ASIC MARKET INTEGRITY RULES (FEX MARKET) AMENDMENT 2014 (NO. 1)
EXPLANATORY STATEMENT
Prepared by the Australian Securities and Investments Commission
Corporations Act 2001
The Australian Securities and Investments Commission (ASIC) makes the ASIC Market Integrity Rules (FEX Market) Amendment 2014 (No. 1) (the Instrument) under subsection 798G(1) of the Corporations Act 2001 (the Corporations Act).
- Enabling legislation
Subsection 798G(1) of the Corporations Act provides that ASIC may, by legislative instrument, make rules that deal with the activities or conduct of licensed markets and of persons in relation to licensed markets and in relation to financial products traded on licensed markets.
The ASIC Market Integrity Rules (FEX Market) 2013 (the ASIC Market Integrity Rules (FEX)) were made under subsection 798G(1) of the Corporations Act on 20 December 2013. The ASIC Market Integrity Rules (FEX) deal with the activities or conduct of the licensed market (the FEX Market) operated by FEX Global Pty Ltd (ACN 124 127 224) (FEX).
Capitalised terms in this Explanatory Statement refer to defined terms in the ASIC Market Integrity Rules (FEX).
2. Background
The ASIC Market Integrity Rules (FEX) were made prior to the launch of the new FEX Market and were modelled on the ASIC Market Integrity Rules (ASX 24 Market) 2010 (ASIC Market Integrity Rules (ASX 24)). ASIC's policy in relation to the ASIC Market Integrity Rules (FEX) has been to ensure those Rules differ from the ASIC Market Integrity Rules (ASX 24) only as far as is necessary to reflect the operational differences between the FEX and ASX 24 Markets. The rationale for this approach is to:
(a) contribute to a level playing field between FEX and ASX 24 in respect of the requirements placed on participants of each of these markets;
(b) minimise the opportunity for regulatory arbitrage by participants;
(c) assist participants of the FEX and ASX 24 markets to comply with regulatory obligations under the market integrity rules; and
(d) contribute to efficiency in supervision and enforcement of the market integrity rules by ASIC because the same standards of conduct will be applied.
On 5 August 2013, ASIC made the ASIC Market Integrity Rules (ASX 24 Market) Amendment 2013 (No. 2) (Amending Instrument). The Amending Instrument amended the ASIC Market Integrity Rules (ASX 24) to address regulatory issues arising from recent market structure developments, including growth in automation and innovation in electronic trading in domestic markets. In particular, the Amending Instrument was designed to address:
(a) manipulative trading practices that may be effected using trading algorithms; and
(b) inconsistencies between the regulatory provisions applicable to manipulative trading practices in our domestic futures and equities markets.
To achieve these outcomes, the Amending Instrument substituted former Rule 3.1.2 of the ASIC Market Integrity Rules (ASX 24) with a revised Rule 3.1.2 to:
(a) include circumstances of the Order a Market Participant is required to consider, including to address manipulative trading practices that may be effected through trading algorithms; and
(b) harmonise the provision relating to manipulative activity in the ASIC Market Integrity Rules (ASX 24), with the provisions relating to manipulative activity in the ASIC Market Integrity Rules (ASX Market) 2010 (ASIC Market Integrity Rules (ASX)) and ASIC Market Integrity Rules (Chi-X Australia Market) 2011 (ASIC Market Integrity Rules (Chi-X)).
These amendments were required for ASIC to continue to effectively carry out its responsibility for market supervision in the context of a changing market environment.
At the time of making the Amending Instrument, ASIC did not make equivalent amendments to Rule 3.1.2 (FEX).
In order to maximise consistency between the ASIC Market Integrity Rules (FEX) and (ASX 24) in accordance with ASIC's policy approach outlined above, ASIC has decided to replace existing Rule 3.1.2 (FEX) with a revised Rule 3.1.2 (FEX). Revised Rule 3.1.2 (FEX) is identical to revised Rule 3.1.2 (ASX 24).
3. Purpose of the Legislative Instrument
The Instrument substitutes existing Rule 3.1.2 (FEX) with a revised Rule 3.1.2 (FEX), to maximise consistency between the ASIC Market Integrity Rules (FEX) and (ASX 24). Revised Rule 3.1.2 (FEX):
(a) includes circumstances of the Order a Market Participant is required to consider, including to address manipulative trading practices that may be effected through trading algorithms; and
(b) harmonises the provision relating to manipulative activity in the ASIC Market Integrity Rules (FEX), with the provisions relating to manipulative activity in the ASIC Market Integrity Rules (ASX), (ASX 24) and (Chi-X).
Details of the Instrument are contained in Attachment A.
4. Consultation
ASIC consulted on the equivalent amendments effected by the Amending Instrument to the ASIC Market Integrity Rules (ASX 24), through Consultation Paper 202: Dark liquidity and high-frequency trading: Proposals (CP 202) released in March 2013, and meetings with industry stakeholders and information sessions for members of the Australian Financial Markets Association (AFMA), the Financial Services Council (FSC) and the Stockbrokers Association of Australia (SAA).
In May 2014 ASIC wrote to the Market Operator, FEX Global Pty Ltd, seeking feedback from the Market Operator and prospective Market Participants on the proposal to revise Rule 3.1.2 (FEX). ASIC did not receive any comments on the substance of the proposal.
5. Penalties
Subsection 798G(1) of the Corporations Act provides that market integrity rules are legislative instruments for the purposes of the Legislative Instruments Act 2003.
Subsection 798G(2) of the Corporations Act provides that market integrity rules may include a penalty amount for a rule. A penalty amount must not exceed $1,000,000. The penalty amount set out below a rule is the penalty amount for that rule.
6. Commencement of the Instrument
This instrument commences on the later of 26 May 2014 and the day on which the instrument is registered under the Legislative Instruments Act 2003.
7. Statement of Compatibility with Human Rights
A Statement of Compatibility with Human Rights is included in this Explanatory Statement at Attachment B.
8. Regulation Impact Statement
The amendments to Rule 3.1.2 (ASX 24) effected by the Amending Instrument, along with other changes made by the Amending Instrument in response to recent market developments, were the subject of Regulation Impact Statement: Australian market structure: further proposals in June 2013, which was lodged on FRLI with the ASIC Market Integrity Rules (ASX 24 Market) Amendment 2013 (No. 2).
The Office of Best Practice Regulation (OBPR) has advised that a Regulation Impact Statement is not required for this Instrument.
ATTACHMENT A
Paragraph 1 – Enabling Legislation
This paragraph provides that the Instrument is made, with the written consent of the Minister, under subsection 798G(1) of the Corporations Act 2001.
Paragraph 2 – Title
This paragraph provides that the title of the Instrument is the ASIC Market Integrity Rules (FEX Market) Amendment 2014 (No. 1).
Paragraph 3 – Commencement
This paragraph provides that the Instrument commences on the later of 26 May 2014 and the day on which the instrument is registered under the Legislative Instruments Act.
Paragraph 4 – Amendments
This paragraph provides that the ASIC Market Integrity Rules (FEX Market) 2013 are amended by omitting Rule 3.1.2 and substituting a revised Rule 3.1.2. This has the effect of harmonising the market manipulation rules of the ASIC Market Integrity Rules (FEX) with the ASIC Market Integrity Rules (ASX), (ASX 24) and (Chi-X).
Rule 3.1.2(1)(a) provides that a FEX Market Participant must not offer to purchase or sell a Contract or deal in any Contract as Principal with the intention creating a false or misleading appearance of active trading in any Contract or with respect to the market for, or the price of, any Contract, or if that offer to purchase or sell or dealing has or is likely to have the effect of creating such a false or misleading appearance. A reference in Rule 3.1.2(1)(a) to a Market Participant offering to purchase or sell a Contract or deal in any Contract as Principal includes a reference to offering to purchase, sell or deal in any Contract on its own behalf or on behalf of certain other persons (including a related body corporate of the Market Participant) specified in Rule 3.1.2(2).
Rule 3.1.2(1)(b) provides that a FEX Market Participant must not offer to purchase or sell a Contract or deal in any Contract on account of any other person where the Market Participant intends to create, or is aware that the person intends to create, or ought reasonably suspect, taking into account the circumstances of the Order, that the person has placed the Order with the intention of creating, a false or misleading appearance of active trading in any Contract or with respect to the market for, or the price of, any Contract.
In considering the circumstances of an Order, the Market Participant must have regard to certain matters set out in Rule 3.1.2(3), including whether the Order or execution of the Order would be inconsistent with the history of or recent trading in that Contract, and whether the Order is accompanied by settlement, delivery or security arrangements which are unusual.
ATTACHMENT B
Statement of Compatibility with Human Rights
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
ASIC Market Integrity Rules (FEX Market) Amendment 2014 (No.1)
This Legislative Instrument 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.
1. Overview of the Legislative Instrument
Background
The ASIC Market Integrity Rules (FEX Market) Amendment 2014 (No.1) (Legislative Instrument) is made under subsection 798G(1) of the Corporations Act 2001 (Act) and amends the ASIC Market Integrity Rules (FEX Market) 2013 (ASIC Market Integrity Rules (FEX)).
The ASIC Market Integrity Rules (FEX) deal with the activities or conduct of the licensed market (the FEX Market) operated by FEX Global Pty Ltd (ACN 124 127 224).
The ASIC Market Integrity Rules (FEX) were modelled on the ASIC Market Integrity Rules (ASX 24 Market) 2010 (ASIC Market Integrity Rules (ASX 24)). ASIC's policy in relation to the ASIC Market Integrity Rules (FEX) has been to ensure those Rules differ from the ASIC Market Integrity Rules (ASX 24) only as far as is necessary to reflect the operational differences between the FEX and ASX 24 Markets. The rationale for this approach is to:
(a) contribute to a level playing field between FEX and ASX 24 in respect of the requirements placed on participants of each of these markets;
(b) minimise the opportunity for regulatory arbitrage by participants;
(c) assist participants of the FEX and ASX 24 markets to comply with regulatory obligations under the market integrity rules; and
(d) contribute to efficiency in supervision and enforcement of the market integrity rules by ASIC because the same standards of conduct will be applied.
On 5 August 2013, ASIC made the ASIC Market Integrity Rules (ASX 24 Market) Amendment 2013 (No. 2) (Amending Instrument), amending the ASIC Market Integrity Rules (ASX 24) to address regulatory issues arising from recent market structure developments, including growth in automation and innovation in electronic trading in domestic markets. In particular, the Amending Instrument was designed to address:
(a) manipulative trading practices that may be effected using trading algorithms; and
(b) inconsistencies between the regulatory provisions applicable to manipulative trading practices in our domestic futures and equities markets.
To achieve these outcomes, the Amending Instrument substituted former Rule 3.1.2 of the ASIC Market Integrity Rules (ASX 24) with a revised Rule 3.1.2 to:
(a) include circumstances of the Order a Market Participant is required to consider, including to address manipulative trading practices that may be effected through trading algorithms; and
(b) harmonise the provision relating to manipulative activity in the ASIC Market Integrity Rules (ASX 24), with the provisions relating to manipulative activity in the ASIC Market Integrity Rules (ASX Market) 2010 (ASIC Market Integrity Rules (ASX)) and ASIC Market Integrity Rules (Chi-X Australia Market) 2011 (ASIC Market Integrity Rules (Chi-X)).
These amendments were required for ASIC to continue to effectively carry out its responsibility for market supervision in the context of a changing market environment.
At the time of making the Amending Instrument, ASIC did not make equivalent amendments to Rule 3.1.2 (FEX).
In order to maximise consistency between the ASIC Market Integrity Rules (FEX) and (ASX 24) in accordance with ASIC's policy approach outlined above, ASIC has decided to replace existing Rule 3.1.2 (FEX) with a revised Rule 3.1.2 (FEX). Revised Rule 3.1.2 (FEX) is identical to revised Rule 3.1.2 (ASX 24).
The Legislative Instrument therefore substitutes existing Rule 3.1.2 (FEX) with a revised Rule 3.1.2 (FEX). Revised Rule 3.1.2 (FEX):
(a) includes circumstances of the Order a Market Participant is required to consider, including to address manipulative trading practices that may be effected through trading algorithms; and
(b) harmonises the provisions relating to manipulative activity in the ASIC Market Integrity Rules (FEX) with the provisions relating to manipulative trading activity in the ASIC Market Integrity Rules (ASX), (ASX 24) and (Chi-X).
2. Human rights implications
The Legislative Instrument does not engage any of the applicable human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.
3. Conclusion
The Legislative Instrument is compatible with human rights as it does not raise any human rights issues.
4. Consultation
ASIC consulted on the equivalent amendments effected by the Amending Instrument to the ASIC Market Integrity Rules (ASX 24), through Consultation Paper 202: Dark liquidity and high-frequency trading: Proposals (CP 202) released in March 2013, and meetings with industry stakeholders and information sessions for members of the Australian Financial Markets Association (AFMA), the Financial Services Council (FSC) and the Stockbrokers Association of Australia (SAA).
In May 2014 ASIC wrote to the Market Operator, FEX Global Pty Ltd, seeking feedback from the Market Operator and prospective Market Participants on the proposal to revise Rule 3.1.2 (FEX). ASIC did not receive any comments on the substance of the proposal.
Australian Securities and Investments Commission