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3.6 Market intermediaries

The market intermediaries sector includes market participants, securities dealers, corporate advisers, over-the-counter (OTC) traders, retail OTC derivatives issuers, and wholesale electricity dealers.

ASIC’s work in this sector during 2019–20 included focusing on market integrity and retail investor trading in the COVID-19 pandemic environment, as well as monitoring of fixed income, currencies and commodities (FICC) markets.

ASIC deferred its onsite supervision programs for market intermediaries, instead publishing guidance on business continuity and supervision arrangements to help intermediaries comply with their regulatory obligations in the pandemic environment.

Market integrity during the COVID-19 pandemic

ASIC closely monitored securities, futures, interest rates, commodities and FX markets during the COVID-19 pandemic period to identify market misconduct, price dislocation and emerging market vulnerabilities.

We focused particularly on promoting informed markets and quickly identifying and responding to misinformation, market manipulation and inappropriate short selling.

With the significant increase in trading volumes and volatility, alerts from ASIC’s trade surveillance system peaked at over 1,000 alerts on several days (around seven times the norm).

In a bid to detect potential market disruption caused by market intermediaries being unable to provide effective trade execution and facilitation of capital raising activities, ASIC engaged with intermediaries to understand and assess their operational resilience, business continuity and supervision arrangements, including whether outsourced and offshore services continued to operate effectively.

To help market intermediaries meet their regulatory obligations, ASIC published guidance and reminders of regulatory obligations in our Market Integrity Update newsletters. We also provided guidance on business continuity and back-up arrangements and the supervision of staff in a remote working environment.

Fixed income, currencies and commodities onsite reviews

FICC markets are global and directly link to the real economy. While they are wholesale markets, FICC transactions may fund or manage risk for businesses and superannuation funds. ASIC’s FICC strategy addresses threats to these markets that may cause harm to the real economy and consumers.

We have intensified our focus on FICC markets through proactive onsite surveillance.

Each review of FICC market participants was conducted over several days, involving a series of meetings with key staff, onsite inspections, and demonstration of key systems and controls. We required production of detailed information to test business practices and employee behaviours, and controls implemented by licensees to effectively manage conduct risk.

Two thematic reviews targeted:

  • fixed income sales and trading practices, including governance and supervision, risk management, and compliance controls that supported these businesses at nine intermediaries
  • conflicts of interest arrangements employed by four wholesale financial markets businesses.

Foreign exchange markets

Our work in wholesale foreign exchange (FX) markets, including onsite reviews during 2018 and 2019, was summarised in Report 652 Wholesale FX practices in Australia, published in December 2019. It highlighted our observations about better practices, as well as some poor practices by participants operating in the market.

We will continue to test these practices and arrangements to drive better behaviours and industry standards. Where we identify compliance failures or misconduct, we will take regulatory action.

Allocation practices in debt capital market transactions

Building on our findings in Report 605 Allocations in equity raising transactions, we undertook a review of market practice for allocations in debt capital market (DCM) transactions and are co-leading work with international peers through the International Organization of Securities Commissions (IOSCO).

A properly functioning DCM market is vital for the real economy, as demonstrated by governments’ and corporates’ ability to issue bonds and raise capital during the COVID-19 pandemic crisis.

Poor conduct in DCM markets can reduce the trust and confidence of issuers and investors, resulting in reduced participation and higher funding costs. The proper management of risks associated with allocations of debt securities, including management of conflicts of interest and ensuring that information provided to issuers and investors is accurate and not misleading, is essential.

ASIC consulted with a range of stakeholders and industry participants on DCM market practices and reviewed selected corporate, government and semi-government bond issues.

We extended our review to include post-COVID-19 pandemic transactions to see if market practices changed during this volatile period.

We identified various areas for improvement, including:

  • management of conflicts of interest
  • messaging to investors during transactions, including defining and disclosing joint lead manager interest
  • excluding inflated bids from being recorded in bookbuild demand
  • providing meaningful post-deal statistics to investors, particularly around allocation decisions
  • supervision and compliance arrangements.

Cyber resilience

We continue to focus on the cyber resilience capabilities of firms operating in Australia’s financial markets. Our Report 651 Cyber resilience of firms in Australia’s financial markets: 2018–19, released on 18 December 2019, identifies new and emerging trends, as well as challenges that have emerged over the past two years. We will continue to monitor and assess improvement over time.