Clayton Utz Insights

19 July 2012

New reporting requirements for brokers

By Geoff Hoffman and Nicholas Mavrakis.

Key Points:

ASIC's new market integrity rules are a significant shift in broker reporting obligations.

New market integrity rules will require brokers to report suspicious activities to ASIC.

There is also a new short selling reporting requirement which will require brokers to specify, at the time an order is placed, the quantity of a sell order that is a short sale.

Suspicious activity reporting

Reportable "suspicious activities" relate mainly to insider trading and price-fixing.

A market participant will be required to report suspected insider trading if it has reasonable grounds to suspect that a person has placed an order into or entered into a transaction on the market in relation to a financial product while in possession of inside information. The market participant must submit a report even if the participant is not aware of the identity of the insider or all of the details of the order or transaction.

This is a significant shift in broker reporting obligations – and extends the "market policeman" role (a role already applying to anti-money laundering and counter-terrorism activities) to client trading activities.

A participant will also be required to submit a report if it has reasonable grounds to believe that a transaction or an order transmitted to a trading platform has or is likely to have the effect of:

  • creating an artificial price for trading in financial products;
  • maintaining at a level that is artificial (whether or not it was previously artificial) a price for trading in financial products;
  • creating, or causing the creation of, a false or misleading appearance of active trading in financial products; or
  • creating, or causing the creation of, a false or misleading appearance with respect to the market for, or the price for trading in, financial products.

It will up to brokers to develop policies, with guidance from ASIC (see Regulatory Guide 238), on what level of activity will constitute "reasonable grounds to suspect" for the purpose of reporting the activity.

This price-fixing reporting obligation will apply whether or not the market participant is aware of the intention of any party to the transaction or order or all of the details of the transaction or order.

In both cases, the report must be submitted as soon as practicable.

The market participant must not disclose that the notification was made, or the information contained in the notification, to any person other than for the purposes of seeking legal advice or as required by law.

Short-selling reporting

A new Rule 5.12.1 (inserted by ASIC Market Integrity Rules (ASX Market) Amendment 2012 (No. 2) and ASIC Market Integrity Rules (Chi-X Australia Market) Amendment 2012 (No. 2)) will require market participants to identify, when an order is placed, the number of products in the sell order that are short.

This requirement does not change the existing obligation to disclose short sale transactions. It changes only the method of reporting.

Specifically, the new rule will require market participants to:

  • include in a "Reportable Short Sale Order" transmitted to the market the number of Section 1020B Products that the seller will vest in the buyer under the relevant securities lending arrangement; and
  • include in a report of a "Reportable Short Sale Transaction", provided to the Market Operator under Rule 5.1.1 of the Competition Market Integrity Rules, the number of Section 1020B Products that the seller will vest in the buyer under the relevant securities lending arrangement.

“Reportable Short Sale Order” is defined as "an Order to sell Section 1020B Products which, if executed, would result in a 'Reportable Short Sale Transaction' [defined as 'a transaction for the sale of Section 1020B Products for which the seller is required to comply with subsection 1020AB(3) of the Corporations Act']."

Disclosure should be made when a seller enters into an agreement to sell, based on the seller’s position at that time. In ASIC's view, this is the time the order is placed into the market.

The maximum penalty for non-compliance will be $1,000,000.

ASIC also says that, if a market participant has more than one trading account, the position of each account will be relevant to whether a sale is reported short or long. The overall position of the market participant is not relevant to the individual sales that are reported.

When does it start?

The suspicious activity reporting requirement is contained in ASIC Market Integrity Rules (ASX Market) Amendment 2012 (No. 1). This inserts a new Rule 5.11.1.

Rule 5.11.1 imposes the notification requirement on ASX participants, but subrule 5.11.1(3) says that participants are not required to comply with until 1 November 2012. (An identical rule has been made for Chi-X participants.)

Complicating things, the accompanying ASIC Regulatory Guide (RG 238) says that ASIC will waive the obligation to comply with the rule until 20 January 2013 (which makes you wonder why ASIC didn't just make the new rule effective from that date).

The new short selling reporting requirement will not apply until 10 March 2014.

For more information, contact...
Email: Geoff Hoffman, Partner in Charge
Tel: +61 2 9353 4617
Email: Nicholas Mavrakis, Partner
Tel: +61 2 9353 4621
Disclaimer
Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.
Geoff Hoffman
Geoff Hoffman