Financial Services Regulation

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Client Update: ASIC market regulation – proposed Market Integrity Rules

2 March 2010

In brief: On Friday, 26 February, the Australian Securities and Investments Commission released a Consultation Paper outlining its proposed Market Integrity Rules, as part of the transfer of market supervisory functions from market operators to ASIC. Partner Richard Spurio (view CV) and Lawyer Jaime McKenzie report on what ASIC's proposed regime will mean for the future supervision and regulation of Australian financial markets.

Changes to market supervision

As outlined in our Client Update: ASIC market regulation, on 24 August 2009, the Federal Government announced its intention to shift responsibility for the supervision of market participants in licensed domestic financial markets to the Australian Securities and Investments Commission (ASIC). Under the current regime, each market operator, such as Australian Securities Exchange Limited (ASX), supervises the operation of its own market.

On 10 February 2010, the Government introduced into Parliament the Corporations Amendment (Financial Market Supervision) Bill 2010. Part 7.2A of the Bill provides that ASIC has the function of supervising licensed financial market operators, and authorises ASIC to introduce Market Integrity Rules. Apart from specific circumstances, the Minister for Financial Services, Superannuation and Corporate Law must consent to each rule. The Bill provides that ASIC's Market Integrity Rules will apply to market participants, operators of licensed markets, and prescribed entities, except for their involvement in overseas markets.

ASX and Sydney Futures Exchange Ltd (SFE) will retain responsibility for making and supervising operational rules for the functioning of their markets, including clearing and settlement rules and the admission of participants. In addition, ASX will retain responsibility for its listing rules, including continuous disclosure requirements.

Proposed Market Integrity Rules

On Friday, 26 February, ASIC released CP 131 Proposed ASIC Market Integrity Rules: ASX and SFE markets. ASIC will notify industry soon of its approach to domestic licensed market operators other than ASX and SFE.

The Market Integrity Rules will be based on existing ASX and SFE operating rules. ASIC has stated that it does not propose to alter the substance of the existing rules at the time of transfer of supervision.

Appendix 1 to CP 131 lists the current ASX operating rules, and whether ASX, or ASIC, or both, will be responsible for each rule after transfer. Appendix 1 also describes the extent of ASIC's proposed redrafting for each current ASX rule. Appendix 2 to CP 131 does the same for the current SFE operating rules.

Breach of Market Integrity Rules

A markets disciplinary regime will be put in place on the date of transfer. The regime is intended to be closely based on the existing ASX Disciplinary Tribunal regime.

The Bill provides that a breach of ASIC's Market Integrity Rules is a civil penalty provision. Each rule will have either a Tier 1 ($20,000), Tier 2 ($100,000), or Tier 3 ($1 million) penalty amount.

The Bill also allows ASIC to pursue a regime of infringement notices or enforceable undertakings, instead of civil proceedings. ASIC intends to delegate power to a group of market experts to determine whether to pursue this regime, instead of civil proceedings. An infringement notice or enforceable undertaking may require a person to do one or more of:

  • pay a penalty;
  • undertake remedial or institutional measures, including educational programs; or
  • accept alternative sanctions to the payment of a penalty.

A penalty payable under an infringement notice will not exceed three-fifths of the penalty available for the rule under the Market Integrity Rules. However, ASIC reserves the right to pursue breaches under its existing powers, rather than referring the matter to the group of experts.

Recognition of existing decisions and information

ASIC proposes to 'grandfather' existing ASX and SFE decisions and information under the new regime and is considering how best to recognise these under the Market Integrity Rules.

ASIC is also considering the best way to incorporate existing ASX and SFE guidance notes and procedures into the new regime. Material may be transformed into an ASIC regulatory guide, information sheet or form, or may be incorporated in the body of the Market Integrity Rules.

Timing and implementation

ASIC seeks comment on the consultation paper by 26 March 2010. After receiving comments, ASIC will finalise the Market Integrity Rules, in advance of the transfer of supervisory functions to ASIC. The Federal Government proposes that ASIC will commence its supervisory function in the third quarter of this year.

We will keep you informed of developments.

For further information, please contact:

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