EXPLANATORY STATEMENT for
ASIC CLASS RULE WAIVER [CW 16/0352]
Prepared by the Australian Securities and Investments Commission
Corporations Act 2001
The Australian Securities and Investments Commission (ASIC) makes ASIC Class Rule Waiver 16/0352 (this instrument) under subrule 1.2.1(1) of the ASIC Market Integrity Rules (Competition in Exchange Markets) 2011 (the Competition Rules). Under subrule 1.2.1(1), ASIC may relieve any person or class of persons from the obligation to comply with a provision of the Competition Rules. Under Rule 1.2.3 ASIC may specifiy the period during which any relief from thand obligation to comply with a provision of the Rules may apply.
This instrument amends ASIC Class Rule Waiver 13/680 and is a continuance of ASIC Class Rule Waiver 15/0384.
- Background
On 4 May 2015, ASIC amended ASIC Class Rule Waiver [CW 13/680], providing 12 months relief to Participants of the Market operated by ASX Limited (ACN 008 624 691) (ASX) from subrule 4.1.1(1) of the Competition Rules. Relief was granted where a Participant enters into a Transaction in an Equity Market Product that is part of a Contingent Equity Transaction (CET).
A Participant that enters into a CET may therefore breach subrule 4.1.1(1) without the relief granted by ASIC Class Rule Waiver [CW 15/0384].
Reasons for granting the original Class Rule waiver
The Waiver was originally granted in order to:
a) facilitate CETs at a net price, which contributes to the efficiency of the broader market as it enables participants to effectively hedge their options transactions; and
b) allow post-trade transparency of the OTC equity component of the CET, as that transaction will be reported automatically by ASX.
In granting the Waiver, ASIC concluded that because the number of CETs was expected to be relatively low (ASX did not, and still does not, expect CETs to exceed 5% of total FlexClear transactions), their introduction would be unlikely to have an adverse impact on fairness, efficiency of the market, liquidity or price formation.
Furthermore, it was expected that the number of CETs would be low, so the overall effect on pre-trade transparency would be negligible.
Following the granting of the Waiver, an uptake of CETs would have facilitated an assessment of their impact on the market. However, as there have been no CETs to date such an assessment remains unfeasible.
2. Purpose of the instrument
This Class Rule Waiver varies [CW 13-680] by extending the relief for a Particpant from the obligation to comply with the pre-trade transparency obligation in subrule 4.1.1(1) of the Competition Rules by a further 12 months. The current Waiver expires on 4 May 2016 and was originally granted to monitor the impact of CETs on the lit market with regard to price formation and the fairness, efficiency and liquidity of the market. No CETs have transacted in this 12 month period and no data is available to facilitate an assessment on market impact.
A 12 month extension of the Waiver will result in an expiration date of 4 May 2017 by which time assessment of the market impact of this product can be undertaken.
The extension will enable a Participant to enter into a Transaction in an Equity Market Product that is part of a CET, without being required to comply with subrule 4.4.1(1).
3. Operation of the instrument
The instrument substitues the expiration date stated in paragraph 7C of [CW 13/680] of "4 May 2016", with "4 May 2017", thereby extending the waiver by 12 months.
4. Consultation
ASIC did not formally consult on this Class Rule Waiver, as since the relief was granted, no CETs have been traded and the circumstances have not changed since the granting of the original Class Rule Waiver 15/0384.
At the time of issuance of the original waiver, discussions were held with ASX acting on behalf of Participants who potentially would use CETs. ASX advised that these Participants were supportive of a new ASX clearing service of which CETs are an important part.
This legislative instrument is compatible with human rights as it does not raise any human rights issues.
Overview
The ASIC Class Rule Waiver 16/0352, enacted under the Corporations Act 2001, was introduced by the Australian Securities and Investments Commission (ASIC) to address a specific market condition concerning Contingent Equity Transactions (CETs). Initially, ASIC provided relief to market participants from the obligation to comply with certain pre-trade transparency rules, as detailed in subrule 4.1.1(1) of the ASIC Market Integrity Rules (Competition in Exchange Markets) 2011, to facilitate CETs. This relief was part of a broader strategy to enhance market efficiency and hedge options transactions effectively. The original waiver, which expired on 4 May 2016, aimed to monitor the impact of CETs on market fairness, efficiency, and liquidity. However, due to the lack of CETs being transacted during the initial period, no data was available to assess these impacts. To allow for a more comprehensive evaluation, ASIC extended the waiver for another 12 months, until 4 May 2017. This extension aims to enable the assessment of CETs' market impact and maintain the balance between market innovation and regulatory oversight.
Scope and Application
The ASIC Class Rule Waiver [CW 16/0352] applies to participants of the Market operated by ASX Limited, specifically those who enter into transactions involving Contingent Equity Transactions (CETs). The waiver is a continuation of previous waivers [CW 13/680] and [CW 15/0384], extending the relief from a key pre-trade transparency obligation in the ASIC Market Integrity Rules (Competition in Exchange Markets) 2011. The waiver allows participants to engage in CETs without the need to comply with subrule 4.1.1(1) of the Competition Rules for an additional 12 months, until 4 May 2017. This extension aims to provide more time for the assessment of the market impact of CETs, given that no such transactions have occurred since the waiver was initially granted. The waiver does not apply to any other obligations or rules outside of the specified relief, and no CETs have been transacted to date, meaning no assessment of market impact is currently feasible. The waiver operates by substituting the expiration date in the previous waiver with the new date, thereby extending the relief period.
Key Provisions
The ASIC Class Rule Waiver [CW 16/0352] primarily modifies the existing waiver, ASIC Class Rule Waiver [CW 13/680], by extending the relief provided to market participants from the obligation to comply with the pre-trade transparency requirement in subrule 4.1.1(1) of the ASIC Market Integrity Rules (Competition in Exchange Markets) 2011 (Competition Rules). The waiver was initially granted to facilitate Contingent Equity Transactions (CETs) at a net price and to allow post-trade transparency of the over-the-counter (OTC) equity component of these transactions. The relief, which was set to expire on 4 May 2016, is extended by an additional 12 months, thus expiring on 4 May 2017. This extension allows for further assessment of the impact of CETs on market fairness, efficiency, liquidity, and price formation.
The obligations imposed by this waiver are primarily on market participants, specifically those who enter into CETs. These participants are granted relief from the pre-trade transparency requirement in subrule 4.1.1(1) of the Competition Rules for a period of 24 months, from 4 May 2015 to 4 May 2017. This means that during this period, market participants engaging in CETs do not have to report their transactions before they occur, a requirement that is generally intended to enhance market transparency. Instead, they are only required to report these transactions post-trade, as specified in the waiver.
While the waiver itself does not impose any explicit penalties for non-compliance, it is important to note that any breach of the Competition Rules outside the scope of the waiver could lead to enforcement actions by the Australian Securities and Investments Commission (ASIC). Such breaches might attract civil or criminal penalties, as stipulated under the Corporations Act 2001, depending on the nature and severity of the breach. The potential penalties could include fines for individuals or corporations, disqualification from managing corporations, or even imprisonment in severe cases. However, these consequences are not directly related to the waiver but would apply if the waiver’s conditions were not adhered to or if other provisions of the Competition Rules were breached.