ASIC CLASS RULE WAIVER [CW 12/1710]
EXPLANATORY STATEMENT
Prepared by the Australian Securities and Investments Commission
ASIC Market Integrity Rules (Competition in Exchange Markets) 2011
The Australian Securities and Investments Commission (ASIC) makes this instrument under subrules 1.2.1(1) and (3) 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 subrule 1.2.1(3), ASIC may withdraw a waiver given under subrule 1.2.1(3).
1. Background
Competition Rules
In April 2011, ASIC made the Competition Rules, which form part of the regulatory framework for competition between exchange markets.
The Competition Rules apply to a participant (Participant) of a financial market (Market) on or through which offers to acquire or dispose of certain financial products, including Equity Market Products (as defined in Rule 1.4.3), are made or accepted, the operator of which is licensed under subsection 795B(1) of the Corporations Act 2001. These Markets currently include the financial markets operated by ASX Limited (ASX) and Chi-X Australia Pty Ltd (Chi-X).
Pre-trade transparency exceptions
Rule 4.1.1(1) of the Competition Rules provides that, subject to Rule 4.1.1(2), a Participant must not enter into a transaction in an Equity Market Product unless the transaction is entered into by matching of a “Pre-Trade Transparent” order (being an order for which information such as price and volume is made available before execution) on an order book of a Market. Rule 4.1.1(1) reflects the importance of pre-trade transparency to the price formation process and fair and efficient markets.
Rule 4.1.1(2) of the Competition Rules lists the exceptions to the requirements of Rule 4.1.1(1). Participants are not required to comply with Rule 4.1.1(1) in relation to:
(a) Block Trades;
(b) Large Portfolio Trades;
(c) Trades At or Within the Spread;
(d) Permitted Trades during the Post-Trading Hours Period;
(e) Permitted Trades during the Pre-Trading Hours Period; and
(f) Out of Hours Trades,
as defined in Rule 1.4.3 of the Competition Rules.
The exceptions in Rule 4.1.1(2) of the Competition Rules preserved the substance of a number of existing exceptions to pre-trade transparency that were available to Participants of
ASX immediately prior to 31 October 2011, and applied them consistently across Markets.
ASIC Class Rule Waiver [CW 11/1103]
On 27 October 2011, ASIC made ASIC Class Rule Waiver [CW 11/1103] relieving Participants from the obligation to comply with Rule 4.1.1(1) of the Competition Rules in relation to a number of other types of transactions that fall outside the pre-trade transparency exceptions in Rule 4.1.1(2).
Paragraph 4 of ASIC Class Rule Waiver [CW 11/1103] relieved Participants from the obligation to comply with Rule 4.1.1(1) of the Competition Rules, during the period from 31 October 2011 to 31 December 2012 (inclusive), in the case where the Participant entered into:
(a) ETF Special Trades;
(b) Transactions on the “VolumeMatch” order book;
(c) Index Replicating Special Crossings;
(d) Underwriting Disposal Special Crossings;
(e) Exchange Approved Special Crossings;
(f) Completion of Order Special Crossings;
(g) Crossings of a Derivative/Cash Combination,
Paragraph 5 of ASIC Class Rule Waiver [CW 11/1103] relieved Participants from the obligation to comply with Rule 4.1.1(1) of the Competition Rules to allow Participants to enter into a crossing on the basis of the “Best Available Bid” and “Best Available Offer” across all order books not including PureMatch, for a transitional period from 31 October 2011 to 1 March 2012 (inclusive). On 2 March 2012, paragraph 5 of ASIC Class Rule Waiver [11/1103] was amended by ASIC Class Rule Waiver [12/233] so that the relief in that paragraph would apply until withdrawn.
Paragraph 6 of ASIC Class Rule Waiver [11/1103] relieved Participants from the obligation to comply with Rule 4.1.1(1) of the Competition Rules in relation to:
(a) the terms of an Equity Market Product, including a redemption;
(b) a primary market action, including an issue or allotment of, application or subscription for, an Equity Market Product, or acceptance of an offer under an Off-Market Bid; or
(c) the delivery of an Equity Market Product under a Securities Lending Arrangement.
CP 168 and REP 290
In Consultation Paper 168: Australian Equity market structure: Further proposals (CP 168), ASIC proposed (at G5) to withdraw the waiver from Rule 4.1.1(1) for Index Replicating Special Crossings, Underwriting Disposal Special Crossings, Exchange Approved Special Crossings and Completion of Order Special Crossings, on the basis that these Transaction types are rarely used or redundant (see CP 168 at paragraph 365).
ASIC also proposed in CP 168 to extend the waiver from Rule 4.1.1(1) for ETF Special Trades, Transactions on the “VolumeMatch” order book and Crossings of a Derivative/Cash Combination, on the basis these Transaction types were more frequently used or related to relatively new products (see CP 168 at paragraph 365).
In CP 168, ASIC also proposed to make a new market integrity rule confirm that primary market transactions (such as issuance allotment, subscription or takeover bid) and stock lending or stock borrowing transactions were not subject to the pre-trade transparency obligations in Part 4.1 of the Competition Rules, on the basis it was not ASIC’s intention that these activities should be caught by the rules.
In Report 290: Response to submissions on CP 168 Australian equity market structure: Further proposals (REP 290), ASIC confirmed it intended to proceed with these proposals.
Volumematch
On 10 October 2012, ASX announced that its VolumeMatch facility will be discontinued from 10 November 2012 (see ASX Circular No: 471/12).
ASIC Market Integrity Rules (Competition in Exchange Markets) Amendment 2012 (No. 1)
On 27 November 2012, the ASIC Market Integrity Rules (Competition in Exchange Markets) Amendment 2012 (No. 1) introduced a new Rule 4.1.8 into the Competition Rules which provides that Part 4.1 does not apply to Transactions arising from:
(a) the terms of an Equity Market Product, including a redemption;
(b) primary market actions, including an issue or allotment of, or an application or subscription for, an Equity Market Product;
(c) acceptance of an offer under an Off-Market Bid; and
(d) the delivery of an Equity Market Product under a Securities Lending Arrangement (see item [113] of Schedule 1 to that instrument).
The ASIC Market Integrity Rules (Competition in Exchange Markets) Amendment 2012 (No. 1) will also amend the pre-trade transparency exception in Rules 4.1.1(2)(c) and 4.2.3 of the Competition Rules for a “Trade At or Within the Spread” to an exception for a “Trade with Price Improvement), on 26 May 2013 (see items [110] and [118] of Schedule 1 to that instrument).
2. Purpose of this Class Rule Waiver
Paragraph 4 – withdrawal of [CW 11/1103] and [CW 12/233]
Paragraph 4 of this Class Rule Waiver withdraws Class Rule Waivers [CW 11/1103] and [CW 12/233] from no earlier than 1 January 2013, to facilitate the consolidation and refinement of relief from the pre-trade transparency requirements in the Competition Rules.
Accordingly, the relief in paragraph 4 of [CW 11/1103] in relation to Index Replicating Special Crossings, Underwriting Disposal Special Crossings, Exchange Approved Special Crossings, and Completion of Order Special Crossings will expire on 31 December 2012 and will not be extended.
The relief in that paragraph in relation to Transactions on the VolumeMatch order book is no longer required in light of the discontinuation of the VolumeMatch service.
The relief in paragraph 5 of [CW 11/1103] in relation to primary market transactions and stock lending lending or borrowing arrangements will be withdrawn as it is no longer required in light of new Competition Rule 4.1.8.
Paragraph 5 – ETF Special Trades and Crossings of a Derivative/Cash Combination
The purpose of paragraph 5 of the Class Rule Waiver is to extend the relief for Participants from Rule 4.1.1(1) of the Competition Rules in the case of ETF Special Trades and Crossings of a Derivative/Cash Combination, as foreshadowed in CP 168 and REP 290. This relief will apply until it is withdrawn.
Paragraph 6 – Trade At or Within the Spread excluding PureMatch data
The purpose of paragraph 6 of the Class Rule Waiver is to continue the relief for Participants from Rule 4.1.1(1) to allow Participants to enter into crossings on the basis of the “Best Available Bid” and “Best Available Offer” across all order books not including PureMatch. The relief will apply until it is withdraw.
ASIC intends to withdraw the relief in paragraph 6 once PureMatch reaches a liquidity level, on average over 10 consecutive trading days, of 0.2% of the total on-market trading volume in securities quoted on PureMatch. If the relief in paragraph 6 of the Class Rule Waiver is not withdrawn prior to 26 May 2013, ASIC intends to amend the relief to reflect the changes to the pre-trade transparency exception in Rules 4.1.1(1)(c) and Rule 4.2.3 described in the Background to this Explanatory Statement.
3. Operation of this Class Rule Waiver
Withdrawn
Paragraph 4
Paragraph 4 of the Class Rule Waiver withdraws Class Rule Waivers [CW 11/1103] and [CW 12/233].
Waivers
Paragraph 5
Paragraph 5 of the Class Rule Waiver provides relief to Participants from the obligation to comply with Rule 4.1.1(1) of the Competition Rules for:
(a) ETF Special Trades; and
(b) Crossings of a Derivative/Cash Combination.
The relief only applies to a transaction entered into in accordance with the ASX Operating Rules.
The relief in paragraph 5 of this Class Rule Waiver applies until withdrawn.
Paragraph 6
Paragraph 5 of this Class Rule Waiver provides relief to Participants from the obligation to comply with Rule 4.1.1(1) of the Competition Rules in relation to a crossing done other than on an order book of a Market at or within the spread of the “Best Available Bid” and “Best Available Offer”, where the “Best Available Bid” and “Best Available Offer” are the highest “Pre-Trade Transparent” bid and offer (respectively) available across all order books, other than PureMatch, at the time of the transaction.
The relief in paragraph 6 of this Class Rule Waiver applies until withdrawn.
4. Consultation
ASIC consulted with relevant industry stakeholders before making this Class Rule Waiver.
This Class Rule Waiver continues the implementation of ASIC’s existing policy in relation to pre-trade transparency in a multi-market environment, which underwent regulatory impact assessment through the Regulation Impact Statement Competition in exchange markets (April 2011).
The consultation process for the Competition Rules included the publication of Consultation Paper 145 Australian equity market structure: Proposals in November 2010, which proposed market integrity rules to address some of the regulatory issues arising from market developments and the additional regulatory issues resulting from the introduction of competition. Further Consultation was undertaken with the publication of Consultation Paper 168 Australian equity market structure: Further proposals in February 2012.
ASIC’s announcement in FAQ A2 that PureMatch would not be included in the ‘Best Available Bid’ and ‘Best Available Offer’ followed extensive consultation with relevant stakeholders.
The consultation process culminated with the publication of ASIC Report 290 Response to Submissions on CP 168 Australian equity market structure: Further Proposals (REP 290). In that report, at 95-96, it was noted that there was widespread support for the withdrawal of waivers for orders that were rarely used/redundant and extending relief for frequently used transactions or orders that relate to relatively new products. REP 290 also stated that ASIC would introduce a new market integrity rule to confirm that primary market transactions and stock lending would not be subject to the pre-trade transparency obligation (at 95).
5. Statement of Compatibility with Human Rights
This statement is prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.
This Class Rule Waiver is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.
This Legislative Instruments does not engage any of the applicable rights or freedoms.
This Legislative Instrument is compatible with human rights as it does not raise any human rights issues.