12-281MR ASIC consults on market integrity rules for ASX 24 and FEX markets
Thursday 15 November 2012
ASIC has today released a consultation paper proposing amendments to the market integrity rules for the Australian Securities Exchange Limited derivatives market (ASX 24), and to the market integrity rules that will apply to the FEX Global Pty Ltd (FEX) derivatives market should FEX be granted an Australian market licence.
The amendments include rules on risk management, supervisory policies and procedures, foreign participants, capital and related requirements and other minor amendments.
Consultation Paper 195, Proposed amendments to ASIC market integrity rules: ASX 24 and FEX Markets (CP 195) seeks feedback on:
amendments to market integrity rules on risk management, to ensure that all market participants demonstrate prudent risk management regardless of whether they are executing business for client accounts or for house accounts on the ASX 24 and/or FEX markets;
an additional market integrity rule on supervisory policies and procedure requirements to ensure compliance by market participants with market integrity rules, operating rules and the Corporations Act for market participants that trade on the ASX 24 and/or FEX markets;
additional market integrity rules on minimum presence requirements for foreign market participants that trade on the ASX 24 and/or FEX markets and that do not hold an Australian financial services (AFS) licence to facilitate enforcement actions in Australia; and
additional market integrity rules on capital, reporting, margins and disclosure in relation to clearing arrangements for market participants that trade on the FEX market.
ASIC’s approach to the market integrity rules has been to ensure that both the ASX 24 and FEX markets, and their respective participants, are subject to the same requirements, which will contribute to a consistent regulatory approach and assist participants that participate in both markets to comply with their obligations.
ASIC recognises the increased prevalence and impact of proprietary trading firms’ activities in our markets and has proposed amended rules on prudent risk management requirements to ensure appropriate risk management is conducted on these types of trading accounts.
The proposed requirements will apply for market participants who execute trades on behalf of proprietary (house) accounts, and for market participants who solely trade their own capital (i.e. ASX 24 Principal Traders) which include:
an obligation that the participant's risk manager set, on each account, appropriate order and/or position limits based on the financial resources of the firm
that order systems must have order rejection capability; and
that maximum price change limits must also be set.
ASIC expects that the requirement for due diligence to be applied to each proprietary account which accesses the market will further mitigate against the impact of poorly programmed or ‘rogue’ algorithms and ‘fat finger’ errors.
The requirements are the same as those which have always applied to client accounts, but their application will be widened so that in future, a proprietary trading firm will be required to have prudent risk management procedures also apply to its’ account(s), regardless of whether it executes as a client of a participant, or as a participant in its own right.
ASIC expects the broader application of these requirements will create a level playing field for all users of the market and will ensure that the integrity of our markets is maintained.
CP 195 asks respondents to consider if the proposals would result in adverse or unintended consequences, raise any compliance issues and whether there are any other mechanisms to achieve the desired regulatory outcome.
ASIC has consulted at length on FEX’s application for an Australian market licence. In March 2011, ASIC released Consultation Paper 149 Application for an Australian market licence: Financial and Energy Exchange Limited, to gain feedback on FEX’s application for a licence to operate an exchange market for energy, commodity and environmental derivatives.
In May 2011, ASIC proposed market integrity rules for FEX that were modelled on the ASIC Market Integrity Rules (ASX 24 Market) 2010, and consulted on minor amendments to the ASIC Market Integrity Rules (ASX 24) (see Consultation Paper 157 Proposed ASIC market integrity rules: FEX market (CP 157)).
ASIC is finalising its advice on the FEX application for an Australian market licence to the Minister for Financial Services and Superannuation, who is ultimately responsible for granting the licence.
ASIC is seeking feedback on the proposals in CP 195 by 21 December 2012.
ASIC is responsible for supervising domestic licensed financial markets in Australia. As part of its supervisory responsibilities, ASIC makes market integrity rules and monitors compliance with those rules by market participants.