Tag Archives: ASIC

ASIC commences civil proceedings against Westpac for insider trading

ASIC has today commenced proceedings in the Federal Court against Westpac Banking Corporation (Westpac) for insider trading, unconscionable conduct and breaches of its Australian financial services licensee obligations.

The allegations relate to Westpac’s role in executing a $12 billion interest rate swap transaction with a consortium of AustralianSuper and a group of IFM entities (Consortium). The transaction occurred on 20 October 2016 and was associated with the privatisation of a majority stake in the electricity provider Ausgrid by the NSW government. The transaction remains the largest interest rate swap transaction executed in one tranche in Australian financial market history.

At about 7am on 20 October 2016, the Consortium signed an agreement with the NSW Government for the acquisition of Ausgrid.

ASIC alleges that by about 8:30am on 20 October 2016, Westpac knew, or believed, it would be selected by the Consortium to execute the interest rate swap transaction on that morning. ASIC alleges this was inside information. When the market opened at 8:30am, whilst in possession of the alleged inside information, Westpac’s traders acquired and disposed of interest rate derivative products in order to pre-position Westpac in anticipation of the execution of the swap transaction.

ASIC alleges that Westpac’s trading occurred while it was in possession of information that was not generally available to other market participants including those that traded with Westpac that morning. Prohibitions against insider trading are a fundamental tenet of market integrity.

The Consortium, via a special purpose vehicle, executed the interest rate swap transaction with Westpac at 10:27am.

ASIC alleges that Westpac’s trading on the morning of 20 October 2016 had the potential to impact the price of the swap transaction to the detriment of the Consortium or the special purpose vehicle.

In addition to the insider trading allegation, ASIC also alleges that the circumstances surrounding Westpac’s trading on the morning of 20 October 2016, including its failure to provide to the Consortium full and informed disclosure about its intention to pre-position its trading books prior to and with notice of the execution of the swap transaction, amounted to unconscionable conduct.

ASIC is committed to improving market practices in the institutional and Fixed Income, Currency and Commodities (FICC) markets. This matter serves as an important reminder that the insider trading prohibitions apply equally across all financial markets.

ASIC is seeking declarations and pecuniary penalties for Westpac’s alleged contraventions s1043A of the Corporations Act and s12CB of the ASIC Act, a declaration for Westpac’s alleged contravention of s912A of the Corporations Act, and ancillary orders.

ASIC bans the sale of binary options to retail clients

ASIC has made a product intervention order banning the issue and distribution of binary options to retail clients.

The ban will take effect from Monday 3 May 2021 after ASIC found that binary options have resulted in and are likely to result in significant detriment to retail clients.

ASIC reviews in 2017 and 2019 found that approximately 80% of retail clients lost money trading binary options. ASIC found that binary options are likely to result in cumulative losses to retail clients over time because of their product characteristics:

  • the ‘all or nothing’ payoff structure, where one of the two possible outcomes for a binary option contract is that the retail client will lose their entire investment amount;
  • short contract duration (the average contract duration of binary options traded with one provider was less than six minutes); and
  • negative expected returns (that is, the present value of the expected payoff for a binary option contract is lower than the initial investment).

Commissioner Armour said, ‘Binary options’ product characteristics make them incompatible with investment or risk management use by retail clients. ASIC’s product intervention order will protect retail investors from these harmful products at a time of heightened vulnerability.’

ASIC estimates that retail clients’ net losses from trading binary options were around $490 million in 2018. The size of the market in Australia has since reduced significantly after ASIC issued a warning in April 2019 against providing unlicensed or unauthorised services to clients located in several foreign jurisdictions. Australian retail clients are estimated to have made net losses of more than $6.7 million in 2019.

ASIC’s binary options ban brings Australian requirements into line with prohibitions in force in comparable markets and follows the commencement on 29 March 2021 of ASIC’s product intervention order imposing conditions on contracts for difference offered to retail clients.

The order will remain in force for 18 months, after which it may be extended or made permanent. Civil and criminal penalties apply to contraventions of the product intervention order.

Background

A binary option is a cash-settled, over-the-counter (OTC) derivative entered into by two counterparties—the binary option issuer and the client. The ‘all-or-nothing’ payout under a binary option contract is determined by the occurrence or non-occurrence of a specified event in a defined timeframe. This can include an event related to movements in the price of a financial product or a market index (for example, the price of gold increasing in 30 seconds) or an economic event (such as a central bank interest-rate decision).

Regulatory Guide 272 Product intervention power provides an overview of ASIC’s product intervention power, when and how ASIC may exercise the power and how a product intervention order is made.

On 22 August 2019, ASIC released CP 322, seeking feedback on proposals to use its product intervention power to address significant detriment to retail clients resulting from binary options and CFDs (refer 19-220MR). CP 322 attracted more than 400 responses from consumers, consumer groups, CFD issuers, industry bodies and other stakeholders.

On 23 October 2020, ASIC made a product intervention order imposing conditions on the issue and distribution of contracts for difference (CFDs) to retail clients (refer 20-254MR). From 29 March 2021, ASIC’s order strengthens consumer protections by reducing CFD leverage available to retail clients and by targeting CFD product features and sales practices that amplify retail clients’ CFD losses.

In addition to the product intervention orders, ASIC’s actions to address concerns about binary options and CFDs include:

  • enforcement action to address misconduct
  • public warning notices and other statements
  • surveillance projects and thematic reviews
  • stronger regulations
  • extensive retail client education campaigns and guidance for binary option issuers.

More information about ASIC’s supervision and enforcement work is available on our website. ASIC’s Moneysmart website has further information about binary options.

ASIC’s CFD product intervention order takes effect

ASIC’s product intervention order imposing conditions on the issue and distribution of contracts for difference (CFDs) to retail clients takes effect from today.

The order strengthens protections for retail clients trading CFDs after ASIC found that CFDs have resulted in, and are likely to result in, significant detriment to retail clients.

ASIC’s order reduces CFD leverage available to retail clients and targets CFD product features and sales practices that amplify retail clients’ CFD losses, such as providing inducements to become a client or to trade. It also brings Australian practice into line with protections in force in comparable markets elsewhere.

The maximum CFD leverage available to retail clients will range from 30:1 to a 2:1, depending on the underlying asset class. Before now, a retail investor’s CFD exposure could be as much as 500 times their original outlay.

ASIC Commissioner Cathie Armour said ‘We will closely monitor compliance with the product intervention order and won’t hestitate to take appropriate action to enforce the order.’

‘We are also paying careful attention to changes in CFD providers’ reported holdings of retail client money and any mis-classification of retail clients as wholesale clients, which would risk denying them important rights and protections. Protecting retail investors from harm, particularly at a time of heightened vulnerability, is a priority for ASIC,’ Commissioner Armour said.

The maximum penalty for a contravention of a product intervention order is five years’ imprisonment for individuals and substantial pecuniary penalties of up to $555 million for corporations.

If a court finds that a person has contravened a product intervention order, a retail client may recover the amount of loss or damage suffered because of the contravention.

The product intervention order will remain in force for 18 months, after which it may be extended or made permanent.

Background

A CFD is a leveraged derivative contract that allows a client to speculate in the change in value of an underlying asset, such as foreign exchange rates, stock market indices, single equities, commodities or cryptoassets.

Regulatory Guide 272 Product intervention power provides an overview of ASIC’s product intervention power, when and how ASIC may exercise the power, and how a product intervention order is made.

On 22 August 2019, ASIC released Consultation Paper 322 Product intervention: OTC binary options and CFDs (CP 322) seeking feedback on proposals to use its product intervention power to address significant detriment to retail clients resulting from over-the-counter (OTC) binary options and CFDs (refer 19-220MR). CP 322 attracted over 400 responses from consumers, consumer groups, product issuers, industry bodies and other stakeholders.

On 23 October 2020, ASIC made a product intervention order imposing conditions on the issue and distribution of contracts for difference (CFDs) to retail clients (refer 20-254MR).

In addition to the product intervention order, ASIC’s actions to address concerns about CFDs include:

  • enforcement action to address misconduct (for example, refer 21-051MR20-246MR, and 20-161MR)
  • public warning notices and other statements
  • surveillance projects and thematic reviews
  • stronger regulations
  • extensive retail client education campaigns and guidance for binary option issuers.

More information about ASIC’s supervision and enforcement work is available on our website. ASIC’s MoneySmart website has further information about forex trading and CFDs.

ASIC’s proposal in CP 322 to ban the issue and distribution of binary options to retail clients is still under consideration and a decision has not yet been made.

ASIC approves variations to the Banking Code

ASIC has approved variations to the Banking Code of Practice (Code).

The variations, as proposed by the Australian Banking Association (ABA), do the following:

  • Amend the Code’s definition of ‘banking services’ to address an anomaly in the Code’s previous wording that had the unintended result of excluding certain types of small business banking customers who would otherwise meet the Code’s definition of ‘small business’.
  • Make some minor amendments to the Code’s definition of ‘small business’.
  • Extend the application of the Code’s COVID-19 Special Note, which allows for special application of specified Code provisions in light of the extraordinary external environment caused by COVID-19, for a further six months until 1 September 2021.
  • Specify situations in which banks may decline to continue dealing with a representative that a customer in financial difficulty has appointed, if the bank reasonably considers that representative is no longer able to act in the customer’s best interests.
  • Align the Code’s timeframes for responding to complaints with the updated timeframes in ASIC’s Regulatory Guide 271 Internal dispute resolution, which is due to commence on 5 October 2021.

Background

ASIC previously approved the Code, as a whole, in December 2019. That Code commenced on 1 March 2020. On 1 January 2021, as part of the Financial Sector Reform (Hayne Royal Commission Response) Bill 2020, which received Royal Assent on 17 December 2020, a new framework commenced for ASIC’s approval of codes of conduct.

If an application is made to vary an approved code of conduct, ASIC may, by legislative instrument, approve the variation. In the approval, ASIC may identify a provision of the code of conduct as an ‘enforceable code provision’ if ASIC considers that the provision or provisions meet specific legislative criteria.

This approval does not identify any enforceable code provisions. The relatively narrow set of variations are changes to existing Code provisions, and the ABA will be commencing its comprehensive triennial review of the Code later in 2021. The terms of reference for that review will specifically consider the enforceable code provisions framework.

The changes to the small business definition were recommended by Pottinger, the independent firm who reviewed the definition in September and October 2020. The review recommended that those changes be made now and that the more comprehensive changes will be considered as part of the Code’s triennial review.

ASIC statement on ASX equity market outage

The ASX cash equity market trading platform did not reopen for trading today Monday, 16 November 2020, after an outage occurred during the opening auction. ASIC remains in regular communication with ASX, market participants, and members of the Australian Council of Financial Regulators. We are focussed on ensuring that ASX reopens in an orderly manner on Tuesday 17 November, and that market integrity is not compromised. ASIC will also monitor for any impacts resulting from the failure of ASX Trade to open for most of the day.

ASIC views outages of this nature with significant concern. It has had a significant impact on the market, including market participants and investors. The ASX is one of the world’s most active and visible public markets and forms a critical part of Australia’s national economic infrastructure.  Well-functioning financial market infrastructure is critical to the integrity and reputation of the Australian equity market and the trust and confidence investors have in it. As the primary equities market in Australia, ASX performs a vital role.

Market licensees are required to operate a market that, to the extent reasonably practicable, is fair, orderly and transparent, and to have sufficient resources (financial, technological and human) to operate the market, including for any outsourced services. Following the reopening of the market, ASIC will determine whether ASX followed the relevant regulatory requirements under the Corporations Act and met its obligations under its Australian Market Licence.

In addition to ASIC’s expectations that this outage will be resolved as soon as is possible in a safe manner, ASX will be required to provide a full incident report to ASIC.

We note that the Chi-X market remained open for participants to trade listed equities, as well as Chi-X quoted ETFs and TraCRs.