disciplinary action against
suspected misconduct may require co-ordinated action by different
market operators. The potential for misconduct to occur undetected
if ASX listed securities were able to be traded on markets other
than the ASX means that the current regulatory regime, whereby
markets self supervise, effectively precludes the consideration of
competition for market services.
Objectives of Government Action
65. Confidence in the integrity of the operation of the market is
central to its effective functioning. The present situation
whereby the market operators set their rules and supervise
compliance with those rules raises a number of significant issues,
as outlined above.
66. The objective of Government action in this area is to improve
confidence in the integrity of Australia's financial markets by
removing the perceived conflict of interest which markets have in
supervising their own markets and also to create a regulatory
framework which, should competition amongst financial markets be
progressed in Australia, would allow for more efficient and
effective supervision of cross-market trading activity.
Options
67. The International Organization of Securities Commissions (IOSCO)
has previously stated in relation to approaches to financial market
supervision that 'there is no universal right regulatory path to
follow' and 'there does not appear to be a definitive blueprint
that can be adopted by all jurisdictions'. Nevertheless, in the
last decade, there has been a clear move in major jurisdictions
towards centralised and independent regulation or, in some cases,
government regulation of markets and/or market participants.
Canada has introduced independent, non-government supervision of
trading activity in all of its equity security markets, while the
United States has separated participant supervision from market
supervision and established a non-government, industry supervisor
for market participants. In the United Kingdom, the Financial
Services Authority, an independent non-governmental body given
statutory powers, regulates company listings.
68. The move towards centralised or independent regulation in
comparable jurisdictions is a direct result of the conflict of
interest issues which arise when market operators are responsible
for supervision. Australia cannot realistically adopt the non-
government model due to the lack of a suitably equipped industry
body, consequently a Government entity needs to take on this role.
69. Two possible options were identified and dismissed for not
adequately addressing the issue. These options are:
. providing for industry to establish a private company
which would be responsible for the supervision of the
markets - unlike in the United States and Canada which
have long established industry self-regulators, there is
not a readily identifiable organisation or market
stakeholder that might seek, and be competent to perform,
such a not for profit role. In addition, supervisory
responsibility is a serious function, central to
maintaining market integrity and confidence. As such
there is a need for significant Government accountability
in the performance of this function which would not be
obtainable if it was given to a private body to perform;
and
. establishing an independent whole-of-market supervisor:
the cost of establishing a new entity is a fundamental
impediment to this option.
70. Two main options were identified. These are set out below.
Option One: Retain the status quo (no regulatory action)
71. Section 792A of the Act requires holders of an Australian market
licence to have in place adequate arrangements for supervising the
market including:
. handing conflicts between the commercial interests of the
licensee and the need for the licensee to ensure the
market is fair, orderly and transparent;
. monitoring the conduct of participants on or in relation
to the market; and
. enforcing compliance with the market's operating rules.
72. Australian market licensees are currently required to manage their
conflicts of interests and conduct supervision of their respective
markets and are subject to annual compliance assessments by ASIC.
Option Two: Move to a Government whole-of-market supervisor
73. A single whole of market supervisor would consolidate the current
individual supervisory responsibilities into one entity,
streamlining supervision and enforcement, and providing supervision
of trading on Australia's domestic financial markets.
Consequently, a whole-of-market supervisor would be expected to
enhance stability in the market.
74. The transfer of supervisory responsibility to ASIC would address
the need for an effective whole-of-market supervisor. It would
also allow for the Government to undertake the development of a
framework of common rules required for all markets. This would in
turn allow for consideration of the outstanding market licence
applications, which have been awaiting consideration.
75. ASIC would perform similar functions to the present market
supervisors. Specifically ASIC would: supervise participants who
trade on Australia's markets, monitor market conduct and trading
activity, create rules and enforce compliance with these rules.
Impact Analysis
Option One: Retain the status quo (no regulatory action)
76. This option would have the benefit of imposing no additional
regulatory costs on businesses, investors or the Government.
However it would result in the present situation continuing, adding
to regulatory weakness, retaining regulatory, supervisory and
enforcement gaps and negatively impacting on our market's ability
to spread risk and liquidity across more than one effective
monopoly market.
77. This option would prevent Australia from pursuing the benefits
flowing from competition between market operators, should it choose
to do so. Under the status quo the barriers to market competition
and the risks outlined in the problem section remain.
78. The only way for whole-of-market supervision to take place where
markets self-supervise is for there to be information sharing
arrangements between the market operators.
79. However information sharing arrangements between market
operators are not a satisfactory means of addressing this
supervisory issue for a number of reasons. Firstly, as stated
above, this option does not address the inherent conflict of
interest problem which occurs when market operators supervise
themselves. Secondly, such arrangements between competitors are
problematic. Thirdly, information sharing arrangements do not
provide for sufficient whole-of-market supervision. The likely
outcome is that relevant market misconduct information is likely to
fall between the cracks.
Option Two: Move to whole-of-market supervision by ASIC
80. An entity under the jurisdiction of the Commonwealth Government is
the most appropriate body to provide whole-of-market supervision.
The present situation whereby the market operators supervise
themselves raises a number of significant issues, as outlined
above. In addition, unlike in comparable jurisdictions overseas,
there is no organisation or market stakeholder in Australia who
might seek and be competent to perform a not for profit supervisory
role. As such it is necessary that the Commonwealth Government
take on the role of market supervision. ASIC is the Government
body most appropriate to take on responsibility for supervision of
Australia's financial markets. ASIC has increased its proximity to
the market during its recent organisational restructure, and
considers it is capable of performing this function.
81. The Australian Financial Markets Association (AFMA), Australia's
peak industry association for Australia's wholesale banking and
financial markets, has conducted an analysis on the market
supervision issue and advocated the transfer of whole-of-market
supervisory responsibilities to ASIC.
82. This option would have the benefit of eliminating the real or
perceived conflict issues which exist in the current model of
market self-regulation and would also provide a mechanism for whole-
of-market regulation and surveillance. The transfer of supervisory
responsibility to ASIC would allow for one body, ASIC, to be
responsible for ensuring compliance with the corporations
legislation and any ASIC set rules, consequently adding to the
integrity of Australia's markets. A single whole-of-market
supervisor would consolidate the current individual supervisory
responsibilities into one entity, streamlining supervision and
enforcement, and providing complete supervision of trading on the
market. Consequently, ASIC's role as a whole-of-market supervisor
would be expected to enhance stability in the market.
83. This option would affect the Government and market operators in
Australia's financial market. The impact on the Government would
be derived from the transferring of a responsibility which is
currently performed by market operators to ASIC.
84. Market operators would likewise be affected. The removal of
responsibility for supervision of participants and trading would
reduce the regulatory burden on market operators. It would also
make it possible for ASIC to consider the outstanding market
licence applications.
85. Market operators and participants on Australia's financial markets
will be affected to the extent that they will be required to comply
with any rules which are set by ASIC. The extent of any compliance
costs will be determined by the rules which ASIC makes and as such
can not be quantified at this stage.
86. The Wallis Inquiry, which reported in 1997, made a recommendation
that regulatory agencies should collect enough revenue from the
financial entities which they regulate to fund themselves. The
principle is that for reasons of equity and efficiency, the costs
of financial regulation should be borne by those who benefit from
it. It is intended that the costs associated with the
establishment and ongoing operations of the new whole-of-market
supervisor will be fully recoverable by ASIC via a levy issued
against market operators. When the levy is issued it will impose a
direct cost on the market operator. The cost of the levy for
market operators will depend on the method of calculation, which
will be determined at a later date by amendments to the
Corporations (Fees) Regulations 2001. A separate regulation
impact statement will be prepared for these amendments to the
Regulations.
87. It is intended that the imposition of fees by ASIC on market
operators will not have a significant impact on the cost of trading
on financial markets in Australia. The Government's decision to
transfer supervisory responsibility to ASIC will remove the
regulatory obligation on market operators to supervise their
markets. It is expected that this saving to operators will be
offset by their need to pay the ASIC fees. This cost recovery
proposal has similarities to the ways in which costs are recovered
from market operators and/or market users by a number of self-
regulatory organisations responsible for market supervisory
activities globally.
Consultation
88. A draft bill and consultation paper (the Paper) were released for
public comment on 2 December 2009. In addition Treasury officials
conducted roundtable discussions with industry groups, Australian
market licensees, and Australian market licence applicants on the
paper.
89. The paper sought comments on the proposed regulatory framework,
including the establishment of ASIC as a whole-of-market
supervisor, the creation of ASIC set market integrity rules, and
the provision of additional enforcement powers to ASIC.
90. There were 23 submissions to the paper, including submissions from
the ASX, the AFMA, the Stockbrokers Association of Australia, the
Investments & Financial Services Association, the Australian
Bankers Association and Chi-X Australia Pty Limited.
91. Most submissions were supportive of the proposal for ASIC to take
on the role of market supervisor. Based on comments provided in
the submissions to the Paper minor changes were made to the Bill.
Conclusion and Recommended Option
92. This document outlines a range of possible policy options to
address the issues which arise with the current regulation of
market supervision in Australia. Options considered include:
. retaining the status quo (no regulatory action); and
. moving to a whole-of-market supervision to ASIC.
93. Based on the impact analysis outlined above, option 2 has been
selected as the recommended approach. This option achieves the
regulatory outcome of enhancing confidence in the integrity of
Australia's financial markets without imposing significant
regulatory burden. This option primarily proposes to alter the
body which performs the supervisory function, transferring the
supervisory responsibility from individual markets to a statutory
whole-of-market supervisor. Although minimal transitional
regulations may be required to ensure continued market integrity
over the transfer period, any such regulations would be designed to
have minimal regulatory impact on markets and participants. In
addition, any such regulations would take place via regulatory
amendment and would be subject to an additional regulation impact
statement.
94. The other options fails to sufficiently address the identified
issue as they would retain the real or perceived conflict of
interest associated with market operators supervising their own,
and others', markets and would inhibit the development of
competition in Australia's financial market.
Implementation and Review
95. The Government will continue to monitor the application of the
regime to ensure that it is operating effectively.
Index
Schedule 1: Supervision of financial markets
|Bill reference |Paragraph |
| |number |
|Items 1 to 4 and 15 |2.30 |
|Items 1 and 5 of the Corporations (Fees) |2.35 |
|Amendment Bill 2010 | |
|Item 3 of the Corporations (Fees) Amendment |2.36 |
|Bill 2010 | |
|Item 4 of the Corporations (Fees) Amendment |2.36 |
|Bill 2010 | |
|Items 7 and 9 |1.8 |
|Item 8 |1.9 |
|Items 11 and 14, subsection 798G(1) |2.14 |
|Item 12 |1.10 |
|Item 13 |1.10 |
|Item 14, section 798F |2.9 |
|Item 14, subsection 798G(1) |2.11 |
|Item 14, subsections 798G(3) to (5) |2.16 |
|Item 14, subsection 798G(6) |2.17 |
|Item 14, section 798H |2.18 |
|Item 14, subsection 798H(2) |2.13 |
|Item 14, section 798J |2.25 |
|Item 14, section 798K |2.21 |
|Item 14, section 798L |2.27 |
|Items 14, 25 to 27, subsections 798G(2) and |2.15 |
|798H(1) | |
|Item 16 |2.31 |
|Items 17 and 18 |1.15 |
|Items 19 to 23 and 30 to 33 |2.32 |
|Item 24 |2.33 |
|Item 27 |2.19 |
|Item 28 |2.19 |
|Item 29 |2.20 |
|Item 34, section 1511 |1.12 |
|Item 34, section 1512 |1.14, 2.26 |
|Item 34, section 1513 |2.28 |