Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)7 Licensing of financial markets
Preliminary
7.1 The objects of the Chapter are found in proposed section 760A and should be read in conjunction with ASICs charter in section 1 of the ASIC Act.
7.2 The purpose of proposed Part 7.2 is to provide a more flexible regulatory framework than currently applies to securities and futures exchanges. Instead of the seven routes to authorisation for financial markets, there will be one.
7.3 While the provisions in proposed Part 7.2 differ from those found in current Parts 7.2 and 8.2 of the Corporations Law, there is no intention to increase the regulatory burden. Some of the new provisions reflect the more complete framework included in the draft provisions. An example is proposed sections 797B to 797G, which relate to suspension of a licence. Other provisions, which may appear to impose additional obligations, make explicit requirements which exchanges would currently be expected to fulfil. An example is the requirement, expected to be included in the regulations, for rules relating to the procedure in the event of a default.
Allocation of responsibilities
7.4 In brief, Part 7.2 will:
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- allocate different responsibilities to the Minister, ASIC and market licensees respectively in pursuing the functions which they each have of monitoring and promoting market integrity and consumer protection;
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- in particular, the market licensee has the primary responsibility for ensuring that the rules and procedures of the market and their enforcement by the operator are consistent with the objectives of fairness, orderliness and transparency, and is the front-line regulator of participants' conduct in relation to the market;
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- ASIC has primary responsibility for ensuring that participants on a market comply with the Law and Regulations and exercises oversight of the market licensee to ensure that it complies with its ongoing obligations;
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- the Minister, with the advice and assistance of ASIC, has primary responsibility for the licensing of markets, as well as such associated matters as the suspension and cancellation of the licence, and determining whether the market's operating rules are consistent with the operator's obligations.
7.5 Proposed Part 7.2 will replace the following Parts of the proposed Corporations Act:
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- Part 7.2 (Securities Exchanges and Stock Markets);
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- Part 8.2, Divisions 1 and 3 (futures exchanges, exempt futures markets and futures associations) and 4 (to the extent that it applies to these bodies).
Requirement to be licensed
7.6 A person must not operate a financial market unless they have an Australian market licence to operate the market or the market is exempt (proposed section 791A).
7.7 The prohibition extends to holding out that the person has an Australian market licence, that the operation of a market is authorised by an Australian market licence, that a market is exempt or that a person is a participant in a licensed market when that is not the case (proposed subsection 791B).
7.8 Assisting in the operation of a financial market in contravention of proposed section 791A is covered by the Criminal Code Act 1995 and is therefore not explicitly mentioned in these provisions.
7.9 Proposed sections 791A and 791B will replace sections 767 and 1123 of the Corporations Law.
7.10 Strict liability will be applied to proposed paragraph 791A(1)(b) which provides that a person does not need a licence to operate an exempt market. The application of strict liability in this situation means that for an offence of operating a market that is not exempt without a licence there is no burden on the prosecution to show that a defendant knew or was reckless as to whether the market was not exempt, a matter that it might otherwise be difficult to show that a defendant had considered. Strict liability has not been applied in relation to paragraph (a), as the prosecution would not have the same difficulty in showing that a person knew or was reckless as to the fact that they did not have a licence.
7.11 For an offence under proposed section 791A and some other offences related to proposed Part 7.2, there are higher pecuniary penalties (up to 500 penalty units) than for equivalent offences in other parts of the Bill. This reflects the nature and size of bodies that are likely to be operating financial markets.
What is a financial market?
Proposed section 767A - What is a financial market?
7.12 The phrase 'financial market' is defined in proposed section 767A in terms which are derived from the definition of 'stock market' in section 9 of the Corporations Law.
7.13 However, it includes several modifications:
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- to clarify its operation, particularly to the 'OTC market' (see paragraph 767A(2)(a), which is discussed below);
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- to omit information providers on the basis that the obligations imposed by Part 7.2 are not appropriate if only information is being provided;
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- information providers may, however, be subject to other aspects of the new regime - if, for example, interpretation of the information is provided, then the provider will be providing financial product advice and be required to be licensed as a financial service provider;
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- to include a regulation-making power so that, if necessary, other conduct can be taken out of the definition of 'financial market'.
7.14 The word facility is not defined. However, it is clearly not the intention to regulate as the operator of a financial market a person whose involvement is limited to operating an electronic means of communication or is merely an Internet service provider.
7.15 In summary, the following conduct will not constitute operating a 'financial market':
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- transactions involving direct negotiation, as described in proposed paragraph 767A(2)(a);
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- the intention is to exclude the making or accepting of offers or invitations to acquire or dispose of financial products in circumstances that involve direct negotiation between the parties who each accept the counterparty credit risk;
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- this is expected to exclude most transactions which are considered to form part of the informal OTC market;
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- the 'financial market' encompassed in the definition would involve multiple buyers and sellers using the facility - the situation described in proposed paragraph 767A(2)(a) would not fit this concept;
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- a regulation-making power is included in proposed paragraph 767A(2)(a) so that its ambit can be adjusted - for example, in relation to central counterparty markets;
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- conducting treasury operations between related bodies corporate (proposed paragraph 767A(2)(b));
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- the term treasury operations should have its usual business meaning and is expected to refer to the operations of one member of a corporate group in arranging dealings between members of the corporate group.
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- to the extent that the nominated member of the corporate group arranges dealings on behalf of another member of the group with an unrelated company or person, then it may be acting in the capacity of an agent for the second member of the group and this activity would not constitute operating a market.
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- conducting an auction of forfeited shares (proposed paragraph 767A(2)(c)); and
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- any other prescribed conduct (proposed paragraph 767A(2)(d)).
7.16 The exclusion of auctions of forfeited shares currently appears in section 773 of the Corporations Law. The other exclusions referred to above are not currently found in the Corporations Law, but it is considered inappropriate to regulate such conduct as a market.
7.17 Activities of a licensee which are outside the scope of the conduct which the legislation regulates are the legitimate concern of the regulator to the extent that they are relevant to the core area of regulation (for example, where resources are diverted from the regulated conduct to the other businesses, or where the commercial imperative of those other businesses may conflict with the obligations imposed in relation to the regulated activity).
When is a market taken to be operated in this jurisdiction?
7.18 Proposed section 791A provides, among other things, that a person must not operate a financial market in this jurisdiction unless licensed to do so or the market is exempt.
7.19 The concept of operating in this jurisdiction is affected by proposed section 791D which provides for an extension to the concept: the regime will apply to market operators which are registered (incorporated) in Australia and which operate a financial market either in Australia or elsewhere (proposed subsection 791D(1)). The purpose of this extension is to protect Australias national interest and prevent its reputation as a global financial centre being compromised by unscrupulous operators of markets which may incorporate in Australia in order to operate elsewhere.
7.20 The inclusion of proposed subsection 791D(1) does not have any effect on the application of proposed sections 791A and 791B to natural persons.
7.21 The concept of operating in this jurisdiction is not otherwise defined. However, it is expected that mere accessability by one or a few persons in Australia to an electronic market operated from an overseas jurisdiction will not constitute operation of the market in Australia.
7.22 The Minister will be empowered to declare in writing:
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- a particular financial market; or
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- a particular type of financial market;
to be exempt from the requirement to be licensed (proposed subsection 791C(1)). The exemption may be subject to conditions.
7.23 In addition, after the exemption has been declared, the Minister will be empowered to impose conditions, or additional conditions, vary or revoke conditions and revoke the exemption (proposed subsection 791C(2)).
7.24 The provision requires notice and an opportunity to make submissions before the Minister may take such action in relation to an existing exemption (proposed subsection 791C(3)).
7.25 It is anticipated that conditions will be necessary to, for example, limit the exemption to the relevant market, as proposed when the exemption was granted.
7.26 This power is not a substitute for sections 771 and 1127 of the Corporations Law which currently empower the Minister to declare that a specified stock or futures market is exempt. The current powers have been used to provide a specific regulatory regime for markets which do not fit the criteria for approval as a stock or futures exchange. This has been done through exemptions granted on extensive conditions.
7.27 It is envisaged that the new exemption provision will be used in limited circumstances for example, in relation to a facility for which there is no policy reason to regulate as a market.
How to apply for an Australian market licence
7.28 The first step in applying for an Australian market licence will be to lodge an application, which includes the prescribed information, addresses the need for compensation arrangements (if required) and is accompanied by the prescribed documents and fee, with ASIC (proposed subsection 795A(1)).
7.29 ASIC will then be required, within a reasonable time, to give the application to the Minister with its advice (proposed subsection 795A(2)).
When an Australian market licence may be granted
7.30 Before the Minister may grant a licence under proposed section 795B(1), he or she must be satisfied that:
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- the applicant has made an application, as required (proposed paragraph 795B(1)(a));
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- the applicant can meet the obligations which will apply (which are described below) (proposed paragraph 795B(1)(b));
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- the applicant has adequate rules and procedures (see proposed section 793A which is described below) to ensure, as far as is reasonably practicable, that the market will operate in a way that promotes the objectives of fairness, orderliness and transparency (and, in particular, to the extent that those objectives are consistent with one another) (proposed paragraph 795B(1)(c) and paragraph 792A(a));
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- the applicant has adequate arrangements for supervising the market including arrangements for handling conflicts between its own commercial interests and its role as a market supervisor, monitoring the conduct of participants in relation to the market and enforcing compliance with the market's operating rules (proposed paragraph 795B(1)(d));
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- if the Minister considers it to be appropriate in the circumstances, the applicant has adequate clearing and settlement facility arrangements for transactions effected through the market (proposed section 790A (definition of 'clearing and settlement arrangements') and paragraph 795B(1)(e));
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- the need for compensation arrangements has been addressed and, if necessary, approved (see Part 7.5) (proposed paragraph 795B(1)(f));
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- no unacceptable control situation is likely to result (see the provisions relating to 15 per cent limit on voting power in some entities in Division 1 of Part 7.4) (proposed paragraph 795B(1)(g)); and
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- no disqualified individual appears to be involved in the applicant (see the 'fit and proper person test in Division 2 of Part 7.5) (proposed paragraph 795B(1)(h)).
7.31 The criteria relating specifically to foreign operators of overseas markets are summarised separately below.
General obligations on a market licensee
7.32 The general obligations on a market licensee are described in proposed section 792A and build on the initial criteria, which are summarised above, but also bring in the appropriate element of action and continuity. For example, they require that a market not just have adequate procedures and rules to ensure the outcome specified, but take action with a view to achieving that outcome. This therefore encompasses enforcing the rules and procedures and keeping them under review.
7.33 In summary, the general obligations are:
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- to the extent that it is reasonably practicable to do so, do all things necessary to ensure the market operates in a way that promotes the objectives of fairness, orderliness and transparency (proposed paragraph 792A(a));
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- to comply with the conditions on the licence (proposed paragraph 792A(b));
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- to have adequate supervisory arrangements (proposed paragraph 792A(c));
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- to have sufficient resources to operate the market properly and provide for supervisory arrangements (proposed paragraph 792A(d));
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- if compensation arrangements are required to be approved, to have approved compensation arrangements (proposed paragraph 792A(e));
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- if the licensee is a foreign body corporate, to be registered as such under the proposed Corporations Act (proposed paragraph 792A(f));
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- to take all reasonable steps to ensure that an unacceptable shareholder situation does not exist and that no disqualified individual becomes or remains involved in the licensee (proposed paragraph 792A(h) and (i)).
7.34 The particular obligations on foreign licensees are summarised separately below.
7.35 The approach of only including high level objectives in the law was adopted after consideration of the submissions received in response to the consultation paper. It also reflects the view of the Financial Sector Advisory Council that the legislation should provide flexibility to the regulator and extend the life of the legislation. The advantage seen by the Council was the speed with which regulations and guidelines could be changed to reflect the dynamics of the financial markets.
7.36 The ideal of a 'fair, orderly and transparent' market is reflected in proposed paragraph 792A(a), and hence in proposed paragraph 795B(1)(c).
7.37 The word 'transparent' is included in the light of the overwhelming support of Australian and overseas commentators for the value of a transparent market. These include Final Report of the FSI.
7.38 In interpreting the phrase fairness, orderliness and transparency', it is desirable that all the words in the phrase be considered together. One word taken out of context may lead to a course of action which conflicts with the other words in the phrase. Thus, transparency may on occasions be in conflict with liquidity, yet liquidity is needed for an orderly market. The tensions between the three words need to be resolved sensibly, so that an appropriate balance is struck between the demands of different market participants. This is specifically acknowledged in the clause to the extent that those objectives are consistent with one another.
7.39 At the time the licence is granted, conditions will be imposed on the licence.
7.40 These conditions must address (proposed subsections 796A(4) and (5)):
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- the particular market that the licensee is authorised to operate;
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- the class or classes of financial products that can be dealt with on the market;
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- if the Minister considers that the licensee should have clearing and settlement facility arrangements for transactions effected through the market, the type of clearing and settlement facility arrangements that are adequate; and
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- if compensation arrangements under proposed Division 3 of Part 7.4 are required, the minimum amount of the cover.
7.41 Other matters may also be addressed in conditions.
7.42 The procedure for imposing conditions, and varying or revoking existing conditions, is also described (proposed subsections 796A(1) to (3)).
7.43 The Minister may only impose conditions, or vary conditions on his or her own initiative if, among other things, the licensee has been given written notice of the proposed action and an opportunity to make a submission.
7.44 Conditions on a licence relating to the class or classes of financial product which may be traded will bring a flexibility which is impossible under the current regime. Under the Corporations Law, a futures exchange is basically limited to futures contracts, and certain other relevant agreements. A comparable limitation applies to securities exchanges.
7.45 The notion of a class of financial products is discussed below.
7.46 The market licensee is required to have arrangements for monitoring participants conduct in relation to the market and enforcing compliance with its operating rules (proposed paragraph 792A(c)).
7.47 The new provisions will include the possibility of:
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- self-regulation;
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- regulation by a related body corporate; or
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- regulation by an independent supervisor.
7.48 The appropriate supervision arrangements will depend on the individual market. A particular structure may be more suited to one market than to another, depending on its size and nature. However, there must be adequate arrangements for handling conflicts between the commercial interests of the market licensee and its role in supervising particular participants or listed corporations. This requirement is considered necessary in the light of the demutualisation of exchanges here and overseas.
7.49 Possible structures include formal legal separation between the regulatory and commercial functions of the market operator or an independent compliance committee.
7.50 The criteria which independent supervisors would have to satisfy will not be included in the Act, because of the varieties of arrangements which are possible.
7.51 There will be no separate licensing process for market supervisors but the arrangement would need to be considered as part of the initial licence (and the ongoing obligations). This will include an assessment of the skills, resources (including human resources and computer systems) and experience which would be necessary to carry out the task.
7.52 The level of oversight by ASIC of markets will not necessarily vary depending on whether the market is self-regulatory or has an independent supervisor, but is expected to depend rather on the track record of the supervision, whichever route is taken.
7.53 In the light of the statutory role of ASIC, it is not appropriate that it exercise the level of supervision over market participants generally which is expected to be exercised by the market operator (or its independent supervisor).
7.54 The aim of the reforms is to facilitate efficiency, not to impose duplicated requirements. Thus it may be appropriate in certain situations for the supervision of two markets to be undertaken by the operator of one, or for the monitoring of clearing and settlement facility participants for compliance with the rules of the clearing and settlement facility to be undertaken by a related market licensee.
7.55 The operator must also have sufficient resources to operate the market in accordance with the legislative obligations, including providing for supervisory functions (whether they be self-regulation, or regulation by a related or independent body)(see proposed paragraphs 795B(1)(d) and 792A(d)).
7.56 This requirement refers to financial, technical and human resources.
Clearing and settlement facility arrangements
7.57 As indicated above, in considering the application the Minister may consider it appropriate that the applicant has adequate clearing and settlement facility arrangements for the transactions effected through the market (proposed paragraph 795B(1)(e)).
7.58 It is likely that he or she will reach such a conclusion in the majority of applications.
7.59 If the Minister considers that the licensee must have clearing and settlement facility arrangements for transactions effected through the market, the licence must include a condition specifying the type of clearing and settlement facility arrangements that are adequate (proposed paragraphs 796A(4)(c) and 792A(b)).
7.60 If the Minister considers that the licensee does not need clearing and settlement facility arrangements, the participants must be advised accordingly (proposed section 792G).
7.61 The need for compensation arrangements is addressed in proposed paragraph 795B(1)(f) and section 792A(e).
7.62 There are two categories of compensation arrangements in Part 7.5:
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- in relation to markets covered by the National Guarantee Fund;
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- in relation to other markets.
7.63 In relation to the second group, compensation arrangements are required when the transactions of retail clients are being executed through the particular market and assets are being held by the participant for this purpose. The term retail client is defined in proposed section 761G.
7.64 A market licensee may wish to make arrangements which exceed the minimum coverage required. To the extent that the arrangements exceed the minimum, they are relevant to the regulatory regime only to the extent that having that additional coverage impacts on the markets ability to meet the legislations requirements.
7.65 A market licensee will be required to ensure that information about the compensation arrangements that are in place under Part 7.5 is available to the public free of charge (proposed section 792I). It is envisaged that this could be fulfilled by appropriate information being available on the market's Internet site.
The market's operating rules and procedures
7.66 The term operating rules is defined in proposed section 761A and encompasses what are currently known as listing and business rules.
7.67 It should be noted that the term operating rules is defined in section 761A in terms of conduct of the market or in relation to the market - to the extent that rules of a market operator cover other material, they would fall outside the definition.
What the rules and procedures must address
7.68 The subjects which a market must deal with in its procedures and operating rules will be prescribed by the regulations (proposed subsections 793A(1) and (2)).
7.69 This approach has been adopted to complement the high level criteria included in proposed sections 792A and 795B, and to delineate the issues which must be addressed in rules or procedures.
7.70 It is expected that the regulations will require such matters as access, rules about participants conduct, disorderly trading conditions and the initial and continuing conditions under which particular products may be traded, to be addressed in the operating rules.
7.71 It is expected that the regulations will require issues such as links with other markets, recording and effective disclosure of transactions and mechanisms to ensure system integrity and security to be addressed in written procedures.
7.72 Draft regulations will be released for public comment in due course.
7.73 Proposed section 793A and the relevant regulations will therefore undertake the role of subsections 769(2), 770(2), 770A(2) and 1126(2) of the Corporations Law.
7.74 The need for contract protection procedures and mechanisms will be considered under, for example, proposed paragraphs 795B(1)(c) and 792A(a).
7.75 In the case of a market which provides an anonymous trading environment, some form of contract protection (satisfactory for the classes of product concerned) such as novation clearing or credit capping is likely to be necessary before its clearing and settlement arrangements will be considered adequate.
7.76 The public interest is required to be taken into account by the Minister in making certain specified decisions (including granting a market licence)(proposed paragraph 798A(2)(g)).
7.77 While the regulations will provide the basic list of matters to be included in rules and procedures, it is possible that additional rules and procedures will be required in particular circumstances to meet the test in proposed paragraphs 792A(a) and 795B(1)(c).
Effect of the operating rules, enforcement and disallowance
7.78 The provisions relating to operating rules have been consolidated. They relate to:
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- the effect of the business rules (proposed section 793B);
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- the enforcement of the operating rules (proposed section 793C); and
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- the requirement to lodge amendments with ASIC and the power of the Minister to disallow them (proposed sections 793D and 793E).
7.79 These provisions are comparable to sections 772A, 774, 777, 1136 and 1140 of the Corporations Law.
7.80 Special mention needs to be made of two aspects of these provisions:
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- as is currently the case (section 772A), the provisions render the business rules of the market as a contract under seal between the market licensee and each participant, and between a participant and each other participant (proposed section 793B).
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- this provision is needed to take account of the demutualisation of exchanges and to address the relationship between participants inter se. No comparable provision relating to the listing rules is necessary.
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- while the grounds on which a Minister may disallow rule changes under section 774/1136 are currently not specified, proposed section 793E requires the Minister to have regard to the consistency of the changes with the licensee's obligations under Part 7.2, particularly the objectives of fairness, orderliness and transparency.
Other obligations on market licensees
7.81 The notification obligations fall into three categories:
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- notification about the market licensee's own obligations;
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- notification about participants in the market; and
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- notification of information about listed disclosing entities.
7.83 Each is examined briefly below.
Notification about obligations on the licensee
7.84 The market licensee must notify ASIC:
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- if it becomes aware that it may no longer be able to meet or has breached an obligation under section 792A (including a condition on its licence) (proposed subsection 792B(1));
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- when it provides a new class of financial service incidental to the operation of the market (proposed paragraph 792B(2)(a)).
7.85 There are no comparable provisions in the existing Corporations Law. However, the provision of a new class of financial services which are incidental to the operation of the market, would, under the current legislation, require an exemption through the Corporations Regulations.
Notification about participants in the market
7.86 The market licensee must also:
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- notify ASIC when the licensee takes disciplinary action against a participant or believes that the person is, for example, committing a serious contravention of the markets operating rules (proposed paragraphs 792B(2)(b) and (c));
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- These provisions reflect the current requirements in subsections 776(2) and (2A), and 1139(2) and (2A).
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- provide a report to ASIC if it becomes aware of a matter relating to the ability of a financial services licensee who is a participant in the market to meet its obligations as such a licensee (proposed subsection 792B(3)).
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- This is intended to reflect the obligations currently found in section 862 of the Law. However, it has proved necessary to use regulations to supplement the provision because the subject matter currently in the sections referred to in subsection 862(2) will be found in regulations.
7.87 While it is clear that the requirements of proposed paragraphs 792B(2)(b) and (c) and proposed subsection 792B(3) will on occasions overlap, it is considered that they have sufficient independent operation to justify not melding them into one provision. Notifying ASIC twice will not be required if the conduct falls into the overlapping area the one notification addressing the requirements of the relevant provisions would satisfy each of the applicable provisions. This is acknowledged in Note 1 to proposed section 792B.
7.88 If information is provided by a market licensee under a Memorandum of Understanding with ASIC, and the information is also required to be lodged under, say, proposed paragraph 792B(2)(b), then the requirement of that paragraph has been satisfied.
7.89 The proposed amendments relating to qualified privilege and protection from actions for breach of confidence are also relevant in this regard (see proposed Division 1 of Part 7.12).
7.90 Obligations specific to foreign licensees are considered below.
Notification about persons involved in the market
7.91 To complement the provisions of proposed Part 7.4, the market licensee will be required to provide ASIC with certain information about directors, secretaries and executive officers of the market licensee and those holding more than 15 per cent of the voting power of the licensee (or its holding company) (proposed subsection 792B(5)).
Notification about listed disclosing entities
7.92 The market licensee is also required to give ASIC any information about a listed disclosing entity which has been made available to participants (proposed section 792C).
7.93 However, the licensee is not required to give ASIC any information of a kind that is excluded by the regulations.
7.94 If the market has no listed disclosing entities, the obligation will not be triggered.
7.95 This provision reflects subsections 776(2B) and (2C) of the Corporations Law.
7.96 Market licensees will be required to:
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- give such assistance to ASIC, or a person authorised by ASIC, as ASIC reasonably requests to perform its functions (proposed section 792D);
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- this provision is in substitution for subsections 776(1) and 1139(1) of the Corporations Law.
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- a request may be informal, in writing or oral, general or particular. A request is, however, necessary, so that the licensee knows what ASIC wants. Note that failure to comply with the request has criminal consequences.
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- give a person authorised by ASIC reasonable access to the market's facilities for any of the purposes of Chapter 7 (proposed section 792E);
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- this provision reflects subsections 776(3) and (4), and 1139(4) of the Corporations Law.
7.97 Each market licensee is required to provide ASIC with an annual report on the extent to which it has complied with its obligations under Chapter 7 (proposed section 792F).
7.98 The requirement and ancillary provisions permitting the Minister to require an audit report follow section 769C of the Corporations Law.
When an overseas market operator seeks an Australian market licence
7.99 The operator of a financial market which is authorised in a foreign country in which its principal place of business is located may:
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- seek an Australian market licence under the criteria referred to above (proposed subsection 795B(1)); or
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- seek an Australian market licence under proposed subsection 795B(2).
7.100 The purpose of the avenue provided in proposed subsection 795B(2) is to facilitate competition and avoid duplicated regulation, while paying due regard to investor protection and market integrity.
7.101 Whichever course is chosen, the operator will be required to be registered under Part 5B.2 (proposed paragraph 795B(3)(a)).
7.102 If the application is under proposed subsection 795B(2), the Minister may grant an Australian market licence authorising the applicant to operate the same market as is operated overseas if the Minister is satisfied that:
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- the applicant has made an application, as required (proposed paragraph 795B(2)(a));
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- the applicant can meet the obligations that will apply if the licence is granted (proposed paragraph 795B(2)(b));
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- the operation of the market is subject to requirements and supervision in the country in which it is authorised that are at least equivalent to the Australian requirements, judged by the degree of investor protection and market integrity thus achieved (proposed paragraph 795B(2)(c));
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- the applicant undertakes to co-operate with ASIC by sharing information and in other appropriate ways (proposed paragraph 795B(2)(d));
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- no unacceptable control situation is likely to result (proposed paragraph 795B(2)(e));
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- no disqualified individual appears to be involved in the applicant (proposed paragraph 795B(2)(f)); and
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- any other requirements that are prescribed by the regulations for the purpose of this subsection are satisfied (proposed paragraph 795B(2)(g)).
7.103 There will be no requirement for reciprocal recognition of Australian markets in the country of origin of such applicants.
7.104 While most of the provisions of proposed Part 7.2 will apply to such markets, there are a number of provisions specific to markets with subsection 795B(2) licences. In summary, these are:
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- the provisions relating to compensation arrangements will not apply (see proposed section 880A);
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- the provisions relating to the contents of operating rules and procedures, and the disallowance of operating rules will not apply (see proposed subsection 793A(3)).
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- this is on the basis that the total regulatory requirements, including the vetting of procedures and rules, has been considered to be at least equivalent at the time the licence is granted, and on a continuing basis;
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- such a market licensee must, however, lodge changes of rules with ASIC so that the Australian regulator is in a position to assess the market's continuing compliance with the legislation (proposed subsection 793D(3));
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- such a market licensee must also give written notice to ASIC if the licensee ceases to be authorised to operate in the overseas jurisdiction (proposed paragraph 792B(4)(a));
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- ceasing to be authorised to operate in the market in the jurisdiction of the operators principal place of business and the Minister deciding that the overseas regime is no longer equivalent are grounds for the Minister to decide to suspend or cancel the Australian market licence (proposed paragraph 797B(d));
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- the market licensee must notify ASIC of significant changes to the overseas regulatory regime to which it is subject (proposed paragraph 792B(4)(b)).
7.105 If a market operator with a subsection 795B(2) licence wishes to move its principal place of business to another country, it must obtain the Ministers approval (proposed section 792H).
7.106 If the principal place of business is moved to Australia, then the subsection 795B(2) licence is no longer appropriate and a licence under subsection 795B(1) would be required (proposed subsection 792H(2)). However, it is anticipated that the process would be streamlined to the extent that relevant matters had already been proved.
7.107 The factors to be taken into account in relation to decisions about a subsection 795B(2) licence include the arrangements for co-operation between ASIC and the foreign regulator (see proposed subsection 798A(3)).
Further powers of the Minister
The Minister's power to give directions
7.108 If the Minister considers that a market licensee is not complying with its obligations under Chapter 7, the Minister may give to the licensee a written direction to do specified things that the Minister believes will promote compliance by the licensee with those obligations (proposed subsection 794A(1)).
7.109 The market licensee is required to comply with the direction which may be enforced by Court order (proposed subsections 794A(2) to (3)).
7.110 The provision is comparable to section 769B of the Corporations Law.
The Minister's power to require a special report
7.111 The Minister is empowered to require a market licensee to give ASIC a special report on specified matters (proposed section 794B).
7.112 The Minister may also require the licensee to provide an audit report on the special report.
7.113 The licensee is required to give the special report and the audit report (if any) to ASIC within the time specified. ASIC then provides it to the Minister with advice.
7.114 This provision generally follows section 769D of the Corporations Law.
ASIC to assess licensee's compliance
7.115 ASIC will be empowered to do a written assessment of how well a market licensee is complying with its obligations under Chapter 7 - either a total assessment or an assessment of one or more of the obligations under Chapter 7 (proposed section 794C). Such an assessment of the supervision arrangements must be undertaken at least once a year. This would include an assessment of the conduct of any party acting on behalf of the market licensee to fulfil the licensees obligations - for example, as a supervisor as envisaged in paragraph 792A(c).
7.116 The legislation will not spell out the way the assessment is to be undertaken but indicates that reports from overseas regulatory authorities may be taken into account.
7.117 ASICs role in relation to the regulation of exchanges and clearing and settlement facilities is currently reflected to only a limited extent in the Corporations Law.
7.118 The proposed provisions will recognise the role of ASIC in assessing applications and amendments to operating rules, and otherwise providing advice to the Minister.
7.119 Proposed section 798B states that ASIC may give advice to the Minister in relation to any matter in respect of which the Minister has a discretion under Part 7.2, or any other matter concerning financial markets.
7.120 In addition, proposed paragraph 798A(2)(h) requires the Minister to have regard to any relevant advice received from ASIC in his or her assessment of applications and when considering, for example, the imposition of conditions on a licence and whether to disallow a change to the operating rules.
7.121 The Minister will be empowered to delegate his or her powers under this Chapter to ASIC (proposed section 1101J).
7.122 Currently, sections 775 and 1138 provide ASIC with certain powers to give directions in the case of disorderly markets. The provisions contain some differences, section 1138 being more detailed and addressing the consequences for a clearing and settlement facility, as is more relevant to a futures exchange.
7.123 Proposed section 794D replicates the relevant parts of the current provisions:
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- the prerequisite for this power is for ASIC to form the opinion that it is necessary, or in the public interest, to protect people dealing in a financial product or class of financial products (proposed subsection 794D(1));
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- the purpose of referring in proposed paragraph 794D(1)(b) to other directions is to empower the making of the directions to address a range of disorderly trading conditions;
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- the detail included in current section 1138 is not included in the new provision because of the range of products (and possible directions) which may be traded under the new regulatory regime;
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- however, examples are now provided under subsection 794D(1);
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- the section allows for review by the Minister at any stage during the process (proposedsubsection 794D(6)).
7.124 Proposed section 794E will empower ASIC to make ancillary directions to relevant clearing and settlement facilities. The purpose of this provision is to replicate the power currently included in paragraph 1138(7)(b)(ii) and subsection 1138(11) of the Corporations Law.
Matters to be taken into account by the Minister
7.125 The legislation will require the Minister to have regard to a number of factors when considering whether to grant an application, impose, vary or revoke conditions on a licence or disallow a change to the operating rules (proposed section 798A).
7.126 The factors include:
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- the structure of the market;
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- the nature of the products dealt;
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- whether the transactions are undertaken directly by persons who would be categorised as retail or wholesale clients (see proposed section 761G);
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- whether the transactions are undertaken on behalf of retail or wholesale clients; and
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- whether it is in the public interest.
7.127 The factors listed in the proposed section provide assistance to markets (as well as the Minister) in working out how to satisfy the initial criteria and various obligations imposed by the regime on the market.
7.128 In relation to public interest, it is noted that granting the licence could, for instance, increase competition, encourage product innovation or otherwise benefit market participants. It is envisaged that competing markets would be permitted provided that there is effective disclosure of information to promote transparency and the price formation process across a dispersed marketplace.
7.129 Generally speaking, OTC transactions will not take place on a market required to be licensed under Part 7.2.
7.130 Different regulatory requirements for OTC and formal markets are justified because the services and the promises offered in a formal market setting differ from those offered in relation to an OTC transaction.
7.131 The Final Report of the FSI stated, at page 282:
Formal exchanges should continue to be subject to more detailed regulatory requirements than OTC markets, in part because they operate a centralised market open to a large number of participants.
7.132 However, there is a clear need to ensure that regulation of financial markets is not excessive when compared to the regulation of financial service providers who are participating in OTC transactions. This will be taken into account, under proposed paragraph 798A(1)(g).
When a market participant needs its own Australian market licence
7.133 Where a participant in a market is conducting a market in its own right, then generally it should be regulated as a new market. In certain cases it may be appropriate to use the exemption power if, for example, the activities are sufficiently under the supervision of the relevant market. The original market should not be required to supervise the new market.
A new market or expansion of an existing one
7.134 A condition on the Australian market licence must specify the particular market that the licensee is authorised to operate and the class or classes of financial products that can be dealt with on the market (proposed paragraphs 796A(4)(a) and (b)).
7.135 The market licensee will not need to seek approval to quote a new product on the market but, depending on the classes of products referred to in the conditions, the licensee may need to seek approval if it wants to offer facilities for trading a new class of product (and may need to make additional operating rules relating to that class).
7.136 Examples of a class of financial product are securities and derivatives. The manner in which classes of financial products are described is not limited by the paragraphs of proposed section 764A. How a class of financial products is described is limited only by the imagination of the applicant and the decision-maker. There is no such thing as a product so innovative it cannot be described under this requirement. There is therefore no reason to believe that this requirement will cause silos under the licence, rather than on top.
7.137 It is anticipated that the descriptions of classes of products in the conditions will be broadly phrased to reduce the need to seek amendments to the conditions. It is clearly desirable that no separate approval is required to permit the trading of each new index, for example.
7.138 The provision does not prevent a market being provided with a licence, which covers all financial products, or a very limited range of, for example, securities.
7.139 Whether a particular proposal involves a new market or an extension of an existing one will need to be determined by examination of the operation of the current market and the proposal in the light of the definition of financial market.
7.140 The reason for taking this approach is consistency with the initial application, which will require that particular criteria be addressed in relation to a particular market.
7.141 A licence may authorise the licensee to operate two or more financial markets. In that case, a reference in Chapter 7 to the market to which an Australian market licence relates is taken instead to be a reference to each of those financial markets severally (proposed section 795E).
When the market licensee also provides financial services
7.142 A market licensee will not need any additional approval or licence to provide financial services that are incidental to its market operation activities (proposed paragraph 911A(2)(d)).
7.143 However, in these circumstances, the market licensee must notify ASIC when it provides a new class of financial services (proposed paragraph 792B(2)(a)).
7.144 This avoids the need for an exempting regulation, which is the current mechanism.
7.145 On the other hand, if the financial services cannot be characterised as incidental to the market operation activities, then an Australian financial services licence will be required. Such a licence can be included in the same document as the Australian market licence (proposed section 795D).
When a market licensee also operates a clearing and settlement facility
7.146 The holder of an Australian market licence will need to obtain an Australian clearing and settlement facility licence before it operates a clearing and settlement facility as well as a financial market. The two licences may be included in the one document (proposed section 795D).
7.147 Nothing in these amendments should be read as limiting the dealings on a market to dealings in financial products. Thus trade in actual bullion, for example, would not be prohibited; nor would it be subject to regulation under this regime. However, the fact that significant trades in items that are not financial products are taking place on the market would have to be taken into account in assessing, for example, whether there are sufficient resources for and adequate supervision of the financial products aspect of the market.
Variation, suspension and cancellation
7.148 The proposed provisions empower the Minister:
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- to vary the licence to reflect a change of name (proposed section 797A);
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- to immediately suspend or cancel a licence if the licensee ceases to carry on the business of operating the market, becomes externally-administered, asks the Minister to do so or, in the case of an overseas market, the overseas regulatory regime ceases to satisfy the equivalence criterion or the market ceased to be authorised in the overseas jurisdiction (proposed section 797B);
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- to suspend or cancel the licence following a hearing and report, in other circumstances (proposed section 797C); and
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- to vary or revoke a suspension (proposed section 797E).
7.149 The effect of suspension is addressed in proposed section 797D. The suspended licensee will remain subject to certain obligations, such as to give access to its facility to ASIC and to maintain compensation arrangements (if these were previously required). This will be achieved by empowering the Minister to specify in the notice the provisions, which will continue to apply.
7.150 An Australian market licence cannot be varied, suspended or cancelled otherwise than in accordance with these provisions (proposed section 797G).
7.151 Ancillary orders may, in some circumstances, need to be sought under section 1101B.
7.152 A market licensee may be included in the markets official list. This may only be done in accordance with proposed section 798C, which corresponds with subsections 772B(1) to (5) of the Corporations Law.
7.153 Subsection 798C(2) imposes an obligation, which continues throughout the time when the financial products of the licensee are traded on its own market. This notion of continuity is reinforced by amendments to subsection (4).
7.154 In addition to the matters addressed in the current provision, the proposed provision addresses the possibility of self-listing by an overseas licensee (proposed subsection 798C(7)).
7.155 The power of ASIC to modify certain provisions of the Law as they apply to self-listing market licensees (or to exempt them from compliance) is included in proposed section 798D. This corresponds with subsections 772B(6) to (11) of the Corporations Law.
7.156 Fees are payable to ASIC for performing these functions - see Part 9.10. These will also be addressed in the proposed Corporations (Fees) Act 2001 .
Other potential conflict situations
7.157 A new provision (proposed section 798E) has been inserted which will allow ASIC to take a role comparable to that under proposed section 798C where there is a conflict or potential conflict between the commercial interests of a market licensee and the licensees role in supervising an entity listed on the markets official list or a participant on the market.
7.158 While it is envisaged that the usual method of addressing this situation will, in the future, be via independent supervision arranged by the market operator pursuant to proposed paragraph 792A(c)(i), it is considered desirable to provide an avenue whereby ASIC could undertake this function.
7.159 Again, fees will be payable to ASIC - see Part 9.10. These will also be addressed in the proposed Corporations (Fees) Act 2001 .
7.160 Currently, the Corporations Law includes provisions which permit the ASX to change its company type and limit the holding of shares in the Exchange following the change to a company limited by shares (Part 7.1A).
7.161 Since the ASX has used the provisions in Division 1 of Part 7.1A and their operation is spent, it is appropriate that they be deleted. This will not affect the validity of actions taken under them while they formed part of the Corporations Law.
7.162 The provisions of Division 2 of Part 7.1A of the Corporations Law (limitations on holding shares in the ASX) have been omitted and replaced by new provisions relating to limitations on the voting power held in prescribed operators of financial markets and clearing and settlement facilities (or their holding companies) - see Division 1 of Part 7.4.
7.163 The following must be gazetted, but may take effect at an earlier date:
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- the grant of an Australian market licence (proposed section 795C);
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- the imposition of conditions, or additional conditions (or variation or revocation of conditions) on an Australian market licence (proposed subsection 796A(1));
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- suspension, variation or revocation of suspension and cancellation of an Australian market licence (proposed section 797F); and
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- an exemption or declaration by ASIC of the provisions applying to self-listing licensees (proposed subsection 798D(2)).
7.164 The following take effect on gazettal:
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- an exemption under proposed subsection 791C(1);
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- the imposition of a condition, or variation or revocation of conditions, or the revocation of an exemption under proposed subsection 791C(2).
7.165 The following are addressed in Part 7.12:
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- qualified privilege and protection from actions for breach of confidence in various situations (proposed 1100A - 1100D);
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- the effect on transactions of contravention of this Chapter (proposed section 1101H);
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- application of the State/Territory gaming and wagering legislation to transactions relating to financial products (proposed section 1101I).
7.166 Appeals from decisions of the Minister and ASIC may be made to the Administrative Appeals Tribunal (see Part 9.4A of the proposed Corporations Act).