Under the Corporations Act, as a licensed operator of financial markets, ASX is obliged to have adequate arrangements for monitoring and enforcing compliance with the operating rules of those markets. It is also obliged, as a licensed operator of clearing and settlement facilities, to have adequate arrangements for supervising those facilities and for enforcing compliance with their operating rules.

The purpose of this circular is to notify participants in those markets and facilities of some of the enforcement activities recently undertaken by ASX Compliance, so that they are aware of potential areas of concern for ASX and of ASX’s enforcement activities in those areas.

This circular covers enforcement activities that were finalised during the 3 month period ended 31 May 2016. Investigations in relation to other enforcement matters are ongoing.

Failure to perform the daily net down of back to back positions under the ASX Clear (Futures) Operating Rules

ASX issued a formal warning letter to a participant for a breach of ASX Clear (Futures) Operating Rule 46.5 during the period from 1 January 2015 to 31 March 2015 arising from its failure to close-out its back to back open positions pursuant to the direction given by ASX Clear (Futures) in that regard.

The participant confirmed that the breach was caused by failure to receive daily instructions from its client with respect to affiliated accounts, leading the participant to submit inaccurate open interest figures into the exchange system. This resulted in the incorrect statement of open interest to the market in various grains contracts during the period from 1 January 2015 to 31 March 2015.

The requirement for participants to accurately report open interest is fundamental to maintaining the integrity of open interest, which is one of a number of indicators of the ASX 24 market’s depth of liquidity.

ASX recommends all ASX Clear (Futures) participants to have formal procedures and controls in place, including monitoring procedures, to ensure that clients provide daily instructions regarding their open positions to the participant in order to comply with the rule.

The participant has been advised that a failure to comply with the direction for the daily close-out of matched positions (including back to back open positions) in the future will be referred to the ASX Enforcement team for formal enforcement action

Failure to comply with the Risk Based Capital Requirements of the ASX Clear Operating Rules

ASX issued a formal warning letter to a participant for a breach of ASX Clear Operating Rule 5.1.1 for failing to comply with the risk based capital requirements set out in Schedule 1 to those rules.

The participant confirmed that it incorrectly calculated its liquid capital by not treating a term deposit as an excluded asset due to its bank amending its terms and conditions for opened or renewed term deposits to require provision of 31 days’ (previously 30 days’) notice to access funds held in a term deposit prior to its maturity date.

On 6 November 2014 ASX Counterparty Risk Assessment (“CRA”) emailed affected participants in relation to changes by major Australian banks. In its email, CRA confirmed the impact of the changes to the ASX Clear Operating Rule Schedule 1 treatment of term deposits (specifically, that such term deposits were to be regarded as an “excluded asset” until the final 30 days prior to maturity for the purposes of a participant's Schedule 1 calculations).

The participant failed to act on this email notification and consequently its capital returns for the periods ending 31 January 2015, 28 February 2015, 30 April 2015 and 31 May 2015 were not prepared in accordance with Schedule 1 and did not accurately reflect its accounts and its financial position.

ASX recommends all ASX Clear participants have procedures and controls in place to ensure that they comply with notifications from CRA concerning the calculation of the risk based capital requirements.

Maintaining the required amount of liquid capital and submitting accurate returns is fundamental to the integrity and transparency of the clearing and settlement facilities operated by ASX Clear. The participant has been advised that ASX may refer to this matter in any future enforcement action where its record of compliance with ASX rules is called into question.

What do I need to do by when?

Instructions

For your information only.

Need more information?

Issued by

Lyn Allsop-Guest, Manager

Contact information

Lyn Allsop-Guest
+61 (02) 9227 0995
info@asx.com.au

Disclaimer

Note about ASX Online beta

During the period 8am Monday 30 May 2016 to 6pm Friday 3 June, notices will be distributed from both asxonline.com and beta.asxonline.com for comparative purposes. The related notice distributed from asxonline.com can be found here.