Financial Services Regulation

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Client Update: ASIC market regulation

24 August 2009

In brief: The Federal Government today announced proposed reforms that will result in the Australian Securities and Investments Commission being responsible by late next year for both supervision and enforcement of Australian market participants. Partner Warwick Painter and Senior Associate Justine Woodford report on what this significant development will mean for the future supervision and regulation of Australian financial markets.

Current regime

Under the current regime, each financial market operating in Australia supervises the operation of its own market. The main example is the Australian Securities Exchange (ASX). Under the terms of its market operator licence, the ASX:

  • monitors conduct of participants in the markets and facilities it operates;
  • supervises the market to ensure compliance with market rules and listing rules; and
  • refers to the Australian Securities and Investments Commission (ASIC) suspected breaches of the law under a Memorandum of Understanding between the ASX and ASIC.

Proposed changes

As a result of today's announcement by the Federal Government, ASIC will ultimately be responsible for both supervision and enforcement of market misconduct laws (eg insider trading and market manipulation). Accordingly, not only will ASIC assume the current ASX powers of detecting market misconduct by ASX broker participants, it will also take on these responsibilities in relation to brokers who participate in other markets. Note that the proposed changes do not extend to the supervision and monitoring of listed companies on individual markets, so that the ASX, as the licensed market operator, will continue to have control over the supervision and enforcement of the ASX listing rules that govern the conduct of companies listed (or proposing to list) on the ASX.

Timing and implementation

The Federal Government and ASIC propose that ASIC will begin performing its new supervisory function (in addition to its current enforcement role) in the third quarter of 2010. The changes will require legislation and ASIC will also require adequate lead time to ensure it is appropriately prepared with the operational capacity to take on the additional responsibility. At this stage, the Federal Government is proposing the timing will be as follows.

Date Steps
September/October 2009 Drafting of exposure draft legislation
November 2009 Public consultation on exposure draft
December 2009/January 2010 Additional drafting (to take account of public consultation) and preparation of accompanying document
February/April 2010 Amending legislation introduced in 2010 autumn sittings of Parliament
May/June 2010 Amending legislation passed in 2010 winter sittings of Parliament
July/September 2010 ASIC prepares systems for supervision and begins customising SMARTS system (ASIC's new trade surveillance system)
Third quarter 2010 ASIC begins supervision of Australia's financial markets

What this means

The main implications from today's announcement are as follows.

  • Licensed financial market operators, such as the ASX, will no longer self-supervise trading on their own markets. As a result, brokers and other trading participants in those markets will be subject to the direct supervision and enforcement powers of ASIC in relation to market misconduct. However, market operators will retain responsibility for supervising the entities listed on those markets.
  • The Federal Government notes that the proposed reforms:
    • will enhance the integrity of Australia's financial markets;
    • support other initiatives implemented by the Federal Government that are aimed at reinforcing Australia as a credible and significant financial services hub in this region; and
    • bring Australian markets into line with other leading jurisdictions that have, or are in the process of moving to, centralised or independent regulation.
  • Questions remain as to how far the proposed supervision of brokers and other market participants by ASIC will extend. Is it intended that ASX will still admit market participants and supervise their operational capability, financial adequacy and client order processing, leaving ASIC to monitor only trading activities of market participants, or is it proposed that market participants will be solely regulated by ASIC, with ASX having no role to play in relation to its market participants?
  • Giving ASIC the ability to monitor trading activity directly, and to have sole power over brokers and other market participants, should lead to more efficiency and consistency in market supervision and enforcement, as a similar approach to enforcement and supervision can be adopted across all licensed markets. On the other hand, there may be a fear among market participants that supervision by a central regulator, who is remote from the day-to-day operation of the market, could lead to a heavy-handed approach to enforcement and supervision, which may inhibit markets at a time when confidence is just returning to them.
  • There is a question over the operational capability of ASIC to effectively supervise markets and whether sufficient funding from the Federal Government will be available for this purpose. Market supervision is very expensive and time-consuming. ASX will presumably continue to monitor its markets for the purpose of supervising listed companies and it is not clear the extent to which there will be duplication between ASX and ASIC and/or whether ASIC will need to rely at least partly on the operational capability of ASX in order for ASIC to perform its role.
  • The changes are likely to be seen as addressing a perceived conflict of interest that arises under the current system, with the ASX needing to balance its commercial interests and its supervisory obligations, and are likely to clear the way for the Government to consider the licensing of new market operators. The Government has already indicated that this is one outcome of the proposed changes.

We will keep you informed of developments.

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