On 23 October 2023, the Markets Disciplinary Panel (MDP) and the Australian Securities and Investments Commission (ASIC) published an important update. Infringement Notice MDP06/23 addresses alleged contraventions of the ASIC Market Integrity Rules (Securities Markets) 2017 (MIRs or Rules) by a particular market participant that operated a non-public crossing system (dark pool) from 1 April 2011 until its suspension on 11 October 2022.

Here’s what to know about the infringement notice and how your organisation can avoid similar repercussions.

 

Alleged contraventions and ASIC responses

Infringement Notice MDP06/23 outlined three main issues:

First Alleged Contravention — Rules 4A.3.2 and 5A.2.2

The market participant failed to properly disclose the use of indications of interest within the crossing system to clients, breaching specific rules regarding disclosure requirements. The crossing system’s rulebook inaccurately stated that indications of interest were not used.

Second Alleged Contravention — Rule 6.1.1

The market participant executed trades off-market without providing meaningful price improvement over the National Best Bid and Offer (NBBO). The crossing system inaccurately referenced only the Australian Securities Exchange (ASX) best bid and offer instead of the NBBO across both ASX and Cboe.

Third Alleged Contravention — Rule 7.4.2

The market participant incorrectly reported transactions executed elsewhere as being matched on the crossing system in trade reports, violating regulatory data reporting rules.

In 2022, ASIC conducted a thematic review of Trades with Price Improvement (TWPI). It observed this market participant reporting trades as TWPI that in fact were lacking price improvement over the NBBO. In response, ASIC engaged with the market participant regarding crossing system issues.

 

ASIC and MDP outcomes

ASIC and the MDP considered multiple factors when determining a penalty for these alleged contraventions. The four main variables were:

  • Character of the conduct: The MDP considered the market participant’s conduct to be negligent and, in some instances, more serious than careless. This includes a lack of proper disclosure, failure to update systems and inaccurate reporting.
  • Consequences of the conduct: While certain errors didn’t materially impact clients, they raised concerns about market integrity and client information.
  • Compliance culture: The market participant’s lack of system review and failure to update in line with market changes raised concerns about compliance culture.
  • Remedial steps: The market participant suspended the crossing system but took time to rectify errors, indicating a lack of urgency.

Based on these factors and more (conduct period, penalty severity, potential client impact, compliance failure, etc.), ASIC and the MDP imposed penalties for each alleged contravention under both the new and old penalty regimes. The total penalty imposed was $670,500.

 

Compliance takeaways for market participants

Market participants must diligently adhere to regulatory requirements, maintain robust compliance measures and promptly rectify any errors or discrepancies to uphold market integrity and client trust. This includes best practices such as:

  • Transparency and disclosure: Accurate and timely disclosure of system functionalities and changes is crucial for maintaining compliance.
  • Continuous review and update of systems: Market participants should regularly review systems to ensure adherence to market rules and timely updates in line with market changes.
  • Compliance culture and remedial actions: A robust compliance culture with proactive measures to rectify errors promptly is essential to maintain market integrity and client trust.
  • Understanding regulatory requirements: Awareness of regulatory obligations — particularly regarding trade execution, reporting accuracy and transparency — is critical.

 

Protecting your firm

Failing to respond appropriately to the outcomes of an infringement notice could have wide-ranging consequences for market participants. Entities within the industry must take regulatory notices seriously, promptly address compliance gaps and demonstrate proactive measures to align with regulatory requirements. This kind of rigorous compliance is vital for safeguarding their operations, reputation and relationships within the market.

Want to learn more about regulatory compliance and risk management? Contact us today for all the help you need.

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