## _cr12314 — IMF FSAP assessment excerpts on Australia’s securities markets and ASIC (selected tables, findings, and recommended actions) ## Source details **Canonical URL:** [_cr12314 — IMF FSAP assessment excerpts on Australia’s securities markets and ASIC (selected tables, findings, and recommended actions)](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12314.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12314.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12314.pdf.json) --- ### Trading volumes, market shares, and top ASX participants (2011) - Total Equity Trades ($bn): 2,651.4 - Total % Share of Total Trades: 90.14 - Top individual firms (Equity Trades ($bn) — % Share of Total Trades — APRA Regulation — ASX Clearing Participant Capital Requirements): - UBS Securities Australia Ltd — 407.4 — 13.85 — No — Yes - Citigroup Global Markets Australia Pty Ltd — 407.2 — 13.84 — No — Yes - Deutsche Securities Australia Ltd — 258.1 — 8.78 — No — Yes - Goldman Sachs Australia Pty Ltd — 235.6 — 8.01 — No — Yes - Macquarie Securities (Australia) Ltd — 224.7 — 7.64 — Level 2 — Yes - Credit Suisse Equities (Australia) Ltd — 189.5 — 6.44 — No — Yes - Morgan Stanley Australia Securities Ltd — 164.4 — 5.59 — No — Yes - Merrill Lynch Equities (Australia) Ltd — 129.5 — 4.40 — No — Yes - Commonwealth Securities Ltd — 120.6 — 4.10 — Level 2 — Yes - JP Morgan Securities Australia Ltd — 113.3 — 3.85 — No — Yes - RBS Equities (Australia) Ltd — 97.0 — 3.30 — No — Yes - BBY Ltd — 33.1 — 1.12 — No — Yes - Nomura Australia Ltd — 47.0 — 1.60 — No — No - Etrade Australia Securities Ltd — 42.0 — 1.43 — Level 2 — Yes - Susquehanna Pacific Pty Ltd — 39.3 — 1.34 — No — No - Australian Investment Exchange Ltd — 31.6 — 1.07 — Level 2 — Yes - Instinet Australia Pty Ltd — 31.2 — 1.06 — No — Yes - ABN AMRO Clearing Sydney Pty Ltd — 30.0 — 1.02 — No — Yes - IMC Pacific Pty Ltd — 25.6 — 0.87 — No — No - Macquarie Equities Ltd — 24.3 — 0.83 — Level 2 — Yes - Footnotes in table: - 1 ASIC Market Participant capital requirements. - 2 AFSL requirements since only principal trader. - 3 AFSL requirements since only principal trader. ### Market-scale statistics and instrument volumes (year end 2011 unless noted) - ASX Group accounts for approximately 98 percent of the total volume of on-exchange trading in equities and derivatives. - Domestic market capitalization: USD 1,187 billion (equivalent to 82.2 percent of Australia’s GDP). - Market capitalization of top 10 companies: A$527 billion (37.1 percent of GDP). - Total cash market traded value: USD 1.3 trillion. - Average daily turnover: USD 5.4 billion. - Two most actively traded companies accounted for 15.8 percent of market turnover (BHP Billiton Ltd and Rio Tinto Ltd). - Total on-exchange equity trading (year end 2011): Equities exchange traded total 2,020 (A billion turnover, 2006-07 to 2010-11 series shows 2,020 in 2010-11 — 11.2% change since 2006). - OTC and total market turnover (A billion turnover; series 2006-07 to 2010-11; % change since 2006): - Total OTC (2006–2010 series last value): 79,507 — 12.6% - Total Exchange Traded (last value): 49,722 — 24.1% - ALL FINANCIAL MARKETS (last value): 129,229 — 16.7% - Selected OTC volumes in 2010-11 (A billion turnover): - Government Debt Securities: 1,483 — 92.0% change since 2006 - Non-Government Debt Securities: 908 — 50.0% change since 2006 - Swaps: 6,809 — 37.2% change since 2006 - Overnight Index Swaps: 7,425 — 179.1% change since 2006 - Foreign Exchange: 44,569 — -4.5% change since 2006 - Exchange Traded Funds (ETF) market: around A$5 billion (2011). - Decline in equity warrants volumes from A$11.2 billion in 2008 to A$2.9 billion in 2011. ### Funds Under Management — 20 largest Responsible Entities (as of December 31, 2011; $ bn) - Note: funds include MIS and superannuation; categories not separable in data. - Selected licensees (Corporate Group — Wholesale FUM ($ bn) — Retail FUM ($ bn) — Total FUM ($ bn)): - Colonial First State Investments Ltd — RSEL — CBA — 38.49 — 30.22 — 68.71 - Vanguard Investments Australia Ltd — RSEL — — 24.42 — 1.26 — 25.68 - Macquarie Investment Management Ltd — RSEL — Macquarie — 10.82 — 7.46 — 18.28 - Perpetual Investment Management Ltd — No — Perpetual — 8.58 — 5.24 — 13.82 - Platinum Investment Management Ltd — No — — — 11.28 — 11.28 - BT Funds Management Ltd — RSEL — Westpac — 0.97 — 9.97 — 10.93 - Schroder Investment Management Australia Ltd — No — — — 10.68 — 10.68 - IPAC Asset Management Ltd — L2 (NOHC) — AMP — 7.19 — 1.31 — 8.50 - DFA Australia Ltd — No — — — 7.50 — 7.50 - BlackRock Asset Management Australia Ltd — RSEL — — — 7.32 — 7.32 - Equity Trustees Ltd — RSEL — — 6.41 — 0.90 — 7.31 - Advance Asset Management Ltd — L2 (ADI) — Westpac — 5.42 — 0.74 — 6.16 - IOOF Investment Management Ltd — RSEL — IOOF — 0.24 — 5.87 — 6.11 - ANZ Trustees Ltd — L2 (ADI) — ANZ — — 5.81 — 5.81 - MLC Investments Ltd — L2 (ADI) — NAB — 2.10 — 3.46 — 5.56 - BT Investment Management (RE) Ltd — L2 (ADI) — Westpac — 5.13 — — 5.13 - Fidante Partners Ltd — L2 (NOHC) — Challenger — 1.29 — 3.73 — 5.02 - UBS Global Asset Management (Australia) Ltd — No — UBS — 4.32 — — 4.32 - Ibbotson Associates Australia Ltd — No — Morningstar — 4.28 — — 4.28 - Ausbil Dexia Ltd — No — Dexia — 3.78 — — 3.78 - Explanatory notes retained from source: RSEL, L2 (ADI), L2 (NOHC); approx. $4 billion of Perpetual’s total FUM managed by related RSEL is retail FUM. ### Regulatory structure — roles and legal framework - Principal legislative acts: Corporations Act 2001 (CA) and ASIC Act 2001. - Key authorities and roles: - ASIC: corporate, markets and financial services regulator; maintains, facilitates and improves financial system performance; promotes investor/consumer confidence; administers and enforces law; publishes company information. - APRA: prudential supervision of banks, insurers, superannuation trustees; s912A CA waivers apply for APRA-regulated bodies. - ASX: continues role supervising Clearing Participants; capital requirements of Clearing Participants set and monitored by ASX Clear and ASX Clear (Futures), subject to ASIC oversight. - RBA: monetary policy, payment system oversight, financial stability; assesses CSFL applications for compliance with Financial Stability Standards (FSS). - Council of Financial Regulators (CFR): members include ASIC, APRA, RBA and Treasury; coordinates cooperation and advises Government. - ACCC: general consumer protection (excluding financial services/credit). - AUSTRAC: AML/CFT regulator. - Licensing: - Market intermediaries require an Australian Financial Services License (AFSL) from ASIC. - Exchanges require an Australian Market License (AML). - Clearing/settlement facilities require a Clearing and Settlement Facility License (CSFL). ### Major assessment findings on ASIC’s effectiveness and gaps - Overall compliance with IOSCO Principles is high, but notable deficiencies persist (including issues from 2006 assessment). - ASIC strengths: - Wide enforcement powers; enforcement-focused with high-profile prosecutions and strong success rates. - Well-developed disclosure, accounting and auditing regimes aligned with IFRS and ISA. - Established Emerging Risk Committee (ERC) and Office of the Chief Economist contributing to systemic risk monitoring. - Effective oversight of exchanges and continuous improvement in market surveillance (SMARTS). - Key concerns and gaps: - ASIC’s operational independence and sufficiency of resources: assessment recorded Partly Implemented for Principle 2 and Principle 3 in areas (funding and proactive supervision). - Total forecast operating revenue figures provided by authorities: - $261.3m in 2007-08; - peak $360.6m in 10-11; - $352.7m in 2012-13; projected to remain roughly this level across forward estimates. - Non-core funding increases raised to 23.9 percent in 2012-13 (up from 18.7 percent prior year); projected to decline to nine percent by 2015-16 in authority projections. - Limitations on international supervisory information sharing (MABRA/MACMA constraints): Principles 13 and 15 assessed as Broadly Implemented; Government amendments expected by late 2012 aimed to address some restrictions. - Capital adequacy requirements: - Clearing Participants: ASX Clear minimum capital A$20 million for General Clearing Participants; A$5 million for Direct Clearing Participants; ASX Clear (Futures) minimum NTA A$5 million (practical minimum A$7.5 million if maintaining 1.5x preferred level). - Non-Clearing Market Participants minimum capital: A$100,000. - Other AFSL holders subject to base levels, SLF/ASLF regimes and Section B requirements (positive net assets, cash cover for next 12 months for responsible entities, 3 months for others). - Assessment: Principle 30 — Partly Implemented; recommendation to introduce risk-based capital requirements and periodic capital adequacy reporting for all AFSL holders. - Supervisory coverage and proactive supervision: - Markets/Participants (as at May 2012): 137 Market Participants supervised directly; ASIC authorized 2,991 AFSL holders to access market via a Market Participant; approx. 700 Indirect Market Participants actively provide services similar to Market Participants. - CARI and MPS resources: examples — Market Surveillance Team 25 staff; MPS staff 54; Deterrence function 256 staff. - Large portion of regulated population remains subject only to reactive supervision; recommendation to expand proactive supervision and uniform prioritization across ASIC. - Collective Investment Schemes / Wholesale funds: - Retail MIS regulation is comprehensive; Wholesale MIS are largely unregulated in disclosure terms. - Assessment: Partly Implemented for CIS oversight; recommended that ASIC collects sufficient data on Wholesale Funds and enhances supervisory powers over wholesale hedge funds and cross-border cooperation. - Client asset protection: - Segregation rules exist for Retail MIS; self-custody and related-party custody allowed with additional requirements that the assessment considered not sufficiently stringent. - Recommendation: increase safeguards for client asset protection (higher custodian capital, operational guidance, independent verification). - Large exposures and OTC bilateral risks: - No large exposure rules for bilateral transactions involving AFSL holders not supervised by APRA or by a CSFL operator — assessment: Partly Implemented for Principle 37. - Recommendation: extend large exposure requirements to all AFSL holders whose license conditions could enable large exposures relative to capital. ### Enforcement, surveillance, and outcomes (selected figures preserved exactly) - Breach reporting (AFSL holders) — finalized breach reports (excluding insurance matters): - 2006-2007: 1364 - 2007-2008: 1180 - 2008-2009: 1187 - 2009-2010: 1466 - 2010-2011: 1217 - 2010-2011 breach report processing of 1217 reports: - No action in 528 instances (43percent). - Merged with existing matters: 338 (27percent). - Referred or merged for follow up: 377 (30percent). - Public reports of misconduct handled in 2010-11: 15,634 (17 percent increase from 2009-10); 78 percent of assessments finalized in 28 days; 28 percent escalated within ASIC for compliance, investigation or surveillance (compared to 21 percent in 2009-10). - Enforcement outcomes (figures reproduced verbatim as in source — values presented exactly): - Litigation Completed Total: 479280186 156 202 - Administrative: 494952 36 39 - Civil: 37917488 90 134 - Criminal: 515746 30 29 - Litigation Completed Successfully: 97%94%90% 91% 90% - Criminals convicted: 424934 22 25 - Criminals jailed: 212319 12 16 - Summary prosecution: officers prosecuted 561752724 554 425 - Summary prosecution: fines and costs against company officers A$1.1 A$1.07 A$1.03 A$.813 A$.873 - Costs, fines and compensation A$102 A$46 A$14.5 A$287 A$95 - Assets frozen A$38 A$100 A$13.8 A$15.5 A$17.6 - People/Companies banned from financial services/credit 354942 41 64 - Enforceable Undertakings 101114 8 14 - (Source: ASIC — values reproduced verbatim from source.) - Enforcement assessment: Broadly Implemented — strong enforcement record but relative weakness in proactive supervision. ### Recommended action plan (selected prioritized recommendations preserved) - Institutional and governance: - ASIC, APRA and ASX encouraged to further develop cooperation mechanisms for joint supervision. - Government and supervisory authorities should assess whether current regulatory set-up best ensures investor protection and reduction of systemic risk. - Government should consider continued appropriateness of Ministerial powers to ensure sufficient independence of ASIC and explore ways to secure stability of ASIC’s core funding. - Supervisory powers, international cooperation and data: - Government should complete legislative process to expand ASIC’s powers to share supervisory information with foreign regulators via supervisory colleges and bilaterally (Principles 13 and 15). - ASIC should gain access to sufficient information on the Wholesale Funds sector and increase supervision of REs and MIS. - ASIC should introduce risk-based capital requirements and periodic capital adequacy reporting for all AFSL holders (Principle 30). - ASIC should extend large exposure requirements to all AFSL holders whose license conditions could enable large exposures relative to capital (Principle 37). - Market intermediaries and investor protection: - ASIC should allocate more resources to proactive supervision of REs, MIS, market intermediaries and investment advisers (Principles 12, 24, 31). - Government and ASIC should consider introducing requirements for internal controls for all AFSL holders and require periodic evaluation of controls and risk management. - Government should consider investor compensation scheme benefits (Principle 32). - Government and ASIC should consider harmonizing disclosure content and formats across retail disclosure documents and consider disclosure for Wholesale Funds (Principle 26). - Government should extend good fame and character tests to controllers, significant shareholders and those able to materially influence license applicants (Principle 29). ### Authorities’ response (selected points preserved) - Authorities described assessment as "tough but fair" and see high degree of compliance with IOSCO objectives and principles. - On independence/funding: - Authorities do not consider Minister’s power to direct ASIC impedes its independence; ASIC has "complete independence" in exercising powers under corporations legislation. - Funding history provided (exact figures repeated above) with assurance Government will continue to ensure stability of ASIC’s funding; authorities agree to consider adequacy for global commitments. - On information sharing: - Government progressing amendments to enable ASIC to respond to requests from foreign regulators for supervisory purposes; authorities will consider supervisory college participation. - On collective investment schemes and custody: - Authorities support ASIC collecting data on Wholesale Funds and note ASIC reviewing custody standards including financial requirements for retail CIS custody. - On recommended regulatory changes: - Authorities will consider recommendations around licensing, disclosure harmonization, custody safeguards, capital requirements and transfer of powers for market licensing to ASIC. *Source: IMF staff summary and excerpts of the assessment text in content unit _cr12314 (as presented in the provided PDF excerpts).* ### 1. Trading Volume, Market Share, and Regulatory Status of the 20 Most Important ASX ### 1. Trading Volume, Market Share, and Regulatory Status of the 20 Most Important ASX Members in 2011 ### Key Findings on Implementation and Regulatory Concerns - The Australian legal and regulatory framework for securities markets exhibits a high level of compliance with the IOSCO Principles, but a few remaining concerns persist, including some identified in the 2006 assessment. - ASIC’s operational independence and sufficiency of resources are overarching concerns impairing its ability to discharge supervisory functions adequately and effectively across the entire regulated population. - ASIC is primarily a market conduct regulator but is also responsible for overall supervision of a significant number of market intermediaries, including monitoring compliance with prudential obligations (capital requirements and risk management). - Improvements are needed in capital adequacy requirements to better address risks faced by various types of intermediaries. - ASIC has increased focus on systemic and emerging risks; continuing development of the Emerging Risk Committee (ERC) and appropriate escalation of findings to the Council of Financial Regulators (CFR) are important. - ASIC shares regulatory responsibility for Clearing Participants with ASX, which sets and monitors capital requirements; APRA’s role in their supervision is very limited. - The split of prudential supervisory responsibilities underscores the need to assess whether the current regulatory structure is best suited to present and future challenges. - ASIC is enforcement-focused and has enhanced reputation through high-profile prosecutions; it is less focused on ongoing proactive supervision, which requires increased attention. - Legislative restrictions currently hamper ASIC’s international cooperation efforts; Government amendments expected by late 2012 aim to remove some restrictions and bolster ASIC’s capacity for international supervisory cooperation. - Shareholder protection, accounting, and auditing standards in Australia are strong and actively resourced. - Regulatory framework and supervisory practices for collective investment schemes need improvement to comply with IOSCO Principles; ASIC’s supervisory powers over wholesale hedge funds and cross-border cooperation are constrained. - Opening of Australia’s securities markets to competition in execution venues triggered regulatory changes; ASIC assumed many oversight responsibilities previously held by ASX and other domestic market operators. - Ongoing vigilance is required as new risks can arise in traditionally low-risk areas; monitoring should be based on timely, comprehensive, and robust data. ### Assessment Methodology and Process - Assessment period: April 23 to May 11, 2012. - Assessment guidelines: IOSCO Principles and Objectives of Securities Regulation (approved 2010) and Methodology updated 2011. - Principle 38 was not assessed due to separate standards for securities settlement systems and central counterparties. - Sources used: ASIC self-assessment; legislation and ASIC publications; meetings with ASIC, APRA, RBA, Treasury, Financial Reporting Council, Takeovers Panel, Commonwealth Director of Public Prosecutions; and meetings with market participants and industry bodies. - The assessors emphasized not only the legal/regulatory framework but also implementation in practice, including inspection programs, cycle, scope, quality, follow-up on findings, and enforcement actions. ### Regulatory Structure: Roles and Responsibilities - ASIC: corporate, markets, and financial services regulator; established under the Australian Securities and Investments Commission Act 2001 (ASIC Act). ASIC’s required functions under the ASIC Act include: - Maintain, facilitate, and improve the performance of the financial system and entities in it; - Promote confident and informed participation by investors and consumers in the financial system; - Administer the law effectively and with minimal procedural requirements; - Enforce and give effect to the law; - Receive, process, and store, efficiently and quickly, information given to ASIC; - Make information about companies and other bodies available to the public as soon as practicable. - APRA: prudential supervision of banks, insurers, and superannuation (pension) fund trustees; under s912A Corporations Act 2001, certain AFSL holders that are “bodies regulated by APRA” are waived from specific CA requirements because APRA’s requirements are considered sufficient. - ASX: continues to have a significant role in supervision of Clearing Participants; even after transfer of Market Participant supervision to ASIC in August 2010, capital requirements of Clearing Participants are set and monitored by ASX Clear and ASX Clear (Futures), subject to ASIC oversight. - RBA: responsibility for monetary policy, payment system oversight, and overall financial stability. - CFR: membership includes ASIC, APRA, RBA, and Treasury; role in identifying/addressing regulatory overlaps and gaps and advising Government on financial system architecture. - ACCC: administers general consumer protection provisions under Australian Consumer Law, except consumer protection provisions related to financial services and credit (assigned to ASIC). - AUSTRAC: responsible for protecting the integrity of Australia’s financial system and countering money laundering and terrorist financing. - Ministerial role: Parliamentary Minister grants AML and CSFL licenses and approves rules based on ASIC advice; RBA assesses CSFL applications for compliance with Financial Stability Standards. ### Legal Framework - Principal legislative acts: Corporations Act 2001 and ASIC Act 2001. - Market intermediaries must obtain an Australian Financial Services License (AFSL) from ASIC; license is issued for specific itemized activities and financial products. - Persons wishing to operate an exchange must obtain an Australian Market License (AML); operation of a clearing and/or settlement facility requires a Clearing and Settlement Facility License (CSFL). ### Trading Volume, Market Share, and Regulatory Status — Table 1 (Key figures preserved) - Source: ASIC. - Total Equity Trades ($bn): 2,651.4 - Total % Share of Total Trades: 90.14 - Individual firms (Equity Trades ($bn), % Share of Total Trades, APRA Regulation, ASX Clearing Participant Capital Requirements): - UBS Securities Australia Ltd — 407.4 — 13.85 — No — Yes - Citigroup Global Markets Australia Pty Ltd — 407.2 — 13.84 — No — Yes - Deutsche Securities Australia Ltd — 258.1 — 8.78 — No — Yes - Goldman Sachs Australia Pty Ltd — 235.6 — 8.01 — No — Yes - Macquarie Securities (Australia) Ltd — 224.7 — 7.64 — Level 2 — Yes - Credit Suisse Equities (Australia) Ltd — 189.5 — 6.44 — No — Yes - Morgan Stanley Australia Securities Ltd — 164.4 — 5.59 — No — Yes - Merrill Lynch Equities (Australia) Ltd — 129.5 — 4.40 — No — Yes - Commonwealth Securities Ltd — 120.6 — 4.10 — Level 2 — Yes - JP Morgan Securities Australia Ltd — 113.3 — 3.85 — No — Yes - RBS Equities (Australia) Ltd — 97.0 — 3.30 — No — Yes - BBY Ltd — 33.1 — 1.12 — No — Yes - Nomura Australia Ltd — 47.0 — 1.60 — No — No - Etrade Australia Securities Ltd — 42.0 — 1.43 — Level 2 — Yes - Susquehanna Pacific Pty Ltd — 39.3 — 1.34 — No — No - Australian Investment Exchange Ltd — 31.6 — 1.07 — Level 2 — Yes - Instinet Australia Pty Ltd — 31.2 — 1.06 — No — Yes - ABN AMRO Clearing Sydney Pty Ltd — 30.0 — 1.02 — No — Yes - IMC Pacific Pty Ltd — 25.6 — 0.87 — No — No - Macquarie Equities Ltd — 24.3 — 0.83 — Level 2 — Yes - Footnotes (as in source): - 1 ASIC Market Participant capital requirements. - 2 AFSL requirements since only principal trader. - 3 AFSL requirements since only principal trader. ### Funds Under Management (FUM) by 20 Largest Responsible Entities on December 31, 2011 — Table 2 (Key figures preserved) - Source: ASIC. - Note: The funds under management include funds in MIS and superannuation funds. The data is not available separated between these two categories. - Explanatory notes: - RSEL means registered superannuation entity licensee (Level 1 regulation by APRA); - L2 (ADI) means Level 2 regulation by APRA as a subsidiary of an authorized deposit-taking institution; - L2 (NOHC) means Level 2 regulation by APRA as a subsidiary of a registered non-operating holding company. - Approximately $4 billion of total FUM for Perpetual Investment Management Ltd is managed by a related entity, Perpetual Superannuation Ltd, which is an RSEL; this $4 billion is retail FUM. - Selected licensees and FUM (Corporate Group, Wholesale FUM ($ bn), Retail FUM ($ bn), Total FUM ($ bn)): - Colonial First State Investments Ltd — RSEL — CBA — 38.49 — 30.22 — 68.71 - Vanguard Investments Australia Ltd — RSEL — — 24.42 — 1.26 — 25.68 - Macquarie Investment Management Ltd — RSEL — Macquarie — 10.82 — 7.46 — 18.28 - Perpetual Investment Management Ltd — No — Perpetual — 8.58 — 5.24 — 13.82 - Platinum Investment Management Ltd — No — — — 11.28 — 11.28 - BT Funds Management Ltd — RSEL — Westpac — 0.97 — 9.97 — 10.93 - Schroder Investment Management Australia Ltd — No — — — 10.68 — 10.68 - IPAC Asset Management Ltd — L2 (NOHC) — AMP — 7.19 — 1.31 — 8.50 - DFA Australia Ltd — No — — — 7.50 — 7.50 - BlackRock Asset Management Australia Ltd — RSEL — — — 7.32 — 7.32 - Equity Trustees Ltd — RSEL — — 6.41 — 0.90 — 7.31 - Advance Asset Management Ltd — L2 (ADI) — Westpac — 5.42 — 0.74 — 6.16 - IOOF Investment Management Ltd — RSEL — IOOF — 0.24 — 5.87 — 6.11 - ANZ Trustees Ltd — L2 (ADI) — ANZ — — 5.81 — 5.81 - MLC Investments Ltd — L2 (ADI) — NAB — 2.10 — 3.46 — 5.56 - BT Investment Management (RE) Ltd — L2 (ADI) — Westpac — 5.13 — — 5.13 - Fidante Partners Ltd — L2 (NOHC) — Challenger — 1.29 — 3.73 — 5.02 - UBS Global Asset Management (Australia) Ltd — No — UBS — 4.32 — — 4.32 - Ibbotson Associates Australia Ltd — No — Morningstar — 4.28 — — 4.28 - Ausbil Dexia Ltd — No — Dexia — 3.78 — — 3.78 ### Implementation and Supervisory Priorities - ASIC expanded supervisory activities on hedge funds but lacks powers on wholesale hedge funds and cross-border supervisory cooperation. - ASIC is improving risk-based supervisory coverage for market intermediaries; supervisory program would benefit from further expansion and uniform prioritization across the organization. - Close cooperation among ASIC, APRA, ASX, RBA, and Treasury is undertaken through CFR and bilateral arrangements; the adequacy of the current structure should be assessed in light of evolving market complexity and risks. *Source: ASIC (as presented in IMF FSAP assessment document)._ ### 23. ASIC has only recently been given the power to draft legally enforceable market ### _cr12314 - 23. ASIC has only recently been given the power to draft legally enforceable market ### ASIC powers, rules, and relief - ASIC has power to draft legally enforceable market integrity rules for licensed markets and their participants; the market integrity rules require ministerial consent. - Generally the Minister proposes regulations under the Corporations Act, which are made by the Governor-General. - ASIC implements legislation, regulations and the market integrity rules and issues Regulatory Guides that set out how it interprets the legislation and regulations that it administers. - ASIC has statutory power to grant relief to a person or a class of persons from certain provisions of the CA. The power is broad and includes: - exempting a person or a class of persons from provisions of the CA; or - declaring that a provision of the CA applies as if a specified provision was omitted, modified or varied. - All class order relief, with a Regulatory Impact Statement where required, must be tabled in each House of Parliament and can be disallowed by negative resolution. - All class order relief is required to be registered and published on an electronic register maintained by the Attorney-General's Department. - Most, but not all, individual relief is required by the CA to be published by ASIC. - ASIC publishes a quarterly and anonymous compendium setting out the main themes of recent relief granted; references to individual relief would be included if they contributed to a theme. ### Market structure — Market Intermediaries - As at April 2012 there were 137 Market Participants in Australia; all Market Participants are members of a licensed financial market (e.g., ASX, ASX 24 and Chi-X). - ASIC has authorized 2,991 AFSL holders to access the market through a Market Participant, although not all of them in fact do so. - ASIC estimates that approximately 700 of these AFSL holders, Indirect Market Participants, currently actively provide services similar to Market Participants under their licenses. - 3,345 AFSL holders are authorized to act as investment advisors and provide personal advice; some advisors are individuals rather than firms. - ASIC estimates that 2,055 of these AFSL holders are permitted to deal on behalf of clients, have custody of assets, or manage client accounts. ### Market structure — Collective Investment Schemes (Retail MIS) - At the end of 2011, funds under management in Retail MIS were: - Listed property trusts: A$127.4 billion - Unlisted property trusts: A$3.6 billion - Exchange Traded Funds: A$4.7 billion - Other listed equity trusts: A$29.5 billion - Money Market Trusts: A$23.7 billion - Unlisted equity trusts: A$54.4 billion - Unlisted mortgage trusts: A$3.8 billion - Unlisted other trusts: A$16.2 billion - Total: A$263.3 billion - Note: This table does not include information on investments in Wholesale MIS. ### Markets — structure, concentration, and key statistics (year end 2011 unless otherwise mentioned) - ASX Group accounts for approximately 98 percent of the total volume of on-exchange trading in equities and derivatives. - ASX Group created by merger in July 2006 of the Australian Stock Exchange and the Sydney Futures Exchange. - There were 1,983 domestic listed equity issuers and 96 foreign listed equity issuers; total number of issuers, including listed issuers of debt securities, was 2,222. - Domestic market capitalization was USD 1,187 billion; this is equivalent to 82.2 percent of Australia’s GDP. - Market capitalization of the top 10 companies totals A$527 billion; this equals 37.1 percent of GDP. - Total cash market traded value was USD 1.3 trillion. - Average daily turnover was USD 5.4 billion. - The proportion of market turnover accounted for by the two most actively traded companies (BHP Billiton Ltd and Rio Tinto Ltd) was 15.8 percent. - The number of new companies listed was 133. - Share ownership by Australians (direct and indirect) rose from 41 percent in 2008 to 43 percent in 2010. - Foreign sourced investment activity in the shares of Australian companies was estimated to be in excess of 40percent of the market. ### Markets — instruments, volumes, and trends - Derivatives are traded on-exchange and over-the-counter (OTC). ASX 24 instruments include equity and index options, index futures, interest rate futures and options, grain futures and options, wool futures and options, and futures and options over a range of energy and environmental products. - OTC instruments include swaps, forward rate agreements, interest rate options, credit derivatives, and currency options. - On ASX in practice: 3 corporate bonds, 14 floating rate notes, 15 convertible notes and 24 hybrid securities are listed. - Volume in OTC trading of non-government debt securities in 2011 was approximately A$908 billion (versus government bond trading of A$1,483 billion and on-exchange equity trading of A$2.02 trillion). - Exchange Traded Funds (ETF) market currently stands at around A$5 billion. - Decline in equity warrants volumes from a peak of A$11.2 billion in 2008 to A$2.9 billion in 2011. - ASX trades retail oriented products under Contracts for Difference (CFD) and many managed investment schemes are quoted on ASX. ### Trading volumes by instrument type on ASX (A billion turnover; 2006-07 to 2010-11; % change since 2006) - Over-the-counter (OTC) - Government Debt Securities: 772, 716, 792, 928, 1,483 — 92.0% - Non-Government Debt Securities: 605, 637, 494, 675, 908 — 50.0% - Negotiable & Transferable Instruments: 4,665, 5,871, 5,543, 4,112, 3,676 — -21.2% - Repurchase Agreements: 4,415, 3,885, 5,147, 5,418, 7,364 — 66.8% - Swaps: 4,962, 6,099, 5,725, 5,923, 6,809 — 37.2% - Overnight Index Swaps: 2,660, 1,846, 1,031, 3,000, 7,425 — 179.1% - Forward Rate Agreements: 4,241, 5,833, 5,424, 4,519, 5,857 — 38.1% - Interest Rate Options: 361, 425, 285, 379, 370 — 2.4% - Credit Derivatives: 135, 255, 247, 247, 317 — 133.9% - Foreign Exchange: 46,690, 45,837, 44,303, 41,436, 44,569 — -4.5% - Currency Options: 1,110, 745, 834, 706, 730 — -34.2% - Total OTC: 70,617, 72,149, 69,825, 67,343, 79,507 — 12.6% - Exchange Traded - Equities: 1,816, 2,199, 1,503, 1,864, 2,020 — 11.2% - Futures: 38,259, 41,496, 27,192, 34,338, 47,702 — 24.7% - Total Exchange Traded: 40,075, 43,695, 28,695, 36,202, 49,722 — 24.1% - ALL FINANCIAL MARKETS: 110,692, 115,844, 98,519, 103,544, 129,229 — 16.7% - Source: Australian Financial Markets Association report 2011 (as reported). ### Competition in trading venues and regulatory responses - In 2010 the Australian Government announced support for competition between markets for trading in listed shares. - Chi-X Australia completed its license application and began operating in November 2011; it operates a trading platform in the 200 shares that comprise the S&P/ASX 200, ASX quoted ETFs and approximately 12 shares outside the S&P/ASX 200 selected on the basis of demand from participants. - In April 2011 an order under the Foreign Acquisitions and Takeovers Act 1975 prohibited the acquisition of ASX by Singapore Exchange Limited (SGX) due to material risks and supervisory issues impacting effective regulation of ASX operations, particularly clearing and settlement functions. - The government is consulting on CFR proposals to make legislative change to address these concerns. ### Transfer of market supervision, Market Integrity Rules (MIR), and market surveillance - Market and participant supervision transferred from ASX to ASIC in August 2010 to enable real-time surveillance of both ASX and Chi-X. - ASIC introduced seven sets of Market Integrity Rules (MIR): one set for each domestic market and one set of Competition MIRs for the two markets (ASX and Chi-X) on which the same products are competitively traded. - The first set of MIRs largely replicates operating rules previously in operators' trading rule books and regulates conduct in relation to secondary trading. - Competition MIRs address best execution, pre- and post-trade transparency in a multi-market environment, and provide best practice standards for data consolidators. - ASIC was empowered, by amendment to the CA, to write rules directly applicable to license holders; ministerial approval remains necessary (except in an emergency) and rules must be laid before Parliament and are subject to negative resolution. - Cost of installing and operating market surveillance technology to be borne by the industry on a cost recovery basis rather than by the taxpayer. ### Preconditions for effective securities regulation — legal system and insolvency regime - Australia is a federation with Commonwealth, six State Governments and two Territory Governments; the Australian Constitution (1901) establishes the Federal government and separation of powers. - Proposed legislation must be passed by both Houses of Parliament to become law; the Governor-General acts on the advice of the Executive Government. - Australia is subject to the rule of law; English common law and equitable principles are the foundation of Australian laws. - The High Court of Australia holds judicial powers of the Commonwealth; State and Territory courts have original jurisdiction under State or Territory laws and other conferred matters. - The Corporations Act deals with corporate insolvency; relevant provisions focus on winding up, realization of assets, and equitable distribution to creditors, employees and shareholders. - Three types of external administration of insolvent companies: liquidation, receivership and voluntary administration. - Directors must consider options for external administration because they are legally obliged to cause an insolvent company to cease trading or risk personal liability for the company’s debts. ### Main findings and regulatory implications - ASIC has primary responsibility for regulation of securities markets and entities active on them in Australia; it shares responsibilities with APRA, the RBA and ASX in some areas. - Cooperation is organized through the CFR and bilaterally, but the division of responsibilities for prudential supervision of AFSL holders has created a complex supervisory structure. - The extent of the powers of the responsible Minister remains a concern, even though they do not generally include decision-making on day-to-day technical matters. - ASIC’s independence and sufficiency of resources are hampered by the flattening of its overall operating funding over the last three years and a not insignificant dependence on non-core funding. - ASIC has a wide set of powers and is accountable in their use; it has focused on identifying systemic risks and addressing issues arising from products and activities falling outside the regulatory perimeter. - No organizations have formal SRO status in Australia; operators of exchanges and clearing and settlement facilities perform certain functions that could be regarded as self-regulatory but are subject to ASIC oversight. - The transfer of responsibility to ASIC for monitoring secondary trading and market participants has significantly reduced the self-regulatory functions of domestic market license holders (except regarding the listing function and clearing and settlement). *Source: _cr12314 - 23. ASIC has only recently been given the power to draft legally enforceable market* ### 48. Principles for the enforcement of securities regulation: ASIC’s enforcement ### 48. Principles for the enforcement of securities regulation: ASIC’s enforcement ### Enforcement focus and effectiveness - ASIC’s enforcement powers are generally of long standing and well understood by licensees and the public. - ASIC has no reluctance to use its powers to enforce compliance. - ASIC has a well-constructed process for filtering potential cases, for determining which cases to pursue through enforcement mechanisms and which by other means, and how to employ resources in the most efficient and effective way. - ASIC is an enforcement focused regulator seeking outcomes which support its regulatory objectives. - Intelligence gathering and analysis appear to work well. - Investment in investor education is believed to make an important contribution to enabling retail investors to better protect themselves, to recognize scams and to provide ASIC with more timely information on misconduct. - ASIC has a good record in prosecuting cases, and in cooperation with the Commonwealth Director of Public Prosecutions (CDPP). - Its success rate, particularly in the more serious cases, is high. ### Cooperation in regulation (MABRA and cross-border supervision) - Responsibility for responding under MABRA to requests for assistance from overseas regulators has been transferred from the Attorney-General's Department to the Treasury, which has dedicated resources to making speedy decisions. - ASIC lacks authority to respond under MABRA on its own volition. - The growing recognition that cross-border regulatory cooperation should encompass on-going supervision as well as enforcement highlights the limitations on ASIC’s legal authority to obtain information on behalf of other regulators for supervisory purposes. - Until the law is satisfactorily amended, ASIC is likely to become increasingly isolated as the scope of global inter-regulatory cooperation expands through mechanisms such as supervisory colleges and memoranda of understanding focused on supervisory rather than enforcement matters. - The Government is currently in the process of progressing amendments to the MABRA Act and MABRA Regulations which are intended to provide ASIC the capacity to respond to requests for information from individual foreign regulators for supervisory purposes. - The issue of sharing supervisory information in international supervisory colleges remains currently unresolved. ### Issuers, disclosure and corporate regulation - ASIC has issued a series of Regulatory Guides on prospectus disclosure to assist issuers and their advisors to produce disclosure documents that help retail investors better assess the offer. - Australian listed companies and some others operate under a legislative requirement for immediate and continuous disclosure to the public of significant information, with the object of securing a fully informed market. - ASIC has a long standing policy of bringing cases to court against companies, company directors and their professional advisors for breach of their obligations under the continuous disclosure regime. - Recent court decisions in several high profile cases have found in favor of ASIC, usually on appeal. - ASIC is the regulator of corporate conduct, takeovers and other control transactions. - The Takeovers Panel is a peer-based dispute resolution mechanism with the courts as the final backstop. - Australia has adopted a comprehensive body of accounting standards, which follow the International Financial Reporting Standards (IFRS). - The annual accounts of a listed company must be audited, with the half-yearly reports subject to either review or audit. ### Auditors, credit rating agencies, and information service providers - Australia has adopted auditing standards based on the International Standards on Auditing (ISA). - Cooperation between the relevant public interest bodies—ASIC (which supervises auditors and enforces standards), the Financial Reporting Council (FRC), the Auditing and Assurance Standards Board (AUASB), the Companies Auditors and Liquidators Disciplinary Board (CALDB), and the auditors’ professional bodies—appears effective. - The regime for licensing and supervising credit rating agencies (CRA) is fully operational. - CRAs are required to meet all the requirements set out in the IOSCO Code of Conduct Fundamentals for CRAs. - Research report providers are regulated as AFSL holders, which ensure that they are subject to comprehensive requirements to manage any conflicts of interest. ### Collective investment schemes (CIS) - All CIS operators are required to be authorized and are subject to conduct of business, capital and organizational requirements. - Retail CIS need to be registered with ASIC and comply with requirements set out in the CA and ASIC RGs, whereas there are no regulatory requirements on Wholesale CIS. - ASIC’s proactive supervision is currently limited. - The assets of a CIS have to be adequately segregated, but self-custody or related party custody is allowed subject to certain additional requirements that do not appear to be sufficiently stringent. - Initial, ongoing and periodic disclosure requirements apply, but there are no standardized formats for all disclosures. - There are requirements on valuation and pricing of CIS units. - The regulatory framework for CIS applies to hedge funds and their operators, but ASIC lacks certain powers needed for effective oversight and cooperation. ### Market intermediaries - Market intermediaries need to hold an AFSL specifying the services and products they are authorized to provide. - The licensing process appears thorough; however the assessment of the applicant does not extend to its controllers. - Capital requirements are largely not risk-based. - Intermediaries are subject to a suite of prudential, organizational and conduct of business requirements, whereas internal controls are addressed only indirectly. - There is no general statutory requirement to act in the best interest of clients; however, there are specific requirements for certain market intermediaries relating to best interest type duties. - Even though a significant amount of intermediaries may still remain uninspected for extended periods of time, ASIC has expanded its supervisory reach during the past few years. - ASIC, jointly with other CFR members, has plans in place to deal with a failure of a systemically important financial institution. - ASIC’s own plans address the possible failure of non-systemic entities. *Source: IMF staff summary of Principles for the enforcement of securities regulation: ASIC’s enforcement (excerpts).* ### 54. Principles for secondary markets: The power to grant licenses to exchanges and ### _cr12314 - 54. Principles for secondary markets: The power to grant licenses to exchanges and ### Regulatory responsibilities and market structure — key findings - The power to grant licenses to exchanges and clearing and settlement facilities and to approve their operating rules resides with the Minister. - ASIC processes license applications and all rule changes prior to submitting them to the Minister with a recommendation. - ASIC’s oversight of the exchanges is effective. - The transfer of responsibility for surveillance of secondary trading activity to ASIC in August 2010 has somewhat reduced the role of the exchanges in ensuring that their markets are fair, orderly and transparent. - Exchanges (market operators) have retained rules and procedures on participant admission, order types and trading arrangements, and retained responsibility for listing and monitoring compliance by listed entities with their continuous and periodic disclosure obligations. - The primary regulator of the clearing and settlement facilities is the central bank (RBA). - The principal tool used by the RBA is its continuous assessment of a CSFL holder’s performance against the Financial Stability Standards (FSS) it has developed. - Prudential regulation of off-exchange business, where AFSL holders are not regulated by APRA or as Clearing or Market Participants, is a source of weakness. ### Detailed assessment of IOSCO Principles — grades and concise findings - Principle 1 (FI): The responsibilities of ASIC are clearly set out in the CA and ASIC Act. Sharing of supervisory responsibilities between ASIC, APRA and ASX Group clearing facilities has created a complex supervisory structure. The Minister retains certain responsibilities for the AML and CSFL holders, and the RBA is involved in setting standards for clearing and settlement facilities. Cooperation arrangements between the authorities have been established. - Principle 2 (PI): Certain features of the CA and ASIC Act could impact ASIC independence (Ministerial powers to give directions, express expectations, decide on AML and CSFL matters). No evidence of Minister interference in day-to-day decision making. ASIC’s operational independence is constrained by increased dependence on non-core funding. Sufficient accountability measures and review mechanisms exist. - Principle 3 (PI): ASIC has wide powers; current funding is sufficient for current tasks but does not enable proactive supervision required for increasingly complex markets. Dependence on non-core funding allocated to specific tasks. Staff mix retained and attracted; governance and investor education active. - Principle 4 (FI): Well developed consultation process, requirement for regulatory impact analysis, extensive website guidance, procedural fairness including right to a hearing where appropriate. - Principle 5 (FI): Commissioners and staff subject to code of conduct, trading restrictions for relevant staff, strict confidentiality and data protection with sanctions for non-compliance. - Principle 6 (FI): Internal Emerging Risks Committee (ERC) tasked with deepening understanding of emerging and systemic risks; ASIC works with other domestic regulators through the Council of Financial Regulators. - Principle 7 (FI): ERC identifies continued appropriateness of regulatory framework via market trend analysis and surveillance; regulatory actions taken based on ERC work still limited. - Principle 8 (FI): Regulatory framework requires entities to identify and manage conflicts of interest; ASIC monitors compliance and has taken measures to address misaligned incentives. - Principle 9 (FI): No formal SROs in Australia; exchanges and clearing/settlement facilities have statutory obligations and are intensively overseen by ASIC. Since 2010 ASIC assumption of market supervision reduced exchanges’ enforcement responsibilities. - Principle 10 (FI): ASIC has comprehensive powers to obtain information, supported by dissuasive sanctions and extensive record-keeping requirements. - Principle 11 (FI): Long standing enforcement powers, well understood; robust process for case selection and resource allocation; willingness to enforce compliance. - Principle 12 (BI): Enforcement focused and credible; successful high profile prosecutions increased credibility. Relative weakness in proactive supervision versus reactive supervision. - Principle 13 (BI): Legal limitations on ASIC’s power to share supervisory information bilaterally and in colleges risk isolating it internationally. Government progressing amendments expected to be in place by late 2012; supervisory college information sharing remains unresolved. - Principle 14 (FI): ASIC at the forefront of improving information sharing (subject to Principle 13 limits). Arrangements with Hong Kong and New Zealand to encourage cross-border offerings of securities and CIS are innovative. - Principle 15 (BI): Good record in providing assistance to foreign regulators, subject to limitations identified in Principle 13. - Principle 16 (FI): Regulatory Guides on disclosure for public offerings have elevated the regime. ASIC’s improved court success rate in cases against companies and directors has enhanced enforcement of the corporate disclosure regime. - Principle 17 (FI): Separation of ASIC (regulator) and Takeovers Panel (peer-based dispute resolution) works effectively and is widely accepted. - Principle 18 (FI): Accounting standard setting is high quality and consistent with IFRS. ASIC effectively secures compliance and mandates corrections with dissuasive sanctions. - Principle 19 (FI): ASIC has significant powers over auditors and audit practices; interactions with CALDB effective; alert to risks from pressure on audit fees. - Principle 20 (FI): Extensive, well defined constraints on auditors carrying out non-audit work consistent with international norms. - Principle 21 (FI): Australia has adopted auditing standards based on the ISA; AUASB role to maintain standards. - Principle 22 (FI): ASIC implemented the IOSCO Code and a fully compliant supervisory program for CRAs. Concern that retail investor access may be limited as five of six CRAs opted for “wholesale only” licenses. - Principle 23 (FI): Research report providers required to hold an AFSL; subject to conflicts of interest rules and ASIC guidance. ASIC has identified other evaluative service providers that might warrant regulation. - Principle 24 (PI): All CIS operators must be AFSL holders with conduct and organizational requirements; REs of Retail CIS have additional criteria. Retail CIS must be registered; Wholesale CIS are not subject to regulatory requirements. ASIC supervision focused on reactive/desk-based activities rather than on-site inspections. - Principle 25 (BI): CIS broadly defined; most take legal form of investment trusts. Retail CIS constitution lodged with ASIC ensures form and structure compliance. Assets must be segregated but may be held in custody by the RE or a related entity; safeguards not strong enough in those cases. - Principle 26 (BI): Retail CIS investors need a PDS. From June 2012 the PDS for a Simple CIS required to comply with a standard eight page format. Other PDS types not required in standard format. Wholesale CIS not subject to disclosure requirements. ASIC can intervene when PDS filed. Rules on periodic reporting, advertising, investment policy disclosure and asset valuation apply. - Principle 27 (FI): Retail CIS constitution must set valuation rules. ASIC and APRA guidance issued. Independent auditors assess valuations; subscription/redemption rights and pricing error treatment addressed. - Principle 28 (BI): Retail hedge funds and REs subject to same Retail CIS requirements and disclosure. ASIC can collect information from hedge fund operators, subject to sharing restrictions (Principles 13 and 15). Hedge fund operators subject to increased ASIC supervision. - Principle 29 (BI): Market intermediaries must hold an AFSL specifying authorized services/products. ASIC applies comprehensive desk-based licensing; controllers and significant shareholders are not assessed as part of licensing. Authorization covers all types of investment advisers. - Principle 30 (PI): Initial and ongoing capital requirements apply for all AFSL holders; except APRA-regulated bodies and direct members of markets/clearing facilities, requirements are not risk-adjusted and reporting to ASIC is annual only. Capital requirements do not account for risks from unlicensed affiliates. ASIC is undertaking a progressive review of financial resources requirements; compliance of envisaged new requirements with Principle 30 not assessed. - Principle 31 (BI): AFSL holders required to maintain appropriate risk management and compliance systems. No general statutory requirement to act in the best interest of clients; specific best interest duties exist for some intermediaries. No specific regulatory requirement to maintain sufficient internal controls. Client asset protection, KYC, record-keeping and key conduct rules apply. Direct market participants subject to a three year cycle risk-based supervisory program; ASIC extending proactive supervision to important indirect market participants and, to a lesser extent, investment advisors. - Principle 32 (FI): ASIC, with CFR members, has plans to deal with failure of a systemically important financial institution. ASIC plans for non-systemic entity failure exist. Powers include immediate license cancellation in insolvency. Market operators required to maintain guarantee fund for participants. Other AFSL holders required to hold PII. No investor compensation scheme in Australia. - Principle 33 (FI): CA definition of a financial market is very broad but fails to capture some trading systems that should be regulated. Regulation of market infrastructure providers may not be sufficiently efficient given innovation and inter-connectivity. - Principle 34 (FI): Exchange competition has existed only since November 2011 and is viewed as a transitional phase. Ambiguities persist on whether monitoring/enforcement responsibilities lie with ASIC or relevant exchanges, causing uncertainty for licensees. - Principle 35 (FI): Regulatory framework includes requirements for timely pre- and post-trade transparency, subject to standard derogations. ASIC’s analytical work on dark pools, dark liquidity and high frequency trading is well regarded; work based on sufficient accurate data and aligned with ASIC priorities. - Principle 36 (FI): Comprehensive legal framework for market manipulation, insider dealing and market abuse with dissuasive sanctions. ASIC employs systems and human resources to detect offences. Working relationship with CDPP effective; CDPP and judiciary pursue white-collar crime vigorously. - Principle 37 (PI): No rules governing management of large exposures, default risk and market disruption arising from bilateral transactions involving AFSL holders not supervised by APRA and not supervised by ASX or ASIC as Market Participants. Questions on legal provision concerning clearing facility operator powers to transfer client positions from a failing firm to a viable one. - Principle 38 (NA): Not assessed. ### Recommended action plan — prioritized recommendations (selected) - Principle 1 - ASIC, APRA and ASX encouraged to further develop cooperation mechanisms for joint supervision. - Government and supervisory authorities should assess whether current regulatory set-up best ensures investor protection and reduction of systemic risk. - Government and ASIC should consider appropriateness of legal prohibitions to publish certain individual relief to maximize transparency. - Principle 2 - Government should consider continued appropriateness of Ministerial powers to ensure sufficient independence of ASIC, with attention to licensed markets and clearing and settlement facilities. - Government should explore ways to secure stability of ASIC’s core funding. - Principle 3 - Government should ensure ASIC’s core funding is sufficient for future regulatory and supervisory challenges and global commitments. - ASIC should allocate more resources to achieve proactive supervision of all entities under its supervision. - Principles 6 and 7 - ASIC encouraged to develop ERC and maintain focus on emerging and systemic risks; use ERC to identify risks from regulatory gaps. - Principle 9 - ASIC should refine its oversight role in areas where exchange functions are key to ASIC objectives, given reduced exchange responsibilities. - Principle 12 - ASIC should develop proactive supervision for MIS, REs and market intermediaries including investment advisors. - Principles 13 and 15 - Government should complete legislative process to expand ASIC’s powers to share supervisory information with foreign regulators via supervisory colleges and bilaterally. - Principle 24 - ASIC should allocate more resources to proactive supervision of REs and MIS. - ASIC and APRA should cooperate to ensure similar supervision of REs regardless of primary prudential regulator. - ASIC should gain access to sufficient information on the Wholesale Funds sector to ensure appropriate regulation. - Principle 25 - Government and ASIC should increase safeguards for client asset protection in self-custody and related party custody (for example, requiring custodian to hold higher capital, additional operational guidance, and independent verification). - Principle 26 - Government and ASIC should seek further harmonization of content and format of all disclosure documents to assist investor comparisons. - Government and ASIC should consider appropriateness of lack of disclosure requirements for Wholesale Funds. - Principle 29 - Government should extend good fame and character test to controllers, other significant shareholders, holders of significant voting power and those who can materially influence license applicants. - Principle 30 - ASIC should introduce risk-based capital requirements and periodic capital adequacy reporting for all AFSL holders; opportunity to simplify and harmonize current complex regime. - Principle 31 - Government and ASIC should introduce requirements for internal controls for all AFSL holders and require periodic evaluation of controls and risk management. - Government should ensure AFSL holders are required to act in the best interest of clients. - ASIC should extend proactive supervision to sufficiently cover all types of market intermediaries. - Principle 32 - Government should consider investor protection benefits of establishing an investor compensation scheme. - Principle 33 - Government may consider simplifying the two stage licensing and rule approval process for exchanges and transfer powers to ASIC; consider amending CA definition of a financial market to better regulate evolving market structures. - Principle 34 - ASIC should prioritize eliminating remaining overlaps and ambiguities from transfer to ASIC of market surveillance and supervision of non-clearing ASX members. - Principle 37 - ASIC should extend large exposure requirements to all AFSL holders whose license conditions could enable large exposures relative to capital, to match global best practice. - Government and ASIC should analyze issues concerning powers to transfer client positions from a failing firm to a viable one and seek remedies if necessary. *Source: IMF assessment text (Table summaries, findings and recommended action plan).* ### 55. The Australian authorities welcome the comprehensive assessment of Australian ### _cr12314 - 55. The Australian authorities welcome the comprehensive assessment of Australian ### Independence of the Regulator - Authorities consider the assessment "tough but fair." - IMF finds Australian legal and regulatory framework reflects a high degree of compliance with the IOSCO objectives and principles of securities regulation. - Authorities do not consider the Minister’s power to direct ASIC impedes ASIC’s independence (Principle 2, Recommendation 1). - ASIC has "complete independence" in performing functions and exercising powers under the corporations legislation. - Authorities note tension between IOSCO’s additional autonomy expectations for regulatory policies and funding and "ministerial accountability." - Minister’s power to issue directions to ASIC is described as: - limited in scope; - exercised only once and then some 20 years ago; - the power to revoke a direction given by ASIC has never been used. - Authorities conclude the "theoretical and unlikely possibility of inappropriate intervention" does not impair ASIC’s operational independence or ability to discharge functions. - Authorities see scope to "streamline the licensing process for exchanges and clearing and settlement facilities" (Principle 33, Recommendation 1) and will consider responses. ### Funding of the Regulator - Government fiscal approach: all public sector spending subject to robust discipline; viewed as ensuring adequate funding and sustained fiscal responsibility. - Stability of funding (Principle 2, Recommendation 2): - Funding for ASIC has grown since FSAP 2006. - Total forecast operating revenue: - $261.3m in 2007-08; - peak at $360.6m in 10-11 (reflecting temporary funding to assist ASIC to deal with a spike in work flowing from the financial crisis); - $352.7m in 2012-13; - Projected to remain "at roughly this level" across the forward estimates. - Government will continue to ensure the stability of ASIC’s funding. - Adequacy of funding (Principle 3, Recommendation 1): authorities agree ensuring ASIC’s funding is sufficient in light of global regulatory commitments is important. ### Transparency - Authorities will consider appropriateness of laws prohibiting publication of certain individual relief instruments (Principle 1, Recommendation 3). - ASIC publishes a quarterly report providing an overview of circumstances in which ASIC has exercised or refused to exercise its exemption or modification powers. ### Relations with other Regulators - Authorities welcome endorsement of the Council of Financial Regulators (CFR) as forum for cooperation. - Assessment recommendation: assess whether current regulatory setup best ensures investor protection (Principle 1, Recommendation 2); authorities will consider response. - Authorities note division of roles among CFR agencies is generally well understood and performed well through the crisis. - Authorities will work to further cooperation mechanisms to ensure appropriate supervision of entities subject to both APRA and ASIC (Principle 1, Recommendation 1 and Principle 24, Recommendation 2). ### Systemic Risk - Authorities appreciate encouragement to ASIC’s Emerging Risks Committee and will work to ensure it focuses on emerging and systemic risks (Recommendation under Principles 6 and 7). ### Investor Protection - Assessment recommends Government consider investor compensation scheme benefits (Recommendation on Principle 32). - Government is reviewing costs and benefits of a statutory investor protection scheme; authorities will consider response based on review outcome. ### Proactive Supervision - IMF comments on need for proactive supervision of parts of regulated population, subject to funding. - ASIC has begun work on a program to standardize its approach to surveillance. - Authorities will take IMF comments into account in refining supervision (Principle 3, Recommendation 2; Recommendation on Principle 12; Principle 24, Recommendation 1; Principle 31, Recommendation 3). ### International Information Sharing and Cooperation - Government progressing amendments to law to allow ASIC to collect information in response to requests from foreign regulators in a broader range of circumstances. - Authorities will consider whether to permit collection and sharing of information with supervisory colleges (Recommendation on Principles 13 and 15). ### Regulation of Collective Investment Schemes - Authorities agree ASIC should collect data to remain confident wholesale sector is appropriately regulated with regard to risks to wholesale investors and financial stability (Principle 24, Recommendation 3). - Australia maintains a tailored regulatory framework distinguishing wholesale and retail clients; retail schemes/operators subject to significantly higher regulation and oversight. - Authorities will consider: - appropriateness of lack of disclosure requirements for wholesale funds (Principle 26, Recommendation 2); - whether further harmonization of content and format of disclosure documents will assist investor comparison (Principle 26, Recommendation 1). - Authorities note minimum content and format requirements exist for certain types of collective investment schemes but will consider improvements. - Authorities will consider IMF suggestion to increase safeguards for client asset protection in self custody and related party custody (Recommendation on Principle 25). - ASIC is currently reviewing custody standards, including financial requirements, applying to custody (including self custody) of property in retail collective investment schemes. ### Authorization and Ongoing Obligations of AFSL Holders - Assessment recommendations for AFSL authorization and ongoing obligations: a. Extend "good fame and character" test (applicable at time of authorization) to controllers, other significant shareholders, holders of significant amount of voting power and those otherwise in a position to materially influence a license applicant (Recommendation on Principle 29); b. Introduce appropriate internal control requirements for market intermediaries and periodic evaluation of such requirements (Principle 31, Recommendation 1); c. Require the duty to act in the best interest of clients to apply to all market intermediaries (Principle 31, Recommendation 2). - Authorities will consider appropriateness, noting the large scope of requirement (b). - In relation to "best interests" requirement, authorities note Future of Financial Advice reforms have introduced a duty for financial advisers to: - Act in the best interests of their clients (subject to a reasonable steps qualification); and - Place the best interests of their clients ahead of their own when providing personal advice to retail clients. ### Risk-based Capital Requirements - Assessment recommends ASIC introduce risk-based capital requirements and periodic capital adequacy reporting for all AFSL holders (Recommendation on Principle 30). - ASIC has commenced review of capital requirements for all licensed entities, in line with IOSCO Principles. - Authorities consider risk-based capital requirements and periodic capital adequacy reporting may not be appropriate for all AFSL holders, noting some are very small entities that do not hold client assets or are not significant enough to warrant such requirements. ### Market Oversight - Authorities welcome positive comments about effectiveness of ASIC’s oversight of exchanges and Australia’s framework for market abuse. - Assessment recommends ASIC refine market oversight role (Recommendation on Principle 9) and prioritize eliminating overlaps and ambiguities from transfer of market surveillance and supervision of non-ASX members (Recommendation on Principle 34). - ASIC will continue to work with industry to refine oversight as markets develop. - Authorities will consider costs and benefits of amending definition of "financial market" in the Corporations Act to better regulate evolving market structures (Principle 33, Recommendation 2). - Authorities will analyze issues concerning powers of ASIC or clearing facility operator to transfer client positions from a failing firm to a viable one and seek remedies if necessary (Principle 37, Recommendation 2). ### Large Exposures - Assessment concerned about potential exposures from bilateral transactions involving AFSL holders supervised neither by APRA nor by a clearing and settlement facility operator. - Recommendation: ASIC should extend large exposure requirements to all AFSL holders whose license conditions enable them to acquire large exposures relative to their capital base (Principle 37, Recommendation 1). - Authorities assess risk posed as small because "only a very small proportion" of OTC derivative transactions are conducted by such AFSL holders not supervised by APRA or clearing operators; they will take assessment views into account. - G20 requirements for reporting OTC derivative transactions to trade repositories may assist. - Government released draft legislation for public consultation to implement G20 reforms; under draft legislation ASIC could write rules imposing mandatory reporting obligations on persons, including AFSL holders undertaking specific OTC derivatives transactions. - After first stage implementation, authorities suggest assessing whether remaining material gaps exist in monitoring or regulating large exposures. ### Summary - Authorities will continue to evaluate and, as appropriate, implement FSAP recommendations. - Authorities look forward to continuing dialogue with the IMF "to further our goal of enhancing Australia’s regulatory and supervisory framework." ### Detailed Assessment (purpose) - Purpose: ascertain whether legal and regulatory securities market requirements and operations of securities regulatory authorities meet IOSCO Principles. - Assessment used to identify potential gaps, inconsistencies, weaknesses and areas where further powers and/or better implementation may be necessary and to establish priorities for improvements. *Source: IMF staff report excerpt provided in content unit _cr12314 - 55.* ### 92. The assessment of the country’s observance of each individual Principle is made ### _cr12314 - 92. The assessment of the country’s observance of each individual Principle is made ### IOSCO assessment categories and methodology - Assessment categories: fully implemented, broadly implemented, partly implemented, not implemented, and not applicable. - The IOSCO assessment methodology provides assessment criteria for each Principle to achieve designated benchmarks. - The methodology recognizes variation in means of implementation depending on domestic context, structure, and stage of development of the country’s capital market. - Definitions from the source: - Fully implemented: all assessment criteria specified for that Principle are generally met without any significant deficiencies. - Broadly implemented: exceptions to meeting the assessment criteria are limited to those specified under the broadly implemented benchmark for that Principle and do not substantially affect the overall adequacy of the regulation. - Partly implemented: the assessment criteria specified under the partly implemented benchmark for that Principle are generally met without any significant deficiencies. - Not implemented: major shortcomings (as specified in the not implemented benchmark for that Principle) are found in adhering to the assessment criteria. - Not applicable: the Principle does not apply because of the nature of the country’s securities market and relevant structural, legal and institutional considerations. ### Principles Relating to the Regulator — Principle 1: Responsibilities of the regulator - Focus of assessment: ASIC as the main authority responsible for regulation of securities markets in Australia; role of APRA, RBA, and SROs (notably ASX Group) is limited to specific areas. - Legal basis: - ASIC’s responsibilities, powers and authority set out in the ASIC Act; general responsibility for administration of the ASIC Act and the Corporations Act 2001 (CA). - Functions defined in s11(2) and 12A of the ASIC Act. - S2(g) of the ASIC Act requires ASIC to strive to take whatever action it can take, and is necessary, in order to enforce and give effect to the law of the Commonwealth that confers functions and powers on it. - Enforcement and guidance: - ASIC can enforce the law through administrative, civil and criminal measures described under Principles 10 and 11. - ASIC’s Regulatory Guides (RGs) interpret the law and can be used as basis for enforcement. - ASIC can modify or grant relief from application of the CA (class orders and individual relief); class orders are legislative instruments subject to parliamentary scrutiny and published on the ASIC website. - Individual reliefs are normally published; certain individual relief cannot be published due to legal requirements (examples provided: s340 CA and s342A CA). - ASIC publishes a quarterly report summarizing situations where it has exercised or refused exemption/modification powers; summarized information on unpublished individual reliefs included if they contributed to a theme. - Regulatory consistency and overlaps: - ASIC is the sole conduct and product regulator for financial services; definition of financial product is broad and all financial products are subject to same regulatory requirements independent of issuer. - Some formal differences may arise where instruments fall under prospectus regime rather than PDS regime (see Principle 16 in source). - Overlaps with APRA, Minister (or delegate), RBA, and SROs (particularly ASX Group clearing facilities). - Between APRA and ASIC: supervisory overlap arises because ASIC supervises all AFSL holders, including entities regulated by APRA (banks, insurers, superannuation fund trustees). - Framework responses: - Disapplication of certain CA provisions for AFSL holders also regulated by APRA (notably provisions relating to financial, technological and human resources and risk management procedures). - ASIC must consult APRA prior to imposing, revoking or varying AFSL conditions or suspending/cancelling an AFSL if changes could prevent AFSL holder from carrying out APRA-regulated activities; in other cases ASIC must inform APRA within a week of its action (s914A(4) CA). - Where AFSL holder is an ADI, powers conferred to APRA are exercised by the Minister (s914A(5) CA). - Ministerial powers regarding AML or CSFL: issue, vary, suspend or cancel; impose, vary or revoke conditions; disallow proposed changes to operating rules; give directions where not complying with license obligations — actions taken after advice of ASIC. - RBA role: sets and monitors compliance with Financial Stability Standards for CSFL holders to promote overall stability of Australian financial system. - Overlap with clearing facility operators (ASX Clear and ASX Clear (Futures)) where they set and monitor capital requirements of Clearing Participants; AFSL financial resources requirements are waived in such cases. - Cooperation and communication: - CA requires ASIC to communicate with APRA and the Minister on licensing matters. - Memoranda of Understanding (MoU) in place with APRA, ACCC and RBA to establish framework for exchange of information and cooperation. - ASIC-APRA Joint Protocol outlines liaison structure; agencies meet every eight weeks for operational liaison and quarterly for enforcement liaison. - Some coordination of supervisory activities, shared plans; joint inspections are rarely conducted. - s127 of the ASIC Act permits ASIC to release information to Minister, APRA, RBA and some domestic agencies; Chairman may impose conditions on release (see Principle 13 in source). - Clarity and practical differences in supervision: - ASIC’s responsibilities are clearly determined by law; no evident gaps in basic elements of securities regulation or division of legal responsibilities. - ASIC is a conduct regulator focused on compliance with statutory obligations and regulatory standards; APRA is a prudential regulator ensuring financial promises by prudentially regulated entities are met. - ASIC frequently uses prudential tools (capital and risk management requirements) but applies and monitors them less intensely than APRA for banks. - Assessment and comments: - Assessment: Fully Implemented - Comments: - No apparent lack of clarity in ASIC’s responsibilities as defined by law. - Complex supervisory structure due to division of prudential supervision among several authorities and CSFL holders. - Dispersion of regulatory roles may lead to unjustified differences in supervisory practices and lack of market-level overview of risks. - Smooth cooperation among APRA, ASIC, ASX Clear and RBA is essential. - Authorities should ensure the regulatory set-up continues to best ensure investor protection and reduction of systemic risk, in particular considering whether prudential supervision responsibilities are appropriately allocated. - Recommendation: consider continued appropriateness of legal prohibitions on publishing certain individual reliefs to provide maximum transparency possible. ### Principle 2: Operational independence and accountability of the regulator - Ministerial responsibilities and relations: - Minister responsible for ASIC: the Treasurer, assisted by the Minister for Financial Services and Superannuation and the Parliamentary Secretary to the Treasurer. - Ministerial allocations: superannuation, financial services, credit and financial markets to the Minister for Financial Services and Superannuation; corporate governance, audit, insolvency, financial literacy and ASIC administration to the Parliamentary Secretary of the Treasurer. - Directions from the Minister: - Minister may give written direction to ASIC on policies and priorities under s12 ASIC Act. - Before issuing a direction, Minister must provide notice to the ASIC Chairman and allow adequate opportunity for discussion. - If a direction is issued, Minister must publish it in the Government Gazette within 21 days and table it in both Houses of Parliament within 15 sitting days of publication (s12(5) ASIC Act). - Minister is prevented from giving a direction with reference to a particular case (s12(3) ASIC Act) but can direct ASIC to investigate a particular matter in the public interest (s14 ASIC Act); conduct and decisions of investigation remain ASIC’s. - Historical use: only one direction made (1992) under s12 to develop and implement policy relative to Commonwealth Director of Public Prosecutions. - Statement of Expectations / Statement of Intent: - Statement of Expectations issued in February 2007 following Uhrig Report recommendation. - Statement highlighted minimizing procedural requirements and business costs; preference for outcome-based regulation; required ASIC to copy information and correspondence provided to Ministers to the Secretary to the Treasury. - ASIC’s Statement of Intent agreed with substance but emphasized independence and noted legislative limits on providing information to Treasury. - Licensed markets and clearing and settlement facilities: - Certain supervisory decisions for AMLs and CFSLs conferred on the Minister (see Principles 1 and 33). - Minister must approve Market Integrity Rules (MIRs) prepared by ASIC dealing with licensed markets and related activities; process in CA (s798G). - If ASIC gives written advice to an AML or CSFL holder of intention to give a specified direction, the holder may request referral to the Minister; ASIC must do so immediately. Minister may require ASIC not to make, or to revoke, the direction; ASIC must comply immediately (s794D or s823D CA). - In February 2012, the CFR requested streamlining of process by which ASIC can give directions to AML and CSFLs to facilitate more rapid action in distress or significant breaches. - Independence safeguards: - ASIC has formal and open consultation procedures for new policy proposals. - Discretionary procedures (licensing, relief) subject to legislative requirements and ASIC regulatory guidance. - Regulatory Policy Group (RPG) composed of ASIC Commissioners and senior staff makes regulatory policy decisions and guides novel relief applications; less novel matters commonly reviewed by at least two people. - Declarations of Interest Program administers avoidance of conflicts of interest for ASIC and staff. - Funding and financial independence: - Funding appropriated annually by Parliament from the Commonwealth’s Consolidated Revenue Fund under Appropriations Bill. - ASIC raises fees and charges but does not retain most revenue; almost all fees and charges returned to Consolidated Revenue Fund. - In 2010-11, ASIC raised A$622 million in fees and charges. - Small amount retained by ASIC has varied between A$ 7 and 24 million between fiscal years 2007-08 and 2010-11. - Note: between fiscal years 2007-08 and 2010-11 retained amount varied between A$ 7 and 24 million (text preserves spacing and formatting). - Since 2006-07, ASIC allocated Enforcement Special Account (ESA) funding for running major cases. - Graph discussed in source shows: - Sharp increase in core funding in 2009-10 related to the Global Financial Crisis; reduction in core funding in 2010-11 and 2011-12 offset by receipts from fees and charges. - Overall increase in non-core funding since 2007-08 (earmarked for new policy proposals and special projects). - 2012-13 budget allocation: core funding drops by A$17.5 million, non-core funding increases by A$19.5 million; increases share of non-core funding to 23.9 percent from previous year’s 18.7 percent. - Projection: non-core funding will decrease after 2012-13; non-core funding projected to decline to nine percent of total operating revenue by 2015-16, with total operating revenue largely maintained through increase in core funding. - Definitions provided in source: - Core funding: funding the allocation and use of which is a matter for ASIC (within some limitations). - Non-core funding: funding allocated for specific purposes. - Practical note: ASIC does not use funds earmarked for specific purposes to fund other activities. - Since 1 August 2010, market supervision and competition cost recovery regime applies to certain AMLs and participants of ASX and Chi-X to recover additional government-approved funding for ASIC’s new regulatory functions. - Legal protection and governance: - S246 ASIC Act: ASIC, its Commissioners and staff protected from legal liability for acts or omissions done in good faith in performance or purported performance under corporations legislation or prescribed law. - Practical: unlikely ASIC staff would be sued; government would cover legal costs of sued staff except in relation to administrative law issues (in which case ASIC covers legal costs). - Commissioners appointment and tenure: - Appointed by Governor-General upon Minister nomination (s9 ASIC Act). - Term can be up to five years and eligible for reappointment (s108 ASIC Act). - Grounds for termination set out in s111 ASIC Act (misbehaviour, physical or mental incapacity, bankruptcy). - Accountability and procedural fairness: - ASIC reports to Federal Parliament, the Treasurer and Parliamentary Secretary; appears before parliamentary committees including Joint Parliamentary Committee on Corporations and Financial Services and Senate Estimates Committee twice yearly. - ASIC must publish annual report including audited accounts; publishes regulatory actions on its website. - Subject to Financial Management and Accountability Act 1997 for public money; internal audits by ASIC’s Audit Committee; AA&C Unit provides independent review and assurance; external audit by Australian National Audit Office. - Freedom of Information Act provisions apply, subject to exemptions (examples: s37 and s45 FOI Act). - ASIC required to give reasons in writing for decisions if affected person entitled to seek review; normally provides reasons as sound regulatory practice. - Administrative law protections: procedural fairness, hearing rule, impartiality; some statutory powers require opportunity for submissions. - Judicial and merits review: - ASIC’s decisions generally subject to judicial review under ADJR Act and merits review by Administrative Appeals Tribunal (AAT); some regulatory decisions not subject to merits review (s1317C CA) and some not reviewable for merits. - AAT may affirm or substitute ASIC decisions; appeal to Federal Court on questions of law (S44 AAT Act). - Decisions of Minister subject to both merits and judicial review. - Takeovers Panel reviewable for relief from takeovers provisions (s656A CA). - Commonwealth Ombudsman may review ASIC actions and make recommendations but cannot change ASIC decisions. - Confidentiality and disclosure protections available in review processes (AAT confidentiality applications; Federal Court confidentiality orders via s50 Federal Court of Australia Act 1976). - Disclosure of confidential information governed by s127 ASIC Act. - Assessment and comments: - Assessment: Partly Implemented - Comments: - Elements raising independence concerns: - Ministerial powers ranging from directions under ASIC Act to supervisory decision-making for market infrastructure; use is subject to clear and transparent processes and based on ASIC advice, but extent of powers remains a concern. - ASIC dependent on government appropriations; significant portion of funding is non-core earmarked for specific projects. - Relative share of non-core funding increased in recent years, continuing in 2012-13 budget, raising concerns about stability of core funding while ASIC has new permanent responsibilities. - ASIC’s non-core funding projected to decline from fiscal year 2013-14 onwards — viewed as encouraging but not sufficient to guarantee financial independence. - Recommendation: authorities should consider alternative funding arrangements to better equip ASIC to respond to current and emerging challenges in securities regulation domestically and globally. ### Principle 3: Adequacy of powers, resources and capacity (opening material) - ASIC exercises powers defined in the ASIC Act and the CA, including among others: - registers companies and MIS; - grants AFSLs; - registers auditors and liquidators; - grants relief from various provisions of the legislation administered by ASIC; - modifies and exempts the laws it administers, where appropriate; - administers the disclosure requirements for financial products and services in [text continues in source]. *Source: _cr12314 - 92. The assessment of the country’s observance of each individual Principle is made* ### Chapter 7 of the CA and stops the issue of financial products under defective ### _cr12314 - Chapter 7 of the CA and stops the issue of financial products under defective ### ASIC powers and functions - ASIC can: - stop the issue of financial products under defective disclosure documents; - maintain publicly accessible registers of information about companies, AFSL holders and ACL holders; - make rules aimed at ensuring the integrity of financial markets; - investigate suspected breaches of law and in doing so require people to produce books or answer questions at an examination; - issue infringement notices in relation to alleged breaches of some laws; - ban people from engaging in credit activities or providing financial services; - seek civil penalties from the courts; - commence prosecutions; - monitor and regulate corporate activity such as financial reporting, prospectus fundraising, and takeover activity; - conduct real-time supervision of market participants; and - educate and inform retail investors and consumers. - ASIC has an incidental power to do whatever is necessary for, or in connection with, or reasonably incidental to, the performance of its functions (s11(4) and 12A(6) ASIC Act). - Apart from making MIRs, ASIC does not have a rule-making power under the CA, but uses RGs and class orders to interpret the law; market participants view ASIC’s RGs as effectively having the same impact on behaviour as binding regulations. ### Funding and staffing (exact figures as presented) - Regulated population and number of staff (as at May 2012): - Markets / Corporations: - 1.84 million registered companies — 5 staff - 2,216 listed corporations — 58 staff - Exchange Market Operators — 17 staff - AMLs — 5 staff - CSFLs — 19 staff - exempt markets — 98 staff - low volume exempt markets — 28 staff - Financial Reporting and Audit: - 5,077 registered company auditors — 4 staff - large audit firms auditing listed entities — 111 staff - other audit firms auditing listed entities — 33 staff - Market and Participant Supervision: - 137 Market Participants — 54 staff - Approximately 700 active Indirect Market Participants - Supervision of trading on 6 markets - Insolvency Practitioners: - 670 registered liquidators — 28 staff - Investors and Financial Consumers / Investment Managers and Superannuation: - 585 responsible entities — 4,500 registered CIS — 230 super fund trustees — 680 custodial service providers — 44 staff - Investment Banks: - 25 investment banks — 500-600 hedge funds — 44 retail OTC derivative issuers — 6 credit rating agencies — 26 staff - Consumers, Advisers and Retain Investors: - 3,345 AFSL holders authorized to provide personal financial advice — 70 staff - Deposit-takers, Consumer Credit and Insurers: - 180 ADIs — 6,081 credit providers — 64 staff - Total staff directly responsible for various areas — 397 - Additional staffing and structure: - Deterrence (enforcement) functions total staff — 256 - Registry and licensing function staff — 430 (of which approximately 230 are in charge of company registry services and 43 of the licensing function) - With support services and centralized functions, total staff of ASIC is close to 1900. - Funding structure: - ASIC’s funding is split into core and non-core funding. - ASIC largely can specify the operational allocation of core funding; non-core funding must be spent on allocated activities. - ASIC’s view: measured by interaction outcomes and enforcement activity, current funding levels are adequate, and current staff allocation is appropriate. - ASIC notes future growth and complexity in financial markets will challenge adequacy of funding. - Assessment summary: - Assessment: Partly Implemented - Key observations: - ASIC has been assigned significant new responsibilities; funding expected to remain approximately the same level for a third consecutive year in 2012-13. - Non-core funding restrictions mean ASIC cannot effectively decide on operational allocation of a significant part of its resources (inconsistent with Key Question 2.(b) of the Methodology). - Resources allocated to proactive supervision are very limited and leave a significant part of the regulated population subject only to reactive supervision. - An increase in financial resources would better equip ASIC to meet upcoming regulatory challenges. - ASIC has an extensive range of powers; despite limited MIR-making power, it has built a credible regulatory framework using available CA tools. ### Capacity to attract and retain qualified staff - Remuneration and turnover: - Senior Executives are paid 10-20 percent above the APS median. - More junior roles sit at the median of the APS pay scales. - Performance based bonuses range from 3 to15 percent. - As of November 2011, ongoing employee turnover rate was 12.5 percent (a rolling 12 month average), an increase of 3.6 percent from the previous year. - Internal survey: level of self-reported staff retention over the next two years is 59 percent (higher than the 44 percent for large APS agencies); 20 percent of staff indicated they intend to leave within the next two years. - ASIC management view: staff turnover is currently at a healthy level. ### Training and professional development - In 2010-2011, ASIC spent around A$1.4 million on formal learning programs. - ASIC can support staff’s studies financially (up to A$5000/year) and through study and leave entitlements. - ASIC developed learning pathways aligned with business needs and offers seminars and Continuing Professional Development Program opportunities. ### Governance and internal controls - ASIC has a Corporate Governance Charter outlining internal governance and delegation of responsibilities. - ASIC is headed by a full-time Commission responsible for strategic direction and operations; currently five Commissioners, including the Chairman and Deputy Chairman. - Commission meetings are normally monthly and act as decision-making forum on significant strategic issues. - The ASIC Act sets out functions, powers, and statutory governance requirements including delegation rules. - Chairman manages ASIC and decision-making outside Commission meetings; each Commissioner shares responsibility for ASIC’s performance, operations, strategic direction and priorities. - Senior Executive Leaders (SELs) are responsible for day-to-day operation within their areas, reporting lines and authority established with Commissioners. - ASIC has policies and workflows for enforcement and licensing; business units have documentation guiding day-to-day work. - ASIC’s Audit Committee provides independent oversight and reports to the Chairman and the Commission on risk management, internal control frameworks, financial reporting truth and fairness, and legislative compliance. - Audit Committee Chairman, Deputy Chairman and one other member are appointed from outside ASIC; an ASIC Commissioner and a senior executive from ASIC are also members. ### Investor education - ASIC is responsible for promoting confident and informed participation of consumers and investors in the financial system (s1(2) ASIC Act). - ASIC is implementing a National Financial Literacy Strategy with four main work streams: - delivering financial literacy programs; - ensuring access to independent information and tools; - looking beyond education to solutions that promote financial wellbeing; - developing partnerships with industry and the community. - ASIC funds a Consumer Advisory Panel and an External Advisory Panel and maintains regional liaison committees in each State and Territory. ### Principle 4 — Regulatory processes, consultation and procedural fairness - Policy development process: - ASIC consults with the public and other government bodies through formal and informal procedures, including early informal roundtable discussions with industry and consumer advocacy groups. - ASIC funds a Consumer Advisory Panel and an External Advisory Panel for consultation on key issues. - ASIC circulates consultation papers before finalizing new or revised policy, deviating only where urgency requires. - ASIC’s policy development process is subject to the Australian Government’s Regulatory Impact Analysis process; Regulatory Impact Statements (RIS) are prepared and reviewed by the Office of Best Practice Regulation (OBPR) for non-minor issues. - ASIC publishes the RIS and a response report together with the final RG. - ASIC uses media releases to disclose and explain regulatory actions and adoption of new or revised standards and publishes policy materials, RGs, MIRs and relief instruments on its website. - The Governor-General, on advice of the Executive Government, can issue regulations applicable to securities markets; making of such regulations is subject to the same procedural requirements (consultation and RIA) that apply to MIRs and other legislative instruments by ASIC. - Procedural fairness: - Procedural fairness requirements applicable to ASIC are addressed under Principle 2 (details in the source text). - Decisions on AFSL licences: - Criteria for granting or denying a licence are specified in the CA. - s913B of the CA requires ASIC to grant an AFSL if certain requirements are met. - ASIC can refuse to grant an AFSL only after the applicant has been provided with an opportunity to appear and be represented at a private hearing before ASIC. - Process for suspending or revoking an AFSL is specified in the CA; in most cases the AFSL holder will be provided an opportunity to appear at a hearing prior to suspension or revocation. - Only in extreme circumstances (e.g., insolvency) can ASIC act without providing the AFSL holder an opportunity to be heard. _Italic: Source — Chapter content from the provided PDF unit._ ### Section 127(1) of the ASIC Act provides that ASIC is to take reasonable measures to ### _cr12314 - Section 127(1) of the ASIC Act provides that ASIC is to take reasonable measures to ### Confidentiality, public comment and procedural fairness - Section 127(1) of the ASIC Act requires ASIC to take reasonable measures to protect confidential information from unauthorized disclosure. - Information held by ASIC is also subject to the Privacy Principles set out in s14 of the Privacy Act. - ASIC’s public commenting policy on investigations is set out in Information Sheet no. 152; ASIC may make statements when it is in the public interest and will weigh public benefits against potential prejudice to individuals. - If the Minister directs ASIC to investigate under s14 of the ASIC Act, ASIC must prepare a formal report; the Minister may disclose or publish that report (s18 ASIC Act). In practice ASIC normally either takes action under its own powers or prepares a brief of evidence for the CDPP instead of preparing formal reports. - Failure by ASIC staff to observe confidentiality or privacy obligations may constitute a breach of the APS Values and APS Code of Conduct and could lead to disciplinary action; breach of s13 of the Public Service Act may be punishable by imprisonment for up to two years under s70 of the Crimes Act. - ASIC has an obligation to afford procedural fairness when a decision may adversely affect a person’s rights, interests or legitimate expectations; omission of procedural fairness can expose decisions to legal challenge and possible disciplinary consequences. ### Code of conduct, conflicts of interest and staff standards - ASIC Commissioners must disclose direct or indirect pecuniary or other interests that could conflict with decision-making (s124(2) ASIC Act); Commissioners must disclose relevant pecuniary interests to the Minister every six months. - All ASIC staff must disclose and take reasonable steps to avoid conflicts of interest under the Public Service Act and internal ASIC policy; there is an ongoing conflict disclosure obligation and initial and biannual staff disclosures on financial interests and outside employment. - Since September 2011, ASIC internal policy prohibits trading by staff most likely to handle market sensitive information unless pre-trading approval is obtained from ASIC’s Risk and Security Unit, which compares the trading request to a restricted list of entities and products. - Use, collection, access, accuracy, security, storage and disposal of official information are governed by Commonwealth Acts and Regulations; staff must acknowledge awareness of these upon commencement. - Enforcement of the code: ASIC’s Risk and Security Unit monitors compliance; s15 of the Public Service Act requires ASIC procedures for investigating and resolving breaches of the APS Code of Conduct; the Chairman can impose sanctions including termination of employment (s15(1) Public Service Act). The Professional Standards Unit (reporting to Commission Counsel) reviews complaints about staff conduct. ### Consistent application of powers - ASIC uses internal manuals, guides and organizational arrangements with allocation of responsibilities to ensure coordination and consistency across the regulated population. - Assessment recorded in source: Fully Implemented. ### Systemic risk monitoring, Emerging Risk Committee (ERC) and expertise - Monitoring systemic risk is not an explicit legislative mandate for ASIC, but ASIC established the Emerging Risk Committee (ERC) in July 2011 as a cross-organizational group meeting monthly. - ERC permanent membership includes the Chief Economist and representatives from Deterrence, Misconduct and Breach Reporting, Chief Legal Office and International Strategy; it is chaired by a Commissioner and reports to the full Commission monthly. - ERC purpose: channel senior advice to identify emerging risks with implications across ASIC activities; at each meeting a different regulated population is assessed and stakeholder teams participate. - ERC Risk Assessment Framework: used to assess emerging risks and determine responses; examples of systemically relevant issues considered include the risk of a second global financial crisis and a collapse in the Australian residential property market and its impact on Australian banks. - The Office of the Chief Economist provides economic and financial data and analysis for strategic decision-making, including managing systemic risk. - ASIC is developing expertise on risk measurement and analysis within the Office of the Chief Economist and ERC; stakeholder teams develop risk-based surveillance frameworks at varying stages of development, focusing on thematic risks or firm-level risks. - Cooperation with other regulators: ASIC participates in the Council of Financial Regulators (meets four times per year); CFSL holders (e.g., ASX Clear and ASX Clear (Futures)) and the RBA play roles in clearing participant oversight; Treasury has informal conference calls with APRA, RBA and ASIC for systemic information sharing. - Assessment recorded in source: Fully Implemented. - Comment: ERC is work in progress; ASIC is encouraged to further develop ERC and ensure ERC’s focus on emerging/systemic risks and effective channeling to the CFR. ### Regulatory perimeter review and law reform processes - ERC is the main vehicle for identifying and assessing the adequacy of ASIC’s regulatory requirements and framework; standing papers gather evidence on economic developments, complaints data trends and international regulatory developments. - ERC has a standing agenda item to review unregulated products and activities and innovation risks (examples: lack of transparency in structured products, commodity futures risks, monitoring complex shadow banking groups). - Regulatory Policy Group reviews past regulatory policy decisions; Strategic Policy team manages an internal law reform process and engages with Treasury every three months to monitor law reform requests. - ASIC can propose law reform to Treasury or raise issues with other departments; ASIC can also use class orders and regulatory guidance to address gaps (example: class order CO 11/1140 introducing new financial requirements for responsible entities of MIS in November 2011). - Assessment recorded in source: Fully Implemented. ### Conflicts of interest and misalignment of incentives (regulated entities and issuers) - AFSL holders must have arrangements for management of conflicts of interest (s912A(aa) CA); this applies to market intermediaries, REs of MIS (including hedge funds), CRAs and research report providers; conflict requirements also apply to auditors and market operators. - ASIC’s surveillance is risk-based; ASIC requires conflict disclosures to be timely, prominent, specific and meaningful and to occur before or when the financial service is provided to allow clients reasonable time to assess effects. - CP 171 (November 2011) proposed physical and electronic separation of research business and ancillary business units for research report providers and a biannual compliance report requirement; consultation closed on 3 February 2012 and ASIC is reviewing submissions. - For ABS and RMBS disclosure and retention requirements, ASIC has raised issues with Treasury and worked with the Australian Securitisation Forum (ASF). ASF released RMBS disclosure standards effective from July 1, 2012; ASF is developing disclosure standards for other ABS consistent, where practicable, with international retention standards. - Government reforms (Future of Financial Advice) include a prospective ban on conflicted remuneration and a ban on soft-dollar benefits higher than A$300 (per benefit); these proposals were passed by Parliament in June 2012, mandatory from 1 July 2013 and voluntary from 1 July 2012. - Assessment recorded in source: Fully Implemented. ### Self-Regulatory Organizations, AML and CSFL holders oversight - No formal SROs with delegated powers from ASIC; however 17 AML and 5 CSFL holders perform self-regulatory functions for markets and clearing/settlement facilities, with statutory obligations to regulate participants, monitor behaviour and impose sanctions, and to cooperate with ASIC. - Major AMLs with significance: ASX, Chi-X and NSX; ASX holds four of the five CFSLs. - Eligibility rules for participation include director/supervisory structure, business integrity, organisational competency, technical/human resources, capital/financial resources, insurance, and CSFL-specific clearing/settlement agreement requirements. - AML/CSFL holders must, to the extent reasonably practicable, ensure markets are fair, orderly and transparent; ASX operates an Appeals Tribunal for participant admission refusals (but applicants for trading participant admission cannot appeal). - AML/CSFL holders must monitor and enforce operating rules, provide for expulsion/suspension/discipline of participants, and notify ASIC of rule changes; failure to notify ASIC within 21 days causes the changes to cease to have effect. - ASIC reviews draft operating rules in license applications and advises the Minister (who can disallow changes within 28 days); in CSFL cases Minister decisions consider RBA Financial Stability Standards (FSS). - ASIC guidance (RG 172.87) addresses separation of commercial and regulatory functions; ASX Compliance Pty Ltd is an example of structural separation used by ASX. - ASIC has MOUs with ASX, Chi-X and NSX and protocols for sharing information in relation to the MIRs after assuming market supervision in August 2010. - AML/CSFL holders must provide annual reports, audit reports and special reports to ASIC; ASIC publishes annual assessments of compliance and conducts on-site interviews and visits; assessments are historical and forward looking with recommendations followed up. - ASIC retains authority to inquire and intervene where AML/CSFL holder powers are inadequate; AML/CSFL holders are subject to the same professional standards as ASIC (confidentiality, information handling, procedural fairness, conflicts of interest). - Minister has power to suspend or cancel a license after show-cause hearings and recommendation reports. - Assessment recorded in source: Fully Implemented. ### Inspection, investigation, surveillance powers and record-keeping - ASIC has broad inspection, investigation and surveillance powers across corporations and financial products, including routine and no-notice inspections; failure to provide access to ‘books’ is a strict liability offence. - ASIC can serve notices to produce books without prior warning and can require immediate production; ASIC may apply for search warrants if books might be destroyed; warrants issued by a magistrate to the AFP on ASIC application. - ASIC can seize evidential material via warrants under the Proceeds of Crime Act; inspection powers also available under Insurance Act, Life Insurance Act, Retirement Savings Account Act and Superannuation Industry (Supervision) Act (with APRA authorization where required). - Failure to comply with ASIC requirements may lead to court certification, court inquiry, and contempt of court (possible imprisonment or fines); intentional/reckless non-compliance may be punishable by up to two years imprisonment. - Extensive record-keeping and retention requirements for companies, AFSL, AML and CSFL holders: AFSL holders must keep financial records including moneys paid/received, financial products bought/sold, names of buyers/sellers, names of instruction givers, owners of financial products held on their behalf, transaction records stating whether on behalf of client/own account/employee account and the day or period of the transaction. - AFSL holders must deposit client money into a bank account at an ADI and keep financial records that record and explain correctly the financial position; failure is punishable by five years imprisonment or a fine of A$22,000, or both. - Retention periods: financial records retained for seven years after transactions completed; other records (including transactional records) retained for five years; records must be in English (or amenable to translation) and accessible in Australia; books must be available for inspection at the registered office and to the public during normal business hours. - ASIC generally does not outsource its functions; AML and CSFL holders’ monitoring of member conduct and ASIC’s oversight program (inspection, periodic reviews, reporting, rule change review) functionally resembles oversight of delegated monitoring. - 2010 ASIC Act amendment allows ASIC, for any investigation (criminal or civil), to either issue a notice for production of documents or apply for a search warrant under the ASIC Act without first issuing a notice to produce. - Assessment recorded in source: Fully implemented. ### Enforcement powers, sanctions, civil and criminal proceedings - ASIC has powers to commence investigations where it suspects breaches of the CA or other Commonwealth/State law involving body corporates, managed investment schemes, fraud or dishonesty. - Some powers are investigation-specific (compulsory examination on oath); examinees are not excused on self-incrimination grounds, but answers claimed to be self-incriminating are not admissible in other criminal proceedings. - Sanctions and remedies include: - obtaining enforceable undertakings; - administrative powers and sanctions; - seeking civil penalties from courts; - commencing criminal prosecutions (generally via CDPP). - Enforceable undertakings: administrative settlements accepted by ASIC as alternatives to court action; require remediation, monitoring (often by independent expert), public notification to affected clients and may lead to compensation arrangements; cannot substitute for criminal sanctions. - Administrative sanctions and civil actions include: - banning persons from providing financial services; - immediate suspension or cancellation of an AFSL; - suspension or cancellation of an AFSL after offering a hearing; - issuing infringement notices (with financial penalties) as alternatives to civil monetary pecuniary proceedings; - issuing stop orders (e.g., defective PDS or prospectus); - directing an AML or CSFL holder (including to suspend dealings in a financial product/class); - imposing, varying, revoking conditions on an AFSL; - issuing public warning notices; - obtaining court orders to enforce compliance with enforceable undertakings. - ASIC cannot directly impose monetary penalties; infringement notices may require payment but are not directly enforceable; refusal to pay leads ASIC to commence civil penalty proceedings. - ASIC can direct an AML holder to suspend dealings in a product/class if necessary or in the public interest (no formal use yet; issues resolved by agreement to date). - Criminal proceedings: ASIC undertakes minor summary prosecutions and refers major matters to the CDPP; ASIC refers briefs of evidence to the CDPP and maintains regular liaison meetings at state and national levels; referrals to State DPP are rare. - Private rights of action (including class actions) remain unaffected by ASIC enforcement; class actions can be run on contingency fee basis. - Information sharing with other authorities is permitted subject to confidentiality constraints (see Principles 13, 14, 15). - Assessment recorded in source: Fully Implemented. ### Enforcement effectiveness, prioritization and resources - Deterrence function is performed by eight Deterrence teams across States and Territories with a total of 256 people; Market Integrity and Corporate Governance Deterrence team and Financial Services Deterrence team handle market misconduct and financial services/credit misconduct respectively. - Deterrence teams consider strategic significance, alternative actions, cost vs regulatory benefit, and evidence availability in deciding to investigate. - Sanctioning and enforcement tools are calibrated to be effective, proportionate and dissuasive; ASIC emphasizes publicizing enforcement outcomes and does not agree to secrecy of enforcement outcomes unless legally required. - ASIC uses social media and MoneySmart website for outreach; MoneySmart reported over 1.2 million unique visitors since launch in March 2011. - Breach reporting (AFSL holders): obligation to notify ASIC within ten business days of significant breaches or likely significant breaches. - Finalized breach reports (excluding insurance matters) by year: - 2006-2007: 1364 - 2007-2008: 1180 - 2008-2009: 1187 - 2009-2010: 1466 - 2010-2011: 1217 - 2010-2011 breach report processing (of 1217 reports): - No action in 528 instances (43percent). - Merged with existing matters: 338 (27percent). - Referred to relevant team for follow up or merged with existing investigations: 377 (30percent); some referrals directly to Deterrence. - Public reports of misconduct handled in 2010-11: 15,634 (17 percent increase from 2009-10); 78 percent of assessments finalized in 28 days; 28 percent escalated within ASIC for compliance, investigation or surveillance (compared to 21 percent in 2009-10). - Surveillance and inspection resourcing examples: - Market Surveillance Team in MPS: 25 staff, uses SMARTS automated trade surveillance for ASX and Chi-X. - Emerging Risk Committee informs surveillance priorities. - EMO: 28 staff with 3.5 allocated to annual assessments of licensed markets and CSFLs. - FRA (audit firm oversight): 11 staff for auditor oversight; ‘Big 4’ audit firms reviewed on an 18-month cycle; population of 2,216 audit firms aimed to be covered over five years. - COR team: 58 staff, 5.5 employees in surveillance and 20 in document review; processed 919 prospectuses in 2010/11; extended exposure periods in 73 instances and issued 20 interim stop orders. - IB team: 25 staff undertaking proactive surveillance projects. - MBR team: 95 staff (around 75 on non-credit matters). - Summary of Results of Investigations Since 2007 (figures as supplied in source — values presented exactly as in source): - Litigation Completed Total: 479280186 156 202 - Administrative: 494952 36 39 - Civil: 37917488 90 134 - Criminal: 515746 30 29 - Litigation Completed Successfully: 97%94%90% 91% 90% - Criminals convicted: 424934 22 25 - Criminals jailed: 212319 12 16 - Summary prosecution: officers prosecuted 561752724 554 425 - Summary prosecution: fines and costs against company officers A$1.1 A$1.07 A$1.03 A$.813 A$.873 - Costs, fines and compensation A$102 A$46 A$14.5 A$287 A$95 - Assets frozen A$38 A$100 A$13.8 A$15.5 A$17.6 - People/Companies banned from financial services/credit 354942 41 64 - Enforceable Undertakings 101114 8 14 - Source: ASIC (values reproduced verbatim from source). - Assessment for enforcement effectiveness recorded in source: Broadly Implemented. - Comment: enforcement strong but supervisory functions for REs, MIS and market intermediaries require stepped-up proactive surveillance; a significant portion of indirect market participants remain subject only to reactive surveillance. ### Information sharing, international cooperation and legal constraints - ASIC can provide confidential information to domestic regulators and authorities to assist them without external approval; disclosure of personal information otherwise prohibited under the Privacy Act is permitted in certain circumstances and ASIC generally imposes conditions on recipient use. - Sharing confidential information with foreign counterparts is subject to more complex controls: - ASIC may share information in its possession with individual foreign agencies but not with agencies acting collectively (e.g., colleges of supervisors) unless constraints of MABRA/MACMA are satisfied. - ASIC’s information gathering powers cannot be used to collect information solely for a foreign regulator’s supervisory use where ASIC has no independent interest; if the request relates to enforcement, ASIC can assist under MABRA. - Under MABRA ASIC must obtain Treasurer approval; the Treasurer’s considerations align with IOSCO MMOU criteria. - For criminal matters, assistance may be sought under MACMA from the Attorney-General with broader powers (e.g., taking evidence, freezing/seizing assets); AG grounds for refusal also align with IOSCO MMOU. - Limitations apply to info obtained via search warrants under the Crimes Act, from AUSTRAC, or under the Telecommunications (Interception and Access) Act 1979 (TIA Act). - Recent government action (as of source): proposed amendments to MABRA Regulations (expected Q3 2012) to enable ASIC to respond to requests from foreign business law regulators and provide information for general supervisory purposes; proposed MABRA Act amendments to enable ASIC to be given authorization power to respond to such requests. - ASIC enters MoUs and information sharing agreements as administrative practice and was an early signatory to the IOSCO MMOU. - ASIC participates in Intermarket Surveillance Group (ISG) meetings to assist market surveillance (attends but not as a member). - Examples of supervisory/specific MoUs: - New Zealand: 2008 mutual recognition regime and non-public MoU. - Hong Kong: 2008 MOU with Hong Kong SFC for mutual recognition of cross-border collective investment scheme offerings. - Canada: February 2012 supervisory cooperation MOU with four provincial securities commissions (subject to ASIC’s constraints on supervisory info sharing). - U.S.: 2008 MOU with SEC on market oversight and supervision of financial services firms; 2010 MOU with FINRA covering supervisory cooperation. - Confidentiality practice: ASIC takes reasonable measures to prevent unauthorized use/disclosure and can impose conditions, consult foreign regulator before pre-publication use, and assert legal privileges where appropriate. - International cooperation statistics: ICR managed 980 requests for assistance during 2009-10 and 2010-11; only 3 or 4 requests per year are refused. - Average ASIC response times to foreign regulator requests (as reported): - Research requests average response time: 33 days - Enforcement requests average response time: 58 days - Overall average: 44 days - Assessment recorded in source: Principles 13 and 15 — Broadly Implemented; Principle 14 — Fully implemented. - Comment: limitations on ASIC obtaining/sharing supervisory information and inability to participate fully in supervisory colleges constrain international supervisory cooperation; government progress on MABRA changes expected by end of 2012 may address some constraints. ### Issuers, disclosure regimes, prospectus rules and continuous disclosure - ASIC released RG 228 (Prospectuses: Effective disclosure for retail investors) as a comprehensive regulatory guide on prospectus disclosure; other RGs include RG 69 (Debentures and unsecured notes) and RG 213 (Facilitating debt raising). - Definitional points: - ‘Securities’ under CA include shares, debentures, legal/equitable rights or interests in shares and debentures, and options to acquire shares/debentures; corporate bonds and convertible notes fall under securities; many structured products (warrants) and derivatives are treated as financial products subject to financial products disclosure. - Prospectus and disclosure regime highlights: - Offers of securities generally require a disclosure document (s706 CA) unless exempted (s708CA). - Prospectus must satisfy the ‘reasonable investor’ test: disclose all information investors/advisers reasonably require to assess rights/liabilities, issuer assets/liabilities/financial position/performance/prospects. - Disclosure documents must be clear, concise and effective; failure to correct materially adverse misleading omission requires supplementary or replacement disclosure. - Non-quoted securities: seven-day exposure period after lodgment with ASIC before accepting applications; ASIC may extend exposure period by up to seven days and issue interim stop orders of 21 days. - Quoted securities: no exposure period; ASIC can issue interim stop orders at any time after lodgment for 21 days. - ASIC power to grant relief from disclosure provisions: 1 July 2010–30 June 2011 received 219 fundraising relief applications, 146 granted. - Annual and half-year reporting: - Financial report and directors’ report required for each financial year by disclosing entities, public companies, large proprietary companies and registered MIS. - Financial reports must be audited; listed entities’ CEO and CFO must declare records properly kept and compliance with accounting standards; incorrect director declarations attract civil/criminal sanctions. - ASIC can grant financial reporting relief; 1 July 2010–30 June 2011 received 270 applications for relief, 126 granted. - Half-year reports: must be lodged within 75 days after half-year end (s320 CA); auditor review (negative assurance) required. - Continuous disclosure: - Rigorous system ensuring timely disclosure of material information to the market; for listed entities the listing rules (primarily ASX) operationalize continuous disclosure. - Derogations for confidentiality and incomplete negotiations exist; ASX encourages trading halts and recommends press release readiness if derogation fails to hold. - ASIC can direct market operators to suspend dealings for up to 21 days to protect market participants. - Penalties for continuous disclosure breaches: fine of A$22,000 or imprisonment for five years or both; corporations face up to five times individual penalty in some cases; civil penalties up to A$1 million (corporation) or A$200,000 (individual). Infringement notice fines range from A$33,000 to A$100,000 for contraventions. - Since 2004 ASIC has issued 20 infringement notices for alleged continuous disclosure breaches. - Cross-border fundraising and mutual recognition: - Australian fundraising provisions apply to offers received in Australia regardless of where issue/sale/transfer occurs; foreign issuers offering in Australia must comply with prospectus provisions unless exempt or granted relief. - ASIC received 39 applications for relief for foreign issuers since 1 July 2008; limited technical relief granted in 31 applications, relief refused in 4, 4 withdrawn. - Trans-Tasman mutual recognition (2008) permits single disclosure documents across Australia and New Zealand under mutual recognition arrangements supported by a (non-public) MoU. - ASIC operational organization for issuer oversight: - COR and EMR teams: primary responsibility for prospectuses, M&A/takeover documents, related party and independent expert reports; COR staffed with 58, 20 engaged in document review; processed 919 prospectuses in 2010/11 (2006/7 peak 1227), extended exposure periods in 73 instances and issued 20 interim stop orders. - FRA: 40 staff review listed company financial statements. - MPS: surveillance of ongoing market disclosures. - Assessment recorded in source: Fully Implemented. - Comment: ASIC’s RGs (e.g., RG 228, RG 69) materially enhance disclosure quality for retail investors; ASIC’s recent successful court cases have strengthened continuous disclosure enforcement and corporate director awareness. ### Shareholder rights, takeovers, change of control and squeeze-out - Shareholder voting and information rights set by CA, ASIC Act, stock exchange rules and case law; requirements cover notice periods, access to information at AGMs and disclosures for takeovers, schemes of arrangement and share buy-backs. - Change of control principles: full disclosure of material information, reasonable time for shareholders to consider proposals, and equal opportunity to participate in benefits under proposals. - Takeovers framework: - Applies to companies registered in Australia listed on prescribed financial markets (ASX, NSX, BSX, APX) or public companies (50+ shareholders); also applies to listed managed investment schemes. - Control threshold: 20 percent relevant interest triggers takeover prohibitions; 5percent threshold for notifying substantial holdings in listed companies. - Permitted acquisition methods include market bids, off-market bids, schemes of arrangement, shareholder approvals, 3percent creeping acquisitions, pro rata rights issues and downstream acquisitions. - 3 percent creep exception allows gradual increases without a takeover bid; ASIC suggested Treasury consider removing the creep exception (ASIC letter July 2012). - Off-market bids typically require bidder’s statement (including bidder details, funding, consideration history, benefits offered in prior 4 months and other material information); if consideration includes securities, disclosure equivalent to a prospectus is required unless reduced disclosure rules apply for continuously quoted securities in the prior 12 months. - Off-market offers must remain open minimum one month and may not exceed 12 months; automatic extensions of 14 days if consideration improved or bidder reaches 50 percent voting power during final seven days. - Market bids must be unconditional cash offers for all quoted securities and commence 14 days after bid announcement. - Squeeze-out and compulsory acquisition: - If bidder (and associates) have relevant interests in at least 90 percent of securities in bid class and have acquired at least 75 percent of securities offered under the bid, bidder may compulsorily acquire remaining securities; remaining holders must be notified. - General compulsory acquisition power within 6 months of obtaining full beneficial interests in 90 percent of a company; expert valuation report (ASIC-nominated) required; if 10 percent of minority objects, court approval required. - ASIC’s supervisory role in takeovers: - ASIC reviews all original and supplementary bidder’s and target’s statements for compliance; 1 July 2010–30 June 2011: COR and EMR reviewed all 132 original bidder’s and target’s statements and all 155 supplementary statements lodged. - ASIC raises disclosure concerns and expects corrective/additional disclosure via supplementary or replacement statements; monitors statements during offer periods and can provide relief from takeover provisions where appropriate. - Assessment and comments on fairness and equity: mechanisms broadly consistent with equitable treatment objectives, subject to anomalies (e.g., 3percent creep) and enforcement/resource considerations. _Italic source: Extracted and reproduced exactly from the supplied IMF content unit _cr12314 (PDF). _ ### Section 671B CA requires a person who begins or ceases to have a substantial ### _cr12314 - Section 671B CA requires a person who begins or ceases to have a substantial ### Disclosure and substantial shareholding rules - Section 671B CA requires notification where a person: - begins or ceases to have a substantial shareholding (defined in s9 as a relevant interest in five percent of votes) in a listed company or listed MIS; - moves at least one percent if already a substantial shareholder; or - makes a takeover bid. - Notifications must be given to both the entity and the market operator; the market operator publishes the information. - Information required includes the person’s name and address and voting shares in the company. - Timing requirements (s671B CA): - If a takeover bid is made or the person becomes aware of the change during a takeover bid: by 9:30 am of the next trading day. - In other situations: within two days of becoming aware of the information. ### ASIC takeover relief and activity statistics - ASIC has the power to provide relief from the takeover provisions of Chapter 6 of CA. - For the period 1 July 2010 to 30 June 2011: - ASIC received 261 applications for takeover relief. - 102 applications were granted. - ASIC assesses relief applications on individual facts and principles in s602 CA, with emphasis on the equal opportunity principle and whether consideration offered is fair and equitable. ### Takeovers Panel: role and powers - The Takeovers Panel is a dispute resolution mechanism; ASIC regulates the conduct of parties to takeovers. - Composition and appointment: - 57 members appointed by the Minister from takeover practitioners, lawyers, investment bankers and fund managers. - Powers and functions: - May review any ASIC decision to exempt or modify takeovers law on application by affected persons. - May declare “unacceptable circumstances” on application by bidder, target, ASIC or other affected persons. - Upon declaration, may make a wide range of orders enforceable by court order; courts can quash orders (rare). - The concept of unacceptable circumstances covers actual breaches of law and breaches of the spirit of the law. - Caseload: - The Panel deals with approximately 30 applications a year. ### Schemes of arrangement: thresholds and court role - Schemes of arrangement are binding, court-approved agreements to reorganize rights and liabilities and can effect change in control. - Approval thresholds by members and creditors: - (i) 50 percent of members who decide to vote in favor (50 percent headcount requirement); - (ii) 75 percent in issued voting shares to vote in favor (75 percent share count threshold). - Court considerations before approval include that necessary member approval was obtained and it is appropriate to exercise discretion; shareholders’ interests are among considerations. - Pre-court requirements regarding ASIC: - ASIC has been given 14 days notice of the application to the court; - ASIC has been given a reasonable opportunity to examine the proposed terms and a draft explanatory statement; - ASIC has been given a reasonable opportunity to make submissions to the court. ### Acquisitions resulting from buy-backs - Shareholder approval is usually required for buy-backs unless an exemption applies. - ASIC may apply to the Takeovers Panel for a declaration of unacceptable circumstances if it considers the buy-back unreasonable. - ASIC policy: for buy-backs of a significant proportion of shares or transactions with a major shareholder, shareholders should usually have independent advice on voting. ### Shareholders’ rights and remedies - Members may, with leave of the court, bring or intervene in proceedings on behalf of a company (derivative actions), for example against directors for breach of duty. - Court must grant leave if satisfied: - It is probable the company will not itself bring proceedings; - The applicant is acting in good faith; - It is in the best interests of the company that the application be granted leave; - There is a serious question to be tried. - Ratification by members does not prevent bringing or intervening in proceedings with leave. ### Shareholder rights in external administration and bankruptcy - General equitable treatment of members during external administration. - Provisions applying to all members: - An alteration in the status of members during a liquidation is void unless sanctioned by the liquidator; - An alteration in the status of members during an administration is void unless ordered by the court; - In a liquidation, a member of a company limited by shares is liable for the unpaid amount of shares in respect of present and possibly past membership; - Payment of a debt in a liquidation, including by way of dividends, to a member is postponed until all other debts have been satisfied. - Specific shareholder rights during external administration: - Right to apply to the court for a review of a liquidator’s remuneration in certain circumstances; - Right to apply to the court to stay the court winding up; - Right to apply to the court to have questions determined in a creditors’ voluntary winding up; - Right to require the liquidator to convene a meeting in certain circumstances, if the applicant meets the cost. ### Directors’ interests and disclosure - Directors of a listed company must notify the market operator of any interests in its securities (e.g., ASX Listing Rule 3.19A.2); reporting deadline is 5 business days of such change; notifications are public via the ASX company announcements platform. - Directors of unlisted companies must notify ASIC within 14 days (s205G CA); information is publicly available in the ASIC database. - CA requires disclosure by any director (or proposed director) of the nature or extent of any interest held in the last two years in: - The formation or promotion of the company; - Property acquired or proposed to be acquired by the company in connection with its formation or promotion, or the offer of securities; - The offer of securities. - Annual report requirements for each director of a listed company must include: - Their relevant interests in shares of the company or a related body corporate; - Their relevant interests in debentures, or interests of a registered managed investment scheme; - Their rights or options over shares; - Contracts under which directors are entitled to a benefit or that confer a right to call for or deliver shares or debentures; - All directorships of other listed companies held by the directors. ### Cross-border change of control and foreign offers - Foreign companies issuing securities under foreign share offers are exempt from certain CA disclosure provisions in relation to securities issued as consideration for an acquisition under an off market takeover bid, compromise or arrangement, but terms for Australian citizens and permanent residents must be the same as those applying to other persons. - ASIC has provided class order relief from some technical requirements to foreign takeovers and schemes of arrangement. ### Assessment and observations - Assessment: Fully Implemented - Comments and trends: - ASIC regulates the conduct of takeovers and other means of securing control or change of control; the Takeovers Panel provides peer-based dispute resolution with recourse to courts. - Schemes of arrangement are increasingly used as a simpler, cheaper route where effective control is easier to obtain and directors’ obligations are less onerous; this increases responsibilities on courts to protect minority and non-consenting shareholders. - ASIC is alert to new financing techniques (e.g., equity swaps) that may delay disclosure; equity swaps in some cases appear to enable delay of declaration until 10 percent or higher. - ASIC intends to monitor ASX’s proposal to permit listed companies with a capital of less than A$300 million to raise an additional 25 percent of capital (rather than the current 15 percent limit) without shareholder approval and at a substantial discount to the current market price. ### Accounting standards and financial reporting (Principle 18) - No specific legal requirement for public offering documents to include audited financial statements; s710 CA “reasonable investor” test effectively ensures such statements are provided; ASIC would place a stop order on a prospectus that did not include required information. - No CA requirement to provide a cash flow statement for public offerings, but ASX listing requires satisfying either a profit test or assets test: - Profit test: audited accounts (statement of financial position, statement of comprehensive income, statement of changes in equity/retained earnings, statement of cash flows, notes) for the last three full financial years with audit reports. - Assets test: audited or unaudited accounts for the last three full financial years with any audit reports. - For both tests, a pro-forma balance sheet, reviewed by a registered company auditor, may also be required. - Financial statements prepared in accordance with accounting standards which follow the IFRS. - Australian Accounting Standards Board (AASB): - Established pursuant to the ASIC Act. - Functions include development of a conceptual framework, making accounting standards for the CA and other purposes, and participating in development of single set of global accounting standards. - Major objectives: issue Australian versions of IASB documents; produce standards that treat like transactions consistently; significantly influence development of IFRS; identify areas for fundamental review; promote globally consistent application and interpretation. - Role in timely guidance and issuing Australian equivalent interpretations of IFRS Interpretations Committee outputs. - AASB 101 governs presentation of financial statements in Australia; equivalent to IAS 1. - CA requires financial statements to comply with accounting standards and present a true and fair view. - AASB Framework incorporates IASB Framework; investors are a primary user group. - Changes in accounting policy generally require retrospective application per AASB 108 (Paragraphs 19 to 27). ### Surveillance, enforcement and cross-border reporting - ASIC is regulator for CA financial reporting requirements; financial reports lodged with ASIC; ASIC has mandatory information and explanation powers under the ASIC Act. - ASIC’s Financial Reporting and Audit team conducts surveillance; outcomes: - Of the 495 financial reports reviewed in 2010—2011, material changes to financial reports were made by 16 listed entities as a result of ASIC’s surveillance activities. - Enforcement powers against directors for contraventions of financial reporting requirements include civil or criminal proceedings. - If a director fails to take all reasonable steps to comply with accounting standards and CA reporting provisions, a director may commit an offence. - Penalties where contravention is dishonest: up to A$220,000 or imprisonment for five years or both. - Cross-border reporting: - Foreign companies offering in Australia must comply with prospectus provisions unless exempted. - Mutual recognition scheme facilitates trans-Tasman cross border offerings between Australia and New Zealand. - New Zealand entities listed in Australia lodge financial reports in accordance with New Zealand standards acceptable for public offering and listing particulars. - Foreign companies registered in Australia must lodge annually copies of balance sheet, profit and loss statement and cash flow statement and other documents required by their place of origin; ASIC can require audited or unaudited statements in forms and particulars it requires, including compliance with Australian accounting standards, if ASIC believes foreign reports do not sufficiently disclose financial position. ### Auditor oversight (Principle 19) and ASIC powers - ASIC is responsible for public interest auditor oversight under the ASIC Act and the CA. - Registration criteria for auditors with ASIC: - Appropriately qualified; - Satisfied components of an auditing competency standard approved by ASIC or specified minimum hours of suitable practical experience in auditing; - ASIC satisfied the applicant can perform duties of an auditor and is a fit and proper person. - Authorized Audit Company (AAC) registration may include conditions such as maintaining specified professional indemnity insurance, complaints handling procedures, and directors’ deed to ensure run-off cover for a minimum of 7 years after ceasing registration. - ASIC powers in relation to auditors and audit practices include investigation, inspection and information gathering; regulatory actions include: - making an application to the CALDB (which can order suspension or cancellation of an auditor’s registration); - accepting enforceable undertakings from auditors; - commencing prosecution or civil proceedings; - imposing, varying or revoking registration conditions. - Penalties for contraventions of CA requirements range from A$2,750–A$5,500, six months imprisonment, or both. - ASIC’s Financial Reporting and Audit team employs 11 professionally qualified staff members to undertake audit inspections. - Results of ASIC’s oversight are published via regular omnibus reports (on a no-names basis); outcomes of CALDB decisions, enforceable undertakings and court proceedings against an auditor are generally made public. *Source: _cr12314 - Section 671B CA requires a person who begins or ceases to have a substantial (PDF).* ### conclusion of the matter. However, the imposition of conditions on an auditor’s ### _cr12314 - conclusion of the matter. However, the imposition of conditions on an auditor’s ### ASIC inspection program and audit firm coverage - Inspection program includes each of the ‘Big Four’ audit firms, nine second-tier audit firms and 20 smaller audit firms. - Big Four firms audit approximately 83 percent of the entities listed on the ASX (listed entities) by market capitalization. - Second tier firms audit 4 percent of the listed entities by market capitalization. - ASIC inspects the Big Four firms over an 18-month cycle. - The nine second-tier firms have been subject to an ASIC inspection at least once; the majority inspected twice. - The 20 smaller firms that audit a limited number of listed entities have been inspected at least once. - In the 2010-2011 financial year, 75 audit files were reviewed in the audit inspections of 11 firms. - Separately, 18 audit surveillances were undertaken; in one matter an enforceable undertaking was provided. - Three surveillance matters resulted in ASIC imposing license conditions on the auditors (mainly additional education and peer reviews). - Inspection activities review independence processes and non-audit services to ensure compliance with legislative and professional independence requirements. - Registered company auditors’ annual statements are reviewed to identify potential non-compliance with independence requirements. - Assessment: Fully Implemented. - Comment: ASIC has significant powers of investigation, inspection and information gathering and monitors fee reductions to guard audit quality. ### Principle 20 — Auditor independence (description, requirements, sanctions) - Legislative and professional requirements: CA, Australian Auditing Standard (ASA) 102 and 220, APES 110, ASQC 1 and APES 320. - Australian Auditing Standards consistent with ISA; APES 110 consistent with the International Ethical Code; ASQC1 and APES 320 consistent with the International Quality Control Standard. - CA includes general independence requirement and specific independence requirements (business, employment, financial relationships) and offences for contraventions. - Lead audit partner and review partner for a listed company or scheme must rotate off after 5 years and there is a 2-year cooling-off period. - Auditor must give directors an independence declaration stating no contraventions or listing contraventions. - APES 110 identifies threats: self-interest, self-review, advocacy, familiarity, intimidation and prescribes procedures to mitigate or eliminate threats. - ASA 102 provides legal backing to APES 110 for CA audits; APES 110 prohibits many non-audit services to audit clients. - ASQC1 requires audit firms to establish policies and procedures to provide reasonable assurance of independence; ASIC examines such systems in inspections. - Public issuers: top 500 listed companies must have an audit committee; audit committee best practice composition described. - Auditors must notify ASIC as soon as practicable (but within 28 days) where the auditor has reasonable grounds to suspect contravention of the CA. - Sanctions: ASIC can initiate criminal or civil proceedings, refuse registration or receipt of documents it deems false or misleading. - Assessment: Fully Implemented. - Comment: Australia does not impose a total ban on non-audit services to audit clients, but constraints are extensive and consistent with international norms. ### Principle 21 — Audit standards quality and governance - Financial statements for public offerings, listings and annual reports must be audited in accordance with Australian Auditing Standards. - AUASB responsible for Australian auditing standards; since 2005 operates under FRC strategic direction to use ISA as base. - Auditing standards applied to reporting periods commencing on or after 1 January 2010. - AUASB accountability: Chair appointed by Minister; FRC appoints other members; FRC reports annually to Minister on AUASB operations. - AUASB standard-setting process: open and consultative (exposure drafts, stakeholder consultation, public meetings, AUASB Consultative Meeting). - Assessment: Fully Implemented. - Comment: Since April 2006 AUASB has released Australian Auditing Standards based on IAASB standards; AUASB can modify international text where necessary (s227B(4) ASIC Act). ### Principle 22 — Credit Rating Agencies (CRAs) oversight - Since 1 January 2010, CRAs required to hold an AFSL and are subject to ASIC supervision and enforcement powers, plus CRA-specific license obligations. - Key obligations: adopt, publish and adhere to a code of conduct that complies with the IOSCO Code; report annually to ASIC on compliance. - Six CRAs operate in Australia; global firms S&P, Moody’s, and Fitch dominate wholesale markets. - ASIC’s IB stakeholder team regulates CRAs alongside investment banks, hedge funds and retail OTC derivatives issuers. - AFSL requirement applies because credit ratings constitute financial product advice under the CA. - Five of six CRAs have opted for wholesale licenses to avoid retail AFSL additional requirements. - ASIC focuses oversight on the Australian entity providing the credit rating; all three global firms rate Australian companies from offices in Australia. - ASIC replaced all references in the IOSCO Code from ‘should’ to ‘must’ (with limited carve-outs). - CRAs required to ensure credit analysts are trained and competent; specific license conditions relate to training. - CRA licensing program began on January 1 2010; mandatory Annual Compliance Reports finalized late 2011; ASIC has conducted four on-site inspections to verify reports. - ASIC conducts mandatory periodic reporting, mandatory breach reporting and compulsory notice powers for CRAs. - ASIC oversight addresses: The Quality and Integrity of the Rating Process; CRA Independence and the Avoidance of Conflicts of Interest; CRA Responsibilities to the Investing Public and Issuers. - Sanctions for CRAs failing to have a reasonable basis for ratings include action for misleading or deceptive conduct or false or misleading statements. - Assessment: Fully Implemented. - Comment: ESMA assessed the Australian CRA framework equivalent to the EU regime (April 2012). Attempts to prevent retail access to ratings via wholesale-only licenses may be ineffective; ASIC has conducted reactive surveillance in response to disclosure failures. ### Principle 23 — Oversight of other analytical/evaluative service providers (research, experts) - Research report providers must be licensed as general advice providers under the AFSL regime and subject to s912A CA (efficiently, honestly and fairly). - No regulatory distinction between sell-side, buy-side and independent research providers. - ASIC has powers to act against inappropriate research industry practices; past surveillance prompted Parliamentary conflict-management obligations. - ASIC guidance: RG 181 (Licensing: Managing conflicts of interest), RG 79 (Managing conflicts of interest: An ASIC guide for research report providers). - RG 79 requires policies on trading restrictions, management of conflicts (disclose/avoid), consideration of “quiet periods” and robust information barriers, separation of research and trading/investment banking staff, and remuneration decisions not made by conflicted staff. - RG 79 requires procedures to eliminate undue external influence on analysts; research must be based on objective, verifiable facts and analysis. - ASIC published RG 111 (Content of Expert Reports) and RG 112 (Independence of Experts) in March 2011 for commissioned independent expert reports. - ASIC published CP 171 to update RG 79; consultation closed February 2012 and submissions are being reviewed. - ASIC is considering regulatory measures for comparison websites for financial services. - Assessment: Fully Implemented. ### Principles for Collective Investment Schemes (CIS) — overview and MIS framework - In Australia, CIS are Managed Investment Schemes (MIS); definition broad and many MIS take the form of unit trusts. - Regulatory distinction between Retail MIS and Wholesale MIS (retail client treated as default under CA unless designated wholesale). - Wholesale client criteria include price > $500,000, large business, personal assets ≥ $2.5 million or gross income ≥ $250,000 for last two years, or status as ‘professional investor’ or ‘sophisticated investor’. - Retail MIS registration: required if more than 20 members (or 20 in aggregate with related MIS) or promoted by a professional promoter; operating Retail MIS without registration is an offence. - ASIC required to register a Retail MIS within 14 days unless refusal criteria in CA apply. - Responsible Entities (REs) of Retail MIS must ensure a compliance plan (s601FC(1)(g) CA). - REs and operators must hold an AFSL; AFSL must specify registered MIS authorized to operate unless organizational competence demonstrated. - 33 REs currently regulated by APRA; some AFSL requirements do not apply where APRA regulation is in place. - Exemptions for certain foreign CIS available based on equivalence, cooperation arrangements, investor remedies, and FCIS not principally targeting Australian investors or sourcing more than 30 percent of investments from Australian investors. - Supervision: limited regular reporting to ASIC beyond annual/half-yearly financial and directors’ reports and auditors’ reports; ASIC monitors on risk assessment basis and uses compliance plan auditors’ yearly reports. - Staffing: Investment Management and Superannuation stakeholder team = 44 staff; ~75 percent work on MIS matters; 14 persons in charge of surveillance activities. - ASIC uses a risk assessment framework and selection criteria for surveillance projects (information gathering, compliance concerns, distressed sectors, policy informing). - 2011-2012 on-site surveillance included ETFs, compliance plan auditors, and risk management processes. - Desk-based high intensity surveillance covered cash management funds, agribusiness funds, unlisted property trusts. - 88/585 REs were subject to on-site or desk-based high intensity surveillance in 2011/12. - Record-keeping obligations apply to AFSL holders; transaction record-keeping for MIS units/assets applies only to Retail MIS. - Conflicts of interest and related party transaction rules apply; member approval required for giving financial benefits to RE or related parties out of scheme property. - Delegation permitted; delegate must hold AFSL or be authorized representative; AFSL holder remains liable for delegate conduct. - Assessment: Partly Implemented. - Comments: ASIC has limited resources for proactive surveillance; oversight relies heavily on external reports and desk-based work. Concerns about inconsistent inspections between APRA-regulated REs and ASIC-only REs. Lack of information on Wholesale MIS assets and nature is a concern; additional data collection recommended. ### Principle 25 — Legal form, segregation and protection of client assets (Retail MIS focus) - No legal form/structure requirements for Wholesale MIS; applies to registered Retail MIS. - Registered MIS normally statutory trusts; RE holds scheme property on trust for members (s601FC(2) CA). - Constitution must address pricing, RE powers, complaints, fees, indemnities, withdrawal rights, borrowing powers (s601GA CA). - RE of disclosing entity must publicly disclose information that would influence investors; constitution publicly available and lodged with ASIC. - Material changes to investors’ rights require member approval and lodging with ASIC; changes take effect upon lodging. - Segregation: RE must ensure scheme property clearly identified and held separately from RE or other MIS (s601FC(1)(i) CA); applies to custodian (s601FB(2) CA). - ASIC class order allows omnibus custodial accounts for multiple MIS if regular reconciliations and in members’ best interests (CO 98/51). - RG 133: scheme property must be held by third party custodian unless RE meets additional standards (e.g., net tangible assets > A$5 million or being an ADI). - Custody staff standards: independent reporting lines to board/compliance committee, not take part in investment decisions, possible physical separation (RG 133.8). - RE remains obligated to ensure custodian keeps proper records identifying scheme property (Pro Forma 209 condition 35(b)); scheme property held on trust and not available to creditors (s601FB(2) CA). - Winding up: constitution must make adequate provision; registered MIS can be wound up by majority resolution, RE application, or court order (Part 5C.9 CA). - Assessment: Broadly Implemented. - Comments: Self-custody and related-party custody safeguards exist but may be insufficient where investment and custody functions share management; recommended enhancements include higher capital, governance/operational requirements, and periodic independent verification. ### Principle 26 — Disclosure for MIS (Retail MIS focus) - No disclosure requirements for Wholesale MIS; applies to registered Retail MIS. - Investors must receive a Product Disclosure Statement (PDS) when purchasing interests in registered Retail MIS. - PDS formats: Shorter PDS (Simple MIS that can liquidate 80 percent of assets at market price within 10 days) or Standard PDS. Shorter PDS regime phased in and came into force for all MIS on 22 June 2012. - Standard PDS must contain information that might reasonably be expected to have a material influence on investment decision of a retail client (s1013E CA). - ASIC guidance: RG 45 (mortgage schemes), RG 46 (unlisted property schemes), RG 231 (infrastructure entities). - Shorter PDS required disclosures on interests acquired, significant features and benefits, investment options, certain fees and management costs. - Publicly available information includes PDS date, constitution, MIS contact details, valuation methodology, purchase/redemption/pricing procedures, audited financial information, custodial arrangements, delegates. - Ongoing disclosure: disclosing entities must disclose price-sensitive information; non-disclosing registered MIS must notify retail clients of significant PDS changes (s1017B CA). - Periodic reporting: annual financial report (s292 CA), lodged with ASIC within three months after end of financial year (s319 CA); disclosing entities also produce half-year reports (s302 CA) lodged within 75 days (s320 CA). - RE must send periodic statements at least once a year to members (s1017D CA); statements within six months after end of reporting period. - Standard PDS must be clear, concise and effective (s1013C(3) CA); Shorter PDS has detailed formatting requirements (Sch 10E CR). - Advertising restrictions in s1018A CA; misleading or deceptive conduct prohibited (s1041H CA; s12DA ASIC Act). - Assessment: Broadly Implemented. - Comments: High-level disclosure principles generally achieve outcomes for valuation and investment policy, but lack of standard formats for Standard PDS and non-PDS disclosures is a deficiency that may impede investors’ ability to compare MIS. Limited data on Wholesale MIS assets hinders assessment; consider minimum disclosure or guidance for Wholesale Funds. ### Principle 27 — Valuation, pricing and redemption of MIS units (Retail MIS focus) - No valuation/pricing/redemption requirements for Wholesale MIS; applies to registered Retail MIS. - RE required to value scheme property at regular intervals appropriate to the property (s601FC(1)(j) CA); compliance plan must set out arrangements (s601HA(1)(c) CA). - Constitution must describe valuation method if consideration based on property value (RG 134.29); discretionary pricing policies may be documented elsewhere (s601GAB and 601GAC CA). - Financial statements and NAV prepared under Australian Accounting Standards; fair value measurement guidance (AASB 139) when market prices not available. - RG 94 (joint ASIC and APRA): requires documented valuation policies and methodologies for unit pricing. - Independent auditors assess measurements and disclosures for year-end financial statements (s301-302 CA); compliance plan auditors audit adequacy of valuation arrangements and lodge annual audit report (s601HG CA). - Application (subscription) and withdrawal (redemption) prices must be set out in constitution so independently verifiable (RG 134.25); formula-based pricing allowed under CO 05/260. - Liquid scheme defined: ‘liquid assets’ account for at least 80 percent of scheme property (s601KA(4) CA); liquid asset definition per s601KA(6) CA. - For non-liquid MIS, RE must meet s601KB–601KE CA requirements to allow withdrawals; RE must satisfy withdrawal requests within 21 days of close of withdrawal offer (s601KD CA). - RE must provide periodic statements at least once a year (s1017D CA); most REs publish unit prices daily on websites. - Pricing errors: duty to report breaches including pricing failures with materially adverse effect (s601FC(1) CA); RG 94 recommends fair compensation for affected unit holders; very small amounts (under A$20) may not require compensation in some circumstances. - Remedies: member entitled to compensation for loss due to contraventions (s601MA CA); ASIC can pursue civil penalty orders and claims for contravention (Part 9.4B CA). - ASIC has accepted enforceable undertakings from REs for compensation, external reviews and compliance consultant engagement in past pricing error cases. - Suspension of redemptions: if MIS ceases to be liquid, routine redemptions must be suspended; no specific ASIC notification required though PDS update/in-use notice process applies. - Assessment: Fully Implemented. ### Principle 28 — Hedge funds and hedge fund managers/advisers oversight - Majority of hedge funds in Australia structured as MIS; regulatory requirements for retail hedge funds align with other MIS; wholesale hedge funds generally not subject to MIS disclosure/regulation but operators usually must hold AFSL. - Sector size: sector remains small, with less than A$ 50 billion of assets under management according to some estimates. - Disclosure: retail hedge funds excluded from Shorter PDS regime until further policy consideration (government announcement 22 December 2011); ASIC consulting on improved disclosure for retail hedge funds (CP 174 following CP 147). - ASIC hedge fund PDS review activity since 2009: 21 reviews leading to one stop order, one voluntary withdrawal, ten revisions, seven with no further action, two schemes wound up. - Side letters prohibited for retail MIS (preferential rights would conflict with RE duty of equal treatment). - ASIC has power to require production of information from operators of retail and wholesale hedge funds if information in Australia; otherwise relies on overseas regulators via cooperation agreements. - In late 2010 ASIC required nine large hedge fund managers (controlling approximately half of known assets under management in single strategy funds in Australia) to disclose operational information to assess systemic risk. - Hedge fund operators are not subject to ongoing reporting requirements to ASIC of fund portfolios or the elements in Key Question 5 of IOSCO Methodology. - Supervision and enforcement: ASIC applies inspection, investigation, surveillance and enforcement powers to hedge fund operators; conducted 2009 thematic surveillance verifying existence of fund assets from third party service providers; two other risk-based surveillance projects ongoing. - ASIC uses a risk-based methodology to prioritize hedge fund surveillance activities. - Comment: Proportion of wholesale funds higher among hedge funds; lack of ongoing reporting limits ASIC’s transparency into wholesale hedge fund activities. ### Section 127(4)(c) ASIC Act authorizes ASIC to release confidential information in its ### _cr12314 - Section 127(4)(c) ASIC Act authorizes ASIC to release confidential information in its ### Cross-border information sharing and cooperation - Section 127(4)(c) ASIC Act authorizes ASIC to release confidential information in its possession to a government or an agency of a foreign country if it is satisfied that the particular information will enable or assist that government or agency to perform a function or exercise a power, conferred by a law in force in that foreign country. - Subject to the limitations described in Principle 15, ASIC is empowered to collect information on behalf of a foreign regulator under MABRA. - In relation to criminal matters, the foreign regulator may seek assistance from the Attorney-General under MACMA. - Assessment: Broadly Implemented ### Hedge fund disclosure, supervision, and information collection (Key Questions 5, 6, 8, 9) - Key Question 6 (IOSCO Methodology): regulatory system must set standards for proper disclosure by hedge fund managers/advisers or the fund to investors, without distinguishing between retail and wholesale investors. - Such standards do not exist for wholesale hedge funds in Australia. - Standards do exist for retail hedge funds; Austrade statistics indicate retail hedge funds currently constitute the majority of funds under management in Australian hedge funds. - ASIC has recently focused on improving the disclosure requirements of retail hedge funds. - Key Question 8.(a): requires ongoing supervision of hedge fund managers/advisers, including comprehensive powers and effective compliance programs. - ASIC has increased efforts to complement reactive surveillance with a relatively extensive risk-based surveillance program that includes desk-based and on-site surveillance targeting the main risks identified. - Key Question 9: ASIC has certain restrictions in its ability to collect information from Australian hedge fund managers/advisers on behalf of a foreign regulator (see Principle 15 for details). This deficiency is addressed further under Principles 13 and 15. - Key Question 5: ASIC can obtain information from hedge fund operators about the funds they manage on an ad hoc basis, meeting the minimum requirement. - Through the CA requirement for lodging the PDS of retail hedge funds with ASIC, ASIC becomes informed of developments in the retail hedge fund sector on an ongoing basis. - Even though the Australian hedge fund sector remains small by international standards, assessing potential systemic risks arising from the sector is a key objective of Principle 28; authorities should assess how to ensure sufficient information on overall sector developments (see Principle 24 comments). - Recommendation: ASIC is encouraged to continue strengthening hedge fund supervision to better understand risks, particularly systemic risks to the wider financial system. ### Principle 29 — Minimum entry standards for market intermediaries (AFSL framework) - Firms requiring authorization: market intermediaries are regulated as AFSL holders. Financial services requiring authorization include providing financial product advice, dealing in a financial product, making a market for a financial product, operating a registered MIS, and providing custodial or depository services. - Provision of discretionary portfolio management services requires licenses for dealing, providing advice, and providing custodial services (RG 179.31); licenses must specify authorized financial services, financial products authorized, and whether services can be provided to retail or wholesale clients or both. - Market participants and non-market-participant intermediaries: - Market intermediaries seeking membership of a licensed market face additional MIRs and operating rules requirements. - Non-Market Participant intermediaries access markets through a Market Participant and are regulated as AFSL holders but not subject to MIRs or operating rules of markets. - Authorized representatives: - Persons authorized under s916A or s916B CA may provide financial services on behalf of an AFSL holder without holding an AFSL (authorized representatives). - ASIC must be notified within 15 business days if an AFSL holder authorizes a representative. - AFSL holders are accountable for actions of their authorized representatives; authorized representatives generally cannot sub-authorize. - Requirements for authorization (ASIC must grant an AFSL if and only if): - The application contains all necessary information and documents specified in the regulations (s913A CA). - ASIC has no reason to believe the applicant would not comply with ongoing obligations under s912A CA, which include: - Do all things necessary to ensure that financial services are provided efficiently, honestly and fairly; - Have in place adequate arrangements for the management of conflicts of interest; - Have available adequate resources (including financial, human and technological) to provide the financial services covered by the licence and to carry out the supervisory arrangements; - Have adequate risk management systems. - ASIC has no reason to believe the applicant (or its responsible officers if a body corporate) is not of good fame or character. - The applicant has provided any additional information ASIC requested. - The applicant has met any other requirement imposed by regulation. - Licensing process: - Starts with an online application consisting of three parts: authorizations requested and business information; competencies of named “responsible officers”; and questions about complex products/services (derivatives, FX, operating a MIS, making a market). - Supporting documents submitted on paper (business description, people proofs, and financials). - ASIC has a dedicated team to assess AFSL applications and variations on a risk assessment basis; risk ratings consider intelligence, size/nature of business, financial products offered, and client types (wholesale/retail). The process is partially automated. - Higher risk-rated applicants may be asked for additional proofs on compliance, risk management, and conflict management; specific proofs required for certain products/services. Set out in ASIC’s Licensing Kit (RGs 1, 2 and 3). - Licensing requirements include initial capital requirements described under Principle 30. - ASIC assesses sufficiency of internal organization and risk management systems; additional information required for ASX and Chi-X Market Participant applicants. - ASIC can refuse an AFSL if CA requirements are unmet; can impose or vary AFSL conditions after providing opportunity for a private hearing where the applicant may make submissions. - APRA consultation and Minister involvement: - Where AFSL holder (other than an ADI) is subject to prudential regulation, ASIC must consult APRA prior to imposing/revoking/varying AFSL conditions or suspending/cancelling an AFSL if changes could prevent the AFSL holder from carrying out APRA-regulated activities. In other cases ASIC must inform APRA within a week. - If AFSL holder is an ADI, powers conferred on APRA are exercised by the Minister; ASIC conducts hearings and considers submissions on behalf of the Minister. Where Minister involvement not required, ASIC must inform APRA of its decision. - Assessment of responsible officers: - ASIC assesses responsible officers via the good fame and character test (s913B CA). Section 9 of the CA defines responsible officers as “an officer of the body who would perform duties in connection with the holding of the license”. - ASIC interprets this to include each responsible manager and each director. - If ASIC is aware of another officer who influences provision of financial services, that officer will also be subjected to the good fame and character test. - ASIC’s assessment does not extend to direct shareholders or other persons able to exercise control or materially influence the applicant through a predetermined amount of ownership or voting power, except where they are responsible officers. - Further market operator admission requirements are publicly available on ASX Group and Chi-X Australia websites; market operators retain discretion to approve/refuse admission or impose conditions. - Suspension, cancellation, and banning: - Under s915B CA, ASIC may suspend or cancel an AFSL without holding a hearing in certain situations, e.g., AFSL holder ceases business, becomes an insolvent under administration, is convicted of serious fraud, application was materially false or misleading, or omitted a material matter from the application. - After a hearing, ASIC may suspend or cancel an AFSL if it believes the AFSL holder has not complied or will not comply with s912A CA obligations; is no longer satisfied the AFSL holder (or responsible officers, partners, or trustees) is of good fame and character; or a banning order has been made against the AFSL holder or its representatives and ASIC considers this will impair the AFSL holder’s ability to meet licence obligations. - ASIC may ban a person permanently or for a specified period under s920A and 920B CA, for convictions of fraud or non-compliance with financial services law. - Additional requirements apply to Market Participants’ employment of persons who have committed securities law violations or may otherwise be unsuitable. - Ongoing notification requirements: - Regulation 7.6.04 CR and s914A(8) CA require AFSL holders to notify ASIC within at least three business days if an event may make a material adverse change to the AFSL holder’s financial position. - Requirement to notify ASIC within 10 days if there is a change in control of the AFSL holder. - Market Participants must self-report certain matters under relevant market operating rules. - Publicly available information: - Key information about AFSL holders, including authorized financial services, is publicly available on ASIC’s website. - It is possible to search online for authorized representatives and obtain lists of AFSL holders that have authorized a particular representative. - AFSL holders must keep a copy of their AFSL available for inspection and provide free copies of authorized representative authorizations. - If the AFSL holder is a body corporate, officeholders’ details are publicly available via ASIC’s database. - Details of all responsible officers nominated on an AFSL are publicly available through an extract from ASIC. - ASIC will designate and name on the AFSL ‘key persons’ where the AFSL holder is heavily dependent on one or two responsible officers. - A list of Market Participants is publicly available on ASX Group and Chi-X Australia websites. - Investment advisers: all investment advisers, regardless of whether they deal on behalf of clients, hold client assets or manage client portfolios, are subject to the same AFSL requirements including licensing, capital and organizational requirements, record keeping, disclosure and conflicts of interest. - AFSL holders that hold client money are subject to CA requirements on client money protection (Division 2 Part 7.8 CA); covered in more detail under Principle 31. - Assessment: Broadly Implemented - Comment and recommendation: - ASIC’s licensing process appears thorough despite not including an on-site visit or inspection. - It is recommended ASIC pays particular attention to the effectiveness of its ongoing surveillance program, which should extend within a reasonable period to new licensees. Currently this is not the case and influenced the assessment of Principle 31. - ASIC’s good fame and character test does not extend to significant shareholders, persons holding a significant amount of voting power, or persons otherwise in a position to control or materially influence the applicant (directly or indirectly) other than by being a responsible officer. This contrasts with the approach for market operators and clearing/settlement facility operators. - To achieve full compliance with the Principle, it would be sufficient to subject controllers of the applicant to such assessment (Key Question 2.(d)); however, authorities are recommended to go beyond this minimum by applying a suitable percentage of ownership, voting power and other relevant criteria to address all situations of material influence beyond a preset threshold level. - It is recommended that information on those persons be required to be enclosed with the license application. ### Principle 30 — Initial and ongoing capital and prudential requirements - ASIC’s financial resources requirements are set out as conditions in AFSLs which holders must comply with continuously (Pro Forma 209 and RG 166). - RG 166 underlying principle: financial resources requirements aim to: - Help ensure an AFSL holder has sufficient financial resources to conduct its financial services business in compliance with the CA; - Provide a financial buffer decreasing risk of disorderly or non-compliant wind-up if the business fails; - Create incentives for owners to comply through risk of financial loss. - ASIC specifically notes it is not a prudential regulator and financial resources requirements are not intended to ensure an AFSL holder meets its financial commitments. - RG 166 summarized financial resources requirements: - Section A: General policy on financial requirements - All licensees not regulated by APRA: Risk management systems must address risk to financial resources. - Holding an AFS licence: All licensees except APRA-regulated bodies. - Section B: Base level financial requirements - All licensees except licensees regulated by APRA and market and clearing participants that Section D says need not comply: - Positive net assets and solvency. - Sufficient cash resources to cover next 12 months’ liabilities (including expected liabilities) for responsible entities, or next 3 months’ liabilities (including expected liabilities) for all other licensees, with adequate cover for contingencies. - Audit compliance annually and when ASIC asks. - Holding an AFS licence: Providers of financial product advice (advisers); Dealers; Responsible entities and IDPS operators; Custodial or depository service providers; Market makers; Trustee companies providing traditional services. - Section C: Managed investments, custody services, margin lending facilities and trustee companies providing traditional services - Responsible entities and IDPS operators; Providers of custodial or depository services; Issuers of margin lending facilities; Trustee companies providing traditional services. - For responsible entities, a minimum net tangible assets (NTA) requirement of the greater of A$150,000, - (Content ends at provided excerpt.) *Source: _cr12314 - Section 127(4)(c) ASIC Act authorizes ASIC to release confidential information in its* ### 0.5 percent of the ### _cr12314 - 0.5 percent of the ### Sectional financial resources requirements (summary of Sections B–G as presented) - Responsible entities and IDPS operators: NTA requirement of up to A$5 million for IDPS operators, custodial or depository service providers, issuers of margin lending facilities and trustee companies providing traditional services. This requirement is in addition to the requirements in Section B and, if applicable, Sections E, F and G. - Acting as a responsible entity, IDPS operator, a provider of a custodial or depository service, a trustee company providing traditional services, or holding secured property or receiving transferred securities under a margin lending facility: requirements apply to responsible entities and IDPS operators, custodial or depository service providers, issuers of margin lending facilities, trustee companies providing traditional services. - Section D: Market and clearing participants - Must meet the requirements in the ASIC market integrity rules for the ASX, ASX 24 or Chi-X markets, or the ASX Clear’s operating rules, or, if ASIC agrees, the operating rules of a market. - Must have adequate risk management systems, including addressing financial resources. - Requirements in Sections B, C, E, F and G do not apply to financial services businesses connected with participation in the market. - Applies to: ASX, ASX 24 and Chi-X participants based on current ASIC market integrity rules; participants in other licensed markets or licensed CS facilities if ASIC agrees. - Section E: Licensees holding client money or property - Surplus liquid funds (SLF) of A$50,000. - Holding client assets over A$100,000, including money in a separate account, or money or assets on trust for clients in certain situations. - This requirement is in addition to the requirements in Section B and, if applicable, Sections C, F and G. - Applies to: some dealers; trustee companies providing traditional services. - Section F: Licensees with financial obligations from transacting with clients as principal - Tiered adjusted surplus liquid funds (ASLF) requirement from A$50,000 to A$100 million. - ASLF calculation contains adjustments for assets and contingent liabilities. - Requirement for board consideration when trigger points are reached. - Applies where licensees have liabilities or contingent liabilities beyond A$100,000. - This requirement is in addition to the requirements in Section B and, if applicable, Sections C, E and G. - Typical affected entities: market makers; underwriters; some dealers; foreign exchange dealers (who elect to comply with Section F); some issuers of non-standard margin lending facilities. - Section G: Foreign exchange dealers - A$10 million tier one capital. - Applies to financial services business of foreign exchange contracts. - If financial services business is only of entering into foreign exchange contracts, Section F does not apply unless licensee elects to comply with Section F not Section G. - This requirement is in addition to the requirements in Section B and, if applicable, Sections C, E and F. - Applies to: foreign exchange dealers (who elect to comply with Section G). ### Risk sensitivity, APRA interaction, and clearing participants - APRA regulated entities - ASIC does not impose any financial resources requirements where an entity is subject to APRA’s supervision (s912A(1)(d) CA). - APRA applies the risk-based Basel II Standardized Approach to capital requirements and can adjust capital requirements to capture identified risks not included in standard methodologies. - Clearing Participants - ASIC or APRA financial resources requirements do not apply to Clearing Participants. - ASX Clear and ASX Clear (Futures) have primary responsibility as CSFL holders for setting capital requirements, subject to ASIC’s approval, and for monitoring Clearing Participants’ compliance. - Since all Chi-X trades must be cleared through ASX Clear, ASX Clear’s capital requirements apply also to Chi-X Clearing Participants. - ASX Clear minimum capital requirements: - A$20 million for General Clearing Participants. - A$5 million for Direct Clearing Participants. - Additional capital requirements based on current risk exposures (operational risk, counterparty/credit risk, position risk and market risk), with risk weights up to 100 percent. - ASX Clear (Futures) Clearing Participants: - Minimum NTA set at A$5 million. - To avoid additional reporting requirements, participant must maintain over 1.5 times the minimum capital requirement, which leads to a practical minimum capital requirement of A$7.5 million. ### Non-Clearing Market Participants and other market intermediaries - Non-Clearing Market Participants of ASX and Chi-X: - Have similar risk-based capital requirements as ASX Clear Clearing Participants set out in the ASX and Chi-X MIRs. - The minimum capital requirement is A$100,000. - ASX 24 Non-Clearing Market Participants: - Subject to virtually the same NTA regime as ASX Clear (Futures) Clearing Participants except minimum NTA is A$1 million (i.e., A$1.5 million in practice). - Requirements are over and above daily margin requirements covering potential daily mark-to-market losses. - Other market intermediaries (licensees in Sections E and F): - Section F licensees: subject to ASLF tiered requirement. - Section E licensees: subject to SLF requirement. - ASLF and SLF regimes increase capital as liabilities increase; ASLF calculations apply discount factors to address asset risk. - These regimes are not risk-responsive in the same way as Clearing and Non-Clearing Market Participants and APRA regulated entities. - Therefore, intermediaries other than the latter three categories are not subject to risk-based capital requirements as required by the Principle, despite exposure to counterparty and market risks. - ASIC responsibility: monitoring compliance of these market intermediaries with their financial resources requirements. ### Ongoing review of financial resources requirements (ASIC principles and changes) - ASIC is undertaking a progressive review of FRR applying to all AFSL holders. - Review finalized for responsible entities (reflected in table) and retail over-the-counter derivatives issuers. - For retail OTC derivatives issuers, new requirements will replace current ASLF obligations and require NTA equal to the greater of A$1 million or 10 percent of average operating revenue. - ASIC has consulted on new requirements for IDPS operators and Electricity Derivative Issuers. - ASIC’s principles in reviewing FRR: - Skin in the game: Equity owners should have sufficient ‘skin in the game’. - Unexpected losses and expenses: Licensees should hold appropriate financial resources against operational risks; ‘Appropriate financial resources’ should be sized to match these risks. - Buffer against disorderly winding-up: A minimum Net Tangible Assets (NTA) should provide an adequate floor for administration costs; as business grows, winding-up costs likely increase. - Basic organizational capacity: Increasing the minimum FRR will improve basic systems and infrastructure. - Simplify requirements: Replacing ASLF with NTA simplifies verification, reduces compliance costs and interpretation differences. - Alignment with comparable regimes: Minimum FRR should in some cases be increased to align with comparable overseas regimes. ### Reporting, audit, review and supervisory actions - Market Participants (Clearing and Non-Clearing) reporting requirements: - Monthly reports, generally within two/four weeks of the end of the month (depending on participant type). - An audited annual report, generally within three months after the end of the financial year. - More frequent reporting where capital drops: - Weekly (daily) reports where ASX/ASX Clear Participant’s capital has dropped to less than 1.2 (1.1) times the minimum required level. - A report (potentially daily) where ASX 24/ASX Clear (Futures) Participant’s capital has dropped below 1.5 times the minimum required level. - A report (potentially daily) where the ASX Clear (Futures) Participant’s capital level falls by more than 20 percent since the previous report. - Ad hoc reports on request by ASX Clear, ASX Clear (Futures) or ASIC. - Non-compliance can lead to penalties or requirement to cease activity. - Other AFSL holders: - Must notify ASIC of material adverse change in financial position within three days of becoming aware (reg 7.6.04(1) CR). - Must notify ASIC within ten business days of becoming aware of a breach of licence conditions (s912A and s912D CA). - Must lodge notices with ASIC when financial resources fall to specified trigger points, e.g., 1.2 times the minimum (RG 166.122-126). - Must prepare and lodge an annual financial report, with auditor’s report, generally within three months after end of financial year (s989B and s989D CA). - Audit and review: - Annual reports must be audited by an independent auditor and accompanied by an audit report; auditor must provide a positive assurance opinion that AFSL holder complied with ASIC’s financial requirements. - ASIC may review AFSL holder compliance where it has intelligence suggesting possible breach or where auditors have qualified reports. - ASIC can vary, revoke or impose additional licence conditions, consider suspension or cancellation, and in cases of insolvency or administration can immediately suspend or cancel without a hearing. - Embedded sanction for ASLF: if ASLF required is more than A$50,000 and ASLF is below certain trigger points, AFSL holder must not enter into transactions with clients that could give rise to financial obligations until governing body certifies in writing there is no reason to believe it may fail licensee obligations. - ASIC has used licence variation orders and embedded sanction mechanisms in specific cases. - ASIC reviews monthly reports submitted by ASX, Chi-X and ASX 24 Non-Clearing Market Participants; has completed one onsite review. - ASX Clear and ASX Clear (Futures) review returns submitted by Clearing Participants; ASIC may review on concerns. - Penalties where Non-Clearing Market Participant non-compliance with MIRs: up to A$1 million, A$100,000 or A$20,000 depending on rule breached; ASIC may direct compliance and seek court orders (s798J CA). Clearing Participants penalized under operating rules. - ASIC supervision of Non-Clearing Market Participant capital requirements commenced in August 2011; no prosecutions of capital breach under new ASX MIRs or ASX 24 MIRs so far. - Between 2001 and February 2012, ASX Group issued 26 determinations against participants on capital requirements (includes Clearing and Non-Clearing until August 2011). - Unlicensed affiliates: - Except for APRA regulated entities, capital adequacy requirements are imposed only at the AFSL holder level and do not directly address risks from unlicensed affiliates nor applied on a consolidated basis. ### Assessment, identified gaps and recommendation - Assessment: Partly Implemented. - Key findings: - Outside APRA regulated entities and Market Participants (Clearing and Non-Clearing), current requirements for other AFSL holders are not structured to cover all risk types to which market intermediaries are subject (Key Question 2). - These requirements are not sensitive to the quantum of risks undertaken (Key Question 3). - No periodic reporting on level of capital maintained by a market intermediary for entities other than APRA regulated entities and Market Participants (Key Question 6); ASIC relies on self-reporting or auditor reporting. - Australian prudential framework does not directly address risks from unlicensed affiliates for other than APRA regulated market intermediaries (Key Question 10). - Recommendation: - Authorities should introduce capital requirements directly related to the nature and amount of risks undertaken by all market intermediaries. This would allow simplification and harmonization of the current complex regime and facilitate comparisons of risk levels across types of market intermediaries. - Authorities should consider whether the current allocation of responsibilities for setting and monitoring capital adequacy requirements among ASIC, APRA, ASX Clear, and ASX Clear (Futures) is appropriate going forward, including in light of Principle 6 and Principle 31 considerations. ### Principle 31: internal organization, compliance and risk management - Role of management - No explicit statutory requirement for AFSL holders to have appropriate management and organizational structures; ASIC’s position is that such structures are necessary for compliance with general obligations set out in RG 104. - RG 104 guidance: AFSL holders outsourcing functions must ensure appropriate arrangements; Market Participants under ASX and Chi-X MIRs must have appropriate management structures. - AFSL holders must establish and maintain compliance measures, processes and procedures to ensure, as far as reasonably practicable, compliance with financial services laws; must have processes for monitoring, reporting and acting on compliance breaches. - RG 104 requires governing body sign-off on compliance measures and appointment of a director or senior manager to oversee those measures. - Responsible executives of ASX and Chi-X Market Participants are accountable for design, implementation, functioning and review of operations and processes to achieve compliance with MIRs and Operating Rules; must perform an annual review and attest controls are reasonably designed, implemented and functioning. - ASIC expects directors or senior managers to report regularly to the governing body; APRA-regulated AFSL holders comply with APRA requirements for risk management instead of CA requirements. - Internal control and risk management - No requirement for AFSL holders to be subject to an objective, periodic evaluation of internal controls and risk management processes (e.g., internal audit function). - RG 104 notes external review of compliance measures may be sensible; ASIC considers external compliance review particularly appropriate where major breaches or repeated compliance failures have arisen. *Source: _cr12314 - 0.5 percent of the (PDF chapter/section).* ### Section 912A(1)(a) CA requires an AFSL holder to do all things necessary to ensure ### _cr12314 - Section 912A(1)(a) CA requires an AFSL holder to do all things necessary to ensure ### Overview - Section 912A(1)(a) CA requires an AFSL holder to do all things necessary to ensure that financial services are provided efficiently, honestly and fairly. - The framework relies on compliance, risk management and conflict of interest requirements rather than prescriptive segregation of duties to address internal control risks. - ASIC considers these principles-based requirements sufficient in practice and addresses internal control deficiencies in its surveillance activities. ### Compliance function - ASIC conducts a detailed assessment of an intermediary’s compliance function when an intermediary applies for an AFSL; the assessment takes into account the intermediary’s size and business. - Deficiencies are typically resolved by remediation plans implemented by the participant, received and reviewed by ASIC, with implementation confirmed by a third party review or a further review visit by ASIC. ### Conflicts of interest and priority of client orders - AFSL holders must have adequate arrangements for the management of conflicts of interest (s912A(1)(aa) CA) and consider organizational structure, layout, and reporting processes in conflicts management (RG 181). - Conflicts are not prohibited per se; they must be managed adequately, including through disclosure. Where conflicts cannot be managed, the AFSL holder must avoid the conflict or refrain from providing the affected financial service. - Statutory obligation to give priority to client orders: s991B CA prohibits an AFSL holder from entering into a transaction on its own or an associate’s behalf to trade financial products on a licensed market while a client’s instructions to buy or sell that product have not been fulfilled (except where the client’s instructions are conditional and conditions have not been met). - MIRs impose additional requirements for Market Participants dealing for clients and on own account. ### Direct electronic access and pre-/post-execution controls - Part 5.6 of the MIRs requires Market Participants using the trading system to use appropriate automated filters (see Principle 33). - ASX Market Rules Guidance Note No. 22 requires ASX Trading Participants to adopt and enforce written procedures reasonably designed to prevent customers from entering into trades that create undue financial risks for the Clearing Participant; procedures must address pre-execution and post-execution controls. - ASIC is consulting on this subject and intends to publish ASIC guidance in an RG to replace ASX Market Rules Guidance Note No. 22. ### Client assets and client money protections - Division 2 Part 7.8 CA contains a client money protection regime for AFSL holders that hold client money. - Requirements when AFSL holder receives client money: - Pay that money into an account with an ADI or an account approved in the CR. - Payment must be into the account that day or the next business day at the latest. - Client money must be kept in a separate account from the AFSL holder’s funds; no requirement to maintain separate accounts for each client. - Client account operated as a trust account; moneys held on trust for the person entitled. - Client money (or an authorized investment made with that money) cannot be taken in satisfaction of a court judgement or used to set off against other debts, unless directed by the client. - Similar provisions apply to holding of client assets (s984A CA). - Measures aim to facilitate transfer of positions and orderly winding up in insolvency, but views were expressed that CA insolvency provisions do not currently provide enough certainty for administrators about how to deal with client money in winding up an AFSL holder. ### Investor complaints, dispute resolution and KYC - Retail advice providers must have a dispute resolution system comprising an internal dispute resolution scheme and membership of an external dispute resolution scheme (s912A(2)(b) CA); internal scheme must meet ASIC standards and external scheme must be ASIC-approved. - ASX, ASX 24 and Chi-X Market Participants have additional obligations on dealing with customer complaints. - Identification and verification requirements are set out in the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act), administered by AUSTRAC. - AML/CTF Act requires a reporting entity to verify a customer's identity before providing a “designated service”. - ASIC views almost all AFSL holders (except financial advisors who only provide financial product advice and do not deal or arrange dealings in securities or derivatives) as reporting entities required to have customer identification procedures under AML/CTF legislation. - IOSCO Methodology does not assess AML-CTF requirements. - ASX non-mandatory guidelines recommend information to obtain when opening client accounts, verification policies, fraud control measures, and record retention; no equivalent requirements for Non-Market Participants. ### Personal advice and managed discretionary accounts (MDA) - Personal advice to retail clients: AFSL holder or authorized representative must make reasonable inquiries about client’s personal circumstances (objectives, financial situation and needs) and ensure advice is appropriate on that basis (s945A(1) CA). - Providers of MDA services to retail clients must enter into an MDA contract before providing MDA services to a client. - MDA clients must receive quarterly reports on transactions effected as part of the MDA service, the value of assets, and all revenues and expenses, or electronic access to substantially continuous information. - No general requirement to have a written contract with a client except for MDA and certain MIR-defined client agreements. ### Record-keeping and client information - AFSL holders must comply with record-keeping requirements under s988A CA, including financial records that correctly record and explain transactions and financial position of the financial services business. - Records must include details of the client, the person who gave the instructions, the instructions, and date and time details (7.8.19 CR). - Instructions to deal on licensed and foreign markets must disclose particulars of instructions and client details where received on behalf of a client (s991D CA, 7.8.19 CR). - Retention periods: - Financial records retained for seven years after transaction completion. - Other records retained for five years (s1101C CA). - Statements of Advice must be kept for seven years (Pro Forma 206, licence condition, item 57). - Specific record requirements for Market Participants in relation to dealings on behalf of clients. - Financial Services Guide required for retail clients (s941A CA) and must include remuneration and other benefits information (s942B(3) and s942C(3) CA). - Written Statement of Advice required when advice given to retail clients that takes into account their personal circumstances (s946A CA); Statements of Advice must include information about fees, charges, expenses, benefits and interests. - Disclosure documents required before a retail client acquires a financial product or security (PDS Part 7.9 Division 2 CA or prospectus Chapter 6D CA); section 1016A CA requires certain retail sales/issue to be via an ‘eligible application’ accompanied by a PDS, prospectus or other disclosure document. - Retail clients must receive confirmation of transaction when acquiring, disposing, or otherwise involved in a transaction while holding a financial product (s1017F CA). ### Best interest of clients - No general statutory requirement across all intermediaries to act in the best interest of clients. - Section 912A CA imposes obligations to act efficiently, honestly and fairly, and to manage conflicts of interest, but ASIC staff consider this is not always equivalent to a best interest duty. - Specific best-interest-type duties exist for certain intermediaries: - ASX 24 Market Participants must not act in a manner detrimental to the client’s best interest under the MIRs. - FOFA reforms introduced a duty for financial advisers to act in the best interest of clients, subject to a reasonable steps qualification, and to place clients’ best interest ahead of their own when providing personal advice to retail clients. - Recommendation in the source: introduce a general requirement to act in the best interest of clients to cover all market intermediaries (Key Question 18). ### Supervisory program, RADAR and ASIC surveillance activity - ASIC Market & Participant Supervision (MPS) stakeholder team supervises Market Participants and Indirect Market Participants. - Responsible for supervision of 137 Market Participants and approximately 700 Indirect Market Participants. - MPS staff: 54 total; 19 responsible for surveillance. - Key surveillance tool: Risk Assessment Detection and Response (RADAR) system. - RADAR risk profiles updated regularly for larger Market Participants; RADAR for smaller Market Participants may be conducted every three years. - In 2010-11, 49 RADAR visits to Market Participants were conducted. - Indirect Market Participants program: - ASIC identified Indirect Market Participants by notice to largest Market Participants to obtain AFSL holder details. - A list of 100 most important Indirect Market Participants was formed based on size of business (> A$50 million traded annually) and number of clients (> 100 clients). - ASIC aims to subject these 100 Indirect Market Participants to surveillance every 4.5 years. - In 2010-11, 21 RADAR visits were conducted on Indirect Market Participants. - In the three years since April 2009, ASIC assessed 55 Indirect Market Participants using the full RADAR approach: - Approximately 70 percent were taken from the list of 100 significant Indirect Market Participants. - Approximately 30 percent were entities subjected to the full assessment for other reasons (e.g., referral by MBR). - Approximately 50 of the 55 received an on-site visit. - Full remediation programs were implemented in six intermediaries (including independent consultant assessments, changes to business processes and AFSL condition changes including removal of products). - In ten further cases targeted improvement programs were developed with follow-up visits. - Thematic and reactive surveillance work (period 1 August 2010 to 30 June 2011) included reviews of: - Order records, trust accounts, compliance with margin requirements. - Adequacy of supervision of advisers at Market Participants. - Adequacy of controls to prevent market manipulation by clients and prevent erroneous trades. - Reactive surveillance covered unauthorized trading; inappropriate advice to clients; misleading and deceptive marketing; churning of client portfolios; erroneous trades such as trades outside limits; manipulative trading in specific securities and indexes by clients and participants themselves. - Consumers, Advisers & Retail Investors (CARI) stakeholder team supervises a regulated population of 3,345 AFSL holders authorized to provide personal advice. - CARI has recently increased proactive work, launching a review of financial advice industry practice: - Phase 1 reviewed the 20 largest AFSL holders that provide financial product advice to retail clients; ASIC provided interim feedback to firms where meetings occurred. - Phase 2 will increase the population reviewed to a total of 50 firms. - Phase 1 led to a September 2011 report with recommendations on conflicts of interest, training, monitoring and supervision of advisers, product and strategic advice, complaints handling and compensation. ### Assessment findings and recommendations - Assessment status: Broadly Implemented. - Observations: - Principles-based approach generally achieves similar regulatory outcomes to prescriptive requirements in most areas. - Area for enhancement: explicit requirement for market intermediaries to maintain appropriate internal controls (Key Question 5), and requirement for periodic evaluation of internal controls and risk management processes (Key Question 3). - Client identification and verification requirements are not in the CA (Key Question 10) but are addressed under AML/CTF legislation (outside IOSCO assessment scope). - Uncertainty exists about the effectiveness of portability provisions (Key Question 8); this should be verified and rectified if needed. - Recommendation for a general requirement to act in the best interest of clients to cover all market intermediaries (Key Question 18). - Supervisory program adequacy: - ASIC’s RADAR system and on-site visits ensure Market Participants are subject to on-site surveillance at least every three years. - The 100 most important Indirect Market Participants are expected to be subject to on-site surveillance every 4.5 years. *Source: _cr12314 - Section 912A(1)(a) CA requires an AFSL holder to do all things necessary to ensure* ### 4.5 years as a result of increased surveillance activities by ASIC during the past two ### _cr12314 - 4.5 years as a result of increased surveillance activities by ASIC during the past two ### Supervisory coverage and recommendations - ASIC expanded proactive surveillance in recent years but a significant portion of the regulated population remains subject only to reactive surveillance; "4.5 years as a result of increased surveillance activities by ASIC during the past two years." - Remaining 600 Indirect Market Participants remain subject only to reactive surveillance. - AFSL holders providing investment advice have only recently become subject to ASIC’s proactive surveillance activities. - Recommendation: ASIC should prepare a prioritized plan to further expand the scope of market intermediaries subject to proactive supervision, prioritized at ASIC level and using as convergent risk-assessment criteria as possible. ### Principle 32 — Failure procedures, early warning, plans, and powers Findings — early warning mechanisms: - ASIC’s RADAR system targets entities whose default would have a greater market impact. - Automatic sanction element of the ASLF requirement alerts ASIC of AFSL holders at risk of breaching financial resources requirements. - Monthly capital returns of Market Participants and more frequent reporting if capital falls below certain levels. - ASIC gathers intelligence via other activities and surveillance. Findings — plans and coordination: - ASIC participates in the Financial Institution Response Plan (FIRP) for incidents with potential systemic implications; FIRP would be implemented if a default had systemic implications. - ASIC has its own FIRP detailing actions and support to CFR; CFR MoU guides crisis action. - For non-systemic but significant market events, ASIC may activate Significant Market Event Response Plan (SMERP). - Corporate Affairs handles market information dissemination. Powers available to ASIC: - Licensing decisions: impose or vary AFSL conditions (s914A(1)(a) CA); hearings required before measures except where insolvent or ceased business (s915B CA) — suspension/cancellation without hearing; publication in the Gazette and notice to market operators (s915F(2) CA). Example: Kinetic Securities Pty Ltd on August 15, 2011 (voluntary liquidation). - Freezing of accounts: court orders to freeze/restrict dealings with accounts (s983A(3) CA), including accounts outside Australia; court can order payments from frozen accounts to ASIC or nominee and authorize distribution schemes (s983D CA, s983E CA). - Winding up: ASIC can apply for winding up under s459A CA (standing under s459P(1) CA). - Moving client accounts: ASIC can direct transfer of client accounts under s798J CA to protect people dealing in a financial product or class of financial products; market operators may require Market Participant to move client positions (Rule 5160 ASX Operating Rules, ASX 24 Operating Rules; Rule 9.5 and 5.1 Chi-X Operating Rules). - Other measures: seek court orders for breaches of AFSL conditions including minimum financial requirements (s1101B CA); courts may restrain business activities, appoint receivers, or direct specified acts. Compensation arrangements: - AML holders must have compensation arrangements if Market Participants effect transactions on behalf of retail clients (s881A CA); Minister may approve a compensation regime if satisfied it is ‘adequate’ (s885B CA). - Option to join the National Guarantee Fund (NGF) via SEGC (ASX Limited trustee); NGF may meet certain claims for ASX dealings; NGF described as outdated for cross-border and multiple venue issues. - AFSL holders providing financial services to retail clients must have compensation arrangements complying with s912B(2) CA; options: CR (Compensation Regime) requiring adequate professional indemnity insurance (PII) or ASIC-approved alternative. - ASIC guidance on PII adequacy: at least A$2 million limit for any one claim and in aggregate for licensees with total revenue from financial services provided to retail clients of A$2 million or less; for licensees with total revenue greater than A$2 million, minimum cover should be approximately equal to actual or expected revenue from financial services provided to retail clients (up to a maximum limit of A$20 million). Licensees must retain records of how adequacy was determined. ASIC does not approve PII arrangements; ASIC will only approve alternative arrangements that give no less protection than adequate PI insurance. Assessment and recommendation: - Assessment: Fully Implemented for Principle 32. - Comments: ASIC has a wide range of powers and plans and has used some powers in the past. Recommendation that authorities consider additional investor protection benefits of an investor compensation scheme. ### Principle 33 — Authorization and oversight of trading systems and exchanges Key findings: - Financial market defined broadly by s767A CA; Minister grants AMLs (and CSFLs), not ASIC; ASIC reviews applications and advises the Minister. - All IOSCO items considered by ASIC in advice to Minister; Minister must be satisfied granting a license is in the national interest. - Alternative criteria apply for foreign-authorized market operators with principal place of business abroad. - CSFL applicants must demonstrate ability to meet obligations; RBA Financial Stability Standards (FSS) apply to CSFLs acting as central counterparties and/or settlement facilities. - ASIC has power to make Market Integrity Rules (MIR) (requires Minister and Parliament negative resolution approval); AML holders retain responsibilities for operating and listing rules not subsumed into MIRs. - ASIC assesses outsourcing arrangements on application and annually. Assessment and observations: - Assessment: Fully Implemented. - Comments: CA definition of financial market is very broad; ASIC has issued AMLs to 11 Australian entities and 6 overseas entities. 19 entities given exempt status; further 104 entities exempted operating low-volume semi-private markets (limit A$500,000 per annum). Recommendation from earlier remains: consider transferring power to license market operators and CSFLs to ASIC to improve efficiency. ### Principle 34 — Ongoing supervision of exchanges and trading systems Findings: - On 1 August 2010 ASIC assumed primary responsibility for secondary trading surveillance from exchanges. - SMARTS automated trade surveillance reconstructs trading instantaneously across markets, participants and clients. - ASIC Participant Relationship team primarily monitors Market Participants; ASX and Chi-X referrals and MBR complaints also feed into surveillance. - ASIC established Significant Market Event Response Team (SMERT) for market events and disruptions. - Market operators (e.g., ASX Compliance Pty Limited) maintain compliance units; AML holders must advise ASIC of suspected contraventions. - AML holders must notify ASIC of material changes under Competition MIRs; annual assessments by ASIC of AML holder surveillance practices. - Intervention powers largely reside with the Minister; ASIC can give directions in public interest, with effect for 21 days, enforceable by court; Minister can require special reports. Statistics (ASIC market supervision outcomes): - Total number of alerts: 23,494 (1 Jan--30 June 2011); 28,512 (1 Aug--31 Dec 2010). - Preliminary enquiries: 121 (1 Jan--30 June 2011); 91 (1 Aug--31 Dec 2010). - Formal enquiries: 40 (1 Jan--30 June 2011); 2 (1 Aug--31 Dec 2010). - Deterrence referrals: 35 (1 Jan--30 June 2011); 17 (1 Aug--31 Dec 2010). - Note: Automated surveillance produces many more alerts than enquiries or referrals; ASIC refines system to reduce false positives. Assessment: - Assessment: Fully Implemented. - Comments: Anomalous order thresholds and extreme cancellation ranges are sophisticated responses to events like the 6 May 2010 NYSE "flash crash"; importance of transparency and clarity of responsibility between ASIC, ASX and Chi-X emphasized. ### Principle 35 — Transparency of trading (pre-trade, post-trade, dark pools) Pre-trade transparency: - Competition MIRs (apply to ASX and Chi-X) require pre-trade and post-trade information be made available on reasonable commercial terms and non-discriminatory basis. - Market participants must not enter into a transaction in an equity market product unless order is pre-trade transparent on a licensed market order book, subject to exceptions (block trades, large portfolio trades, trades at/within spread, permitted pre/post trading hours trades, out of hours where one party outside Australia). - ASIC estimates around 27 percent of orders in Australian equities are not pre-trade transparent; dark pools estimated to account for less than one quarter of that amount (i.e., less than 5 percent overall). - ASIC intends to amend block trading exception, reducing overall size limit currently A$1m to align with liquidity (range from A$200,000 to A$1m). Post-trade transparency: - Off-exchange transactions in exchange listed securities must be reported to a market operator; post-trade info must be made available continuously and in real-time for trades during trading hours, and before next trading day for trades outside hours. - Post-trade information fields specified; market operator must make trading information available on its publicly available website within 20 minutes of completed transaction free of charge. - Competition MIRs support data consolidators with minimum operating standards. Dark pools and crossing systems: - Only AML holder operating a dark pool in Australia is ASX; most dark pools are broker crossing systems; some specialized dark pool operators active. - ASIC monitors dark trading; Competition MIRs impose reporting for crossing systems (initial and monthly reports). - ASIC consulting on requirement for crossing systems and dark pool operators to provide meaningful price improvement over national best bid and offer; aim to encourage trading on pre-trade transparent books. - ASIC position: transparent orders should take priority over dark orders; fully hidden orders must not have time priority over pre-trade transparent orders (may have price priority). Assessment: - Assessment: Fully Implemented. - Comments: Little OTC trading in exchange listed equities; regulatory debate in Australia focuses on lit vs dark markets and high frequency trading. ASIC announced April 2012 proposals including: - Updating rule on testing of algorithms and annual review of systems; - Additional minimum standards for direct market access; - Tier ‘block size’ exception (currently A$1m) by reference to liquidity of stocks (range from A$200,000 to A$1m); - Meaningful price improvement requirement for dark trades below block size. - ASIC stated: if dark liquidity below ‘block size’ grows by 50 percent in the next 3 years, ASIC will impose a A$50,000 threshold for dark trades arising from passive (limit) orders. ### Principle 36 — Detecting and deterring manipulation and unfair trading Prohibitions and enforcement: - Part 7.10 CA prohibits market manipulation, false trading and market rigging, artificially maintaining trading price, dissemination of information about illegal transactions, insider trading, false or misleading statements, inducing persons to deal, dishonest conduct. - Misleading or deceptive conduct attracts civil liability only; other breaches attract civil and criminal penalties. - MIRs prohibit market manipulation practices (entering orders without intent to trade, wash trades, withholding orders, post-allocation). - Penalties: - Criminal penalties range from A$495,000 to A$950,000 or imprisonment for ten years, or both. - Civil fines up to A$200,000 for individuals and up to A$1 million for corporations; MIR-specific penalties range from A$100,000 to A$1 million. - Insider trading criminal penalties range from A$495,000 to A$4,950,000 or imprisonment for ten years, or both; civil fines A$200,000 (individual) or A$1 million (corporation). - Front running MIR penalties up to A$1 million; AFSL regime offense for priority breaches punished by fine of A$2,750 or imprisonment up to six months or both. - Enforcement methodology: combination of real-time surveillance (SMART), audit trails, display rules, market halts, civil and criminal sanctions. - Cooperation: MoU and effective working relationship with Commonwealth Director of Public Prosecutions (CDPP); CDPP reports high success rates (90 percent in summary offences; 90-100 percent in indictable offences). Cross-market and foreign cooperation: - AML holders required procedures for exchange of information with clearing/settlement facilities, other markets and ASIC; Competition MIRs require electronic data feeds between markets quoting same products. - ASX has MoUs with multiple regional exchanges; ASX in Intermarket Surveillance Group. Futures and commodities: - ASX monitors client position limits via Daily Beneficial Ownership Reports (DBOR); operating rules permit action to correct squeezes or settlement price distortion; ASX provides DBORs to ASIC. Assessment: - Assessment: Fully Implemented. ### Principle 37 — Management of large exposures, default risk and market disruption Systemic and infrastructure measures: - Large exposure and open position risks addressed through CSFL obligations, prudential requirements on market intermediaries, and MIRs. - CSFL holders regulated by ASIC and RBA (RBA sets Financial Stability Standards (FSS)); FSS broadly similar to CPSS-IOSCO Recommendations. - Measure 7 (FSS): risk-control arrangements must give high degree of confidence CCP can settle if participant with largest settlement obligations cannot meet them; requires regular rigorous stress testing. - ASX Clear and ASX Clear (Futures) use daily stress tests; Clearing Participant must post additional collateral if stress-test outcomes exceed STEL; results reported to RBA. - Measure 5 (FSS): settlement must occur with appropriate DvP arrangement; Austraclear settles on DvP Model 1; ASX Settlement on DvP Model 3. Regulation of market intermediaries and large exposure rules: - AML holders’ large exposure rules require additional capital where principal position exceeds: - greater than 25 percent of Market Participant’s liquid capital; or - for equities, greater than 5 percent of market capitalization of the listed entity; and - for debt securities, greater than 10 percent of the total value of the particular debt instrument on issue. - Additional capital equals value of position excess times prescribed position risk factor. - ASX Clear rules govern large exposures calculation (ASX Capital Liquidity Handbook, Rule S1 Annexure 2). - Derivatives: ASX 24 MIR on Concentration of Risk prescribes no one client may represent such percentage of trading as may prejudice ability to meet obligations; daily beneficial ownership reports required. Gaps and concerns: - No large exposure rules for bilateral transactions involving AFSL holders not supervised by APRA and not supervised by ASX as Clearing Participants or ASIC as Market Participants (e.g., certain subsidiaries of global investment banks). - Assessment: Partly Implemented. - Comments: Issue from 2006 remains unchanged; urgent examination recommended of ASIC/clearing facility operator powers to transfer client positions from a failing firm to a viable one. CHESS provides individual client custody accounts; Payment Systems and Netting Act 1998 provides legal certainty for close out netting. Short selling and settlement: - Naked short selling prohibited (subject to exceptions); covered short selling permitted. - ASX settlement T+3; fail fee 0.1 percent of outstanding trade value with floor A$100 and cap A$5,000 per security per day (increased from floor A$50 and cap A$2,000); automatic close out at T+5. - Short sale reporting: - Gross short sales reported by 9 am on trading day following transaction; market operator publicly discloses total sold short same day. - Short position reporting to ASIC by 9am on third day after position created; exemptions where value ≤ A$100,000 and volume ≤ 0.01 percent of total quantity. - ASIC aggregates and publishes data on T+4. - ASX T+3 settlement failure rate less than 1 percent; most settle at T+4. - ASIC routinely checks short position reports; currently no targeted surveillance; plans considered to evaluate compliance. ### Principle 38 — Clearing and settlement systems - Assessment: Not assessed. - Comments: (No further substantive content provided in source for Principle 38 assessment.) *Source: _cr12314 - 4.5 years as a result of increased surveillance activities by ASIC during the past two* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12314.pdf_