ASIC Class Rule Waiver (Amendment) [CW 17/0617]

Administered by Department of the Treasury

Legislation au F2017L00794 Rules Not in force Legislative Instrument

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EXPLANATORY STATEMENT for
ASIC CLASS RULE WAIVER (AMENDMENT) [CW 17/0617]

Prepared by the Australian Securities and Investments Commission

Corporations Act 2001

The Australian Securities and Investments Commission (ASIC) makes ASIC Class Rule Waiver (Amendment) [CW 17/0617] (this instrument) under subrule 1.2.1(1) of the ASIC Market Integrity Rules (ASX Market) 2010 (the Rules). Under subrule 1.2.1(1) of the Rules ASIC may relieve any person or class of persons from the obligation to comply with a provision of the Rules. Under Rule 1.2.3 ASIC may specifiy the period during which any relief from the obligation to comply with a provision of the Rules may apply.

This instrument amends ASIC Class Rule Waiver [CW 14-1091]. Defined terms in this explanatory statement have the same meaning as in the Rules, unless the context requires otherwise.

Background

On 27 October 2014, ASIC made Class Rule Waiver [CW 14-1091] (Class Rule Waiver), providing relief to Participants of the Market operated by ASX Limited (ACN 008 624 691) (ASX) from the requirement to give confirmations to clients in Rule 3.4.1 in relation to Derivatives Markets Contracts, subject to certain conditions.

Reasons for granting the original Class Rule Waiver

On 5 August 2013, ASIC amended Rule 3.4.3 of the Rules which provides that a Market Participant does not need to comply with Rule 3.4.1 for clients other than Retail Clients, if certain information is given to the clients. The amendment to Rule 3.4.3 was to address regulatory issues arising from recent market developments, including the growing number of Market Participants establishing and operating automated services (referred to as “Crossing Systems”) that match or execute orders of their clients otherwise than on an Order Book of an exchange market (see the ASIC Market Integrity Rules (ASX Market) Amendment 2013 (No. 2).

The Class Rule Waiver was originally granted because Participants who complied with Rule 3.4.3 and accordingly did not have to comply with Rule 3.4.1 queried whether it was ASIC’s intention for Rule 3.4.3(1)(b) to apply to Derivative Market Contracts, as well as Cash Market Products. Rule 3.4.3 refers to Market Transactions, which is defined as “a transaction for one or more Products, entered into on a Trading Platform or reported to the Market Operator under the Market Operating Rules.” Further, “Product” is defined as a “Cash Market Product or a Derivatives Market Contract, as applicable.” Rule 3.4.3(1)(b), by virtue of the definition of Product, does apply to Derivatives Markets Contracts.

The Class Rule Waiver was granted to allow for consultation on that question, particularly in relation to the intended operation of the rule, the need for IT development and time for that IT development to occur. The effect of the Class Rule Waiver was to provide relief from the requirement to comply with 3.4.1 for Derivative Market Contracts, in circumstances other than those set out in Rule 3.4.3.

Reasons for extending the original Class Rule Waiver

On 29 April 2016, ASIC made Class Rule Waiver 16/0359 which extended the operation of the Class Rule Waiver [CW 14-1091] to 30 June 2017, from its original expiry date of 30 April 2016. This was due to the consultation in relation to Rule 3.4.3(1)(b) forming part of a broader package of regulatory reform. An extension to the waiver was deemed necessary to allow sufficient time for the reform package to become operational.

ASIC has consulted with a wide variety of stakeholders, including Market Operators, Market Participants and Wholesale Clients about withdrawing Class Rule Waiver [CW 14-1091] and the operation of Rule 3.4.3(1)(b) as part of Consultation Paper 277 Proposals to consolidate the ASIC market integrity rules, (CP 277) published on 24 January 2017.

The feedback from CP 277 highlighted uncertainty about the intended benefits provided by the two elements of the alternative disclosure which may be given to a client under Rule 3.4.3, whether or not the Market Participant entered into the Market Transaction as principal, and the venue of execution of the Market Transaction. The reasons given for this uncertainty were:

(a) The exchange traded options market on ASX are the only Derivative Market Contracts that this disclosure would affect;

(b) Derivative Market Contract crossings transacted on the ASX's exchange traded option market most often involve trading against principal. This is particularly the case if the wholesale client is seeking liquidity and therefore generally assumes the liquidity provider is acting as principal.

(c) Given there is currently only one functioning trading platform for exchange traded options, detailing the venue of execution is not needed at this point in time. Crossing rules for Derivatives Market Contracts also currently exclude these financial products from crossing systems as alternative execution venues.

ASIC maintains the view that it is important for Retail and Wholesale Clients to understand the capacity in which a Market Participant has filled their order, particularly where the transaction is with the Market Participant as principal. This helps ensure conflicts of interest arising from information asymmetry are appropriately managed by way of disclosure.

ASIC acknowledges, however, that the issue of information asymmetry is mitigated somewhat at present due to the different characteristics of the market for Derivative Market Contracts when compared with other markets.

In recognition of these different characteristics ASIC has decided to extend the operation of Class Rule Waiver [CW 14-1091] to 30 June 2020.

Prior to 30 June 2020 ASIC will review the circumstances of the market for Derivative Market Contracts to consider whether the relief in [CW 14-1091] remains appropriate. Examples of changing circumstances which may affect ASIC’s view of the appropriateness of continuing the relief in [CW 14-1091] include changes in market liquidity, commencement of alternative trading venues and product innovation.

2. Purpose of the instrument

This Class Rule Waiver varies [CW 14-1091] by extending the relief from the obligation to comply with the notification requirements in relation to Derivative Market Contracts in subrule 3.4.1 of the Rules until 30 June 2020.

3. Operation of the instrument

The instrument substitues the expiration date stated in paragraph 6 of [CW 14-1091] of “30 June 2017”, with “30 June 2020”.

4. Consultation

ASIC consulted on this instrument in Consultation Paper 277: Consolidating the market integrity rules, published on 24 January 2017.

ASIC Class Rule Waiver [CW 14-1091] is minor and machinery in nature. A Regulation Impact Statement was not required for this instrument as it is minor or machinery in nature and does not alter the existing requirements for Market Participants.

Overview

The ASIC Class Rule Waiver (Amendment) [CW 17/0617], made by the Australian Securities and Investments Commission (ASIC) under the Corporations Act 2001, extends the waiver of certain notification requirements for Market Participants dealing with Derivative Market Contracts until 30 June 2020. The original waiver, implemented in 2014, was intended to address uncertainties regarding the application of Rule 3.4.3 to Derivative Market Contracts and to allow for necessary consultation and IT development. This amendment responds to stakeholder feedback and aims to ensure sufficient time for regulatory reforms to be implemented while considering the unique characteristics of the Derivative Market Contracts market. The purpose of the amendment is to provide continued relief from compliance obligations, allowing for ongoing consultation and market adjustments. The instrument amends the expiration date of the original waiver from 30 June 2017 to 30 June 2020, reflecting the need for extended consultation and market evolution. ASIC has considered the feedback from Consultation Paper 277, acknowledging the unique features of the Derivative Market Contracts market which somewhat mitigates the issue of information asymmetry. By extending the waiver, ASIC aims to manage conflicts of interest effectively while allowing the market to adapt to regulatory changes and innovations. This amendment was developed following consultation and is considered minor and machinery in nature, thus not requiring a Regulation Impact Statement.

Scope and Application

The ASIC Class Rule Waiver (Amendment) [CW 17/0617] is an instrument made by the Australian Securities and Investments Commission under subrule 1.2.1(1) of the ASIC Market Integrity Rules (ASX Market) 2010, providing relief to certain persons from the obligation to comply with a provision of the Rules. Specifically, this amendment extends the relief granted by the ASIC Class Rule Waiver [CW 14-1091], which provides relief from the requirement to give confirmations to clients in Rule 3.4.1 in relation to Derivatives Markets Contracts. This waiver applies to Participants of the Market operated by ASX Limited, subject to certain conditions. The waiver was initially introduced to allow for consultation and time for IT development, particularly in relation to the application of Rule 3.4.3(1)(b) to Derivative Market Contracts. The amendment extends the relief until 30 June 2020 to allow sufficient time for a broader package of regulatory reform and to consider the appropriateness of continuing the relief in light of potential changes in market liquidity, the commencement of alternative trading venues, and product innovation. The waiver does not alter the existing requirements for Market Participants and is minor and machinery in nature, thus not requiring a Regulation Impact Statement.

Key Provisions

The ASIC Class Rule Waiver (Amendment) [CW 17/0617], as mentioned in the explanatory statement, primarily serves to extend the period of a previously granted waiver (ASIC Class Rule Waiver [CW 14-1091]) which originally provided relief to participants in the Australian Securities Exchange (ASX) market from certain notification requirements. Specifically, this waiver extends the relief period from the original expiry date of 30 April 2016 (as amended by ASIC Class Rule Waiver 16/0359) to 30 June 2020 (section 2). The amendment substitutes the expiration date in the existing waiver, altering the date from 30 June 2017 to 30 June 2020 (section 4). The key requirement or permit here is that the waiver allows ASX market participants to continue exempt from the notification obligations in Rule 3.4.1 concerning Derivative Market Contracts for an additional three years, until June 2020. This waiver imposes certain obligations on the parties it governs. Primarily, ASX market participants who are benefiting from the waiver must adhere to the conditions set forth in the original waiver and any subsequent amendments. These conditions include ensuring compliance with Rule 3.4.3, where certain information must be provided to clients. The waiver also necessitates ongoing consultation and review by ASIC to determine if the relief remains appropriate given market conditions, particularly as they pertain to Derivative Market Contracts (section 2). The explanatory statement does not explicitly outline specific offences, penalties, or civil/criminal consequences for breach of the waiver. However, it is implied that non-compliance with the conditions of the waiver or failure to adhere to the stipulated period could potentially lead to regulatory action by ASIC. The extent and nature of any such consequences would depend on the specific circumstances and the provisions of the Corporations Act 2001 and the ASIC Market Integrity Rules (ASX Market) 2010. Given that this is a class rule waiver of minor and machinery nature, it does not require a Regulation Impact Statement, and it does not alter the existing requirements for Market Participants.

Area of Law: Administrative Law
Instrument: Regulation
Concepts: Definitions & Interpretation; Regulatory Standards; Compliance Obligations

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