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3.5 Market infrastructure

The market infrastructure sector includes Australian market licensees, various types of market operators, benchmark administrators, clearing and settlement facility operators, Australian derivative trade repository operators, exempt market operators, and credit rating agencies.

ASIC’s work in this sector during 2019–20 continued to focus on providers’ compliance with their obligations under the financial services laws to help ensure good consumer and investor outcomes and maintain trust and integrity in Australia’s financial markets. We also focused on responding to the impact on businesses and consumers of the COVID-19 pandemic.

Ensuring market resilience

The Australian equity markets experienced significant volatility and record numbers of executed trades during the COVID-19 pandemic period. This placed unprecedented strain on the trade processing capacity of Australia’s financial market infrastructure and the middle and back offices of market participants. There was a serious risk that the number of trades executed on the market could exceed the number that could be reliably processed by the market intermediaries and the clearing and settlement system on a single day.

In order to safeguard Australia’s equity market resiliency, ASIC issued directions under the ASIC Market Integrity Rules (Securities Markets) on 15 March 2020, requiring nine large equity market participants, representing roughly 75% of total trading activity, to limit the number of trades they execute each day.

To comply with the directions, those participants implemented various changes designed to reduce their number of executed trades and increase the average size of submitted orders.

Once we were satisfied that the measures taken by participants were effective, and overall trading activity had stabilised, we revoked the directions on 14 May 2020 and issued an expectations letter to all equity market participants, setting out a principles-based approach to maintaining market resilience.

These actions were supported and enhanced by ongoing dialogue with market operators, clearing and settlement facilities, and market participants, as well as ASIC’s active surveillance of the market, which included monitoring tools developed specifically to help manage COVID-19 pandemic-related risks.

Retail investor trading during the COVID-19 pandemic

Due to elevated market volatility associated with the COVID-19 pandemic, ASIC observed a substantial increase in retail activity in markets, as well as greater exposure to risk.

In May 2020, we released our analysis of retail investor trading during the period, to raise awareness of the risks observed.

ASIC noted significant increases in new and previously dormant accounts of retail brokers entering the market. Trading frequency also increased rapidly, as did the number of different securities traded per day, while the duration of holding securities significantly decreased – indicating an increase in short-term and ‘day-trading’ activity.

Our analysis suggested that few investors pursuing quick windfalls were successful at timing the market, with most likely to incur heavy losses. The higher probability and impact of unpredictable news and events in offshore markets overnight magnified the danger.

ASIC also highlighted concerns around the significant increase in retail investors’ trading in complex, often high-risk investment products, which further contributed to our estimate of retail trading losses. These include highly geared exchange-traded products and CFDs.

As well as releasing our analysis and issuing warnings in the media, we published investor education resources on our Moneysmart website and other channels to highlight market structure, market dynamics and common behavioural biases that retail investors should be aware of during periods of financial market stress.

Licensing of market operators

We strengthened our supervision of wholesale market operators by completing the licensing of previously exempt operators of trading platforms, resulting in heightened supervision and reporting requirements.

We continue our in-depth assessments of governance, supervision and cyber resilience arrangements of professional trading platforms, with the report on Bloomberg Tradebook Australia Pty Ltd published in October 2019.

LIBOR transition

We continued to monitor the transition from LIBOR (London Inter-bank Offered Rate) to alternative reference rates.

We released feedback on responses to ‘Dear CEO’ letters we issued, highlighting the need for financial institutions to plan for LIBOR transition, the issues to consider in transition, and the importance of addressing issues early. We also wrote to a number of entities to increase awareness among smaller financial institutions, fund managers and corporations.

Clearing and settlement

CHESS replacement

ASX is undertaking a multi-year transformation program to replace its clearing and settlement system (CHESS) with a system based on distributed ledger technology.

Together with other Council of Financial Regulators (CFR) agencies and the ACCC, we are supervising ASX’s governance of the project, stakeholder engagement, and management of key risks, including system development and testing, participant readiness, and pricing and data access.

The replacement system must at least deliver the same resilience, performance, recoverability, availability and security as CHESS does, while also delivering the benefits of contemporary technology.

We are engaging with participants and their technology vendors, market operators, issuers and share registries in relation to the change program.