The Australian Securities and Investment Commission (ASIC) has constructed new market integrity rules for suspicious activity reporting and short-sale tagging requirements, which will apply for the Australian Securities Exchange (ASX) and Chi-X Australia.
The new rules for identifying potential market abuse are due to commence on 1 November 2012, with short-sale reporting requirements applicable from 1 March 2014.
Since ASIC provides the industry with a six-month implementation period to allow it to adapt systems and processes, the regulator will waive the obligation to comply with the suspicious activity reporting rule until 20 July 2013.
This new rule will be implemented as a response to the lack of obligation, under existing market integrity rules, for market participants to report suspicious activity. In practice, gaps and limitations with the current reporting mechanisms can restrict the flow of useful information to ASIC which, if provided, would help to better supervise the market and identify particular market activities.
“ASIC expects that the rule will result in an increased number of useful reports by market participants of potential misconduct. ASIC also expects that these reports may be received at an earlier stage than currently which will, in turn, facilitate early identification of possible misconduct,” said Greg Yanco, senior executive leader of market and participant supervision, ASIC.
The short sale tagging obligation will require market participants to specify, at the time an order is placed, the quantity of a sell order that is a short sale.
For order book transactions, this will require detailing the number of instruments that are short at the time the order is placed into the market. For off order book transactions, the number of products that are short will need to be provided in the trade report made available to a market operator.
Based on industry consultation, ASIC said the effect on participant systems will be manageable, given the long lead time being provided.
The rule for suspicious activity has been implemented as a response to consultations held by ASIC, which began in November 2010. The rule provides the clarity that was sought by the industry in submissions and ongoing discussions with key stakeholders.
The new requirements regarding short sale tagging were prompted by experience during the global financial crisis, according to ASIC. At this time, the uncertainty surrounding the actual level of short-selling activity in Australian securities resulted in rumour and speculation in the marketplace, which caused increasing pressure on listed businesses.
The current regulations are not conducive to the reporting of algorithmic trading (which constitutes some 60–70% of orders generated on the market), therefore the overall objective of government action is to create a framework that facilitates the reporting of these trades to ASIC.
ASIC is currently undergoing consultation on market structure reforms, which focuses on extreme price movements, enhanced data for market supervision and pre-trade transparency.
Reporting by Sophie Pallier