Compliance: Theory and Practice in the Financial Services Industry

11E. ASX Stockbroking

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Outline

   Introduction
   Admission and Accreditation
   General Obligations of Participants
   Client Documentation
   Client Trust Accounts
   Trading Rules
   Best Execution
   Confirmations
   Managed Discretionary Accounts
   Error Trades
   Complaint Registers

Unless otherwise indicated, all references in these lecture slides to MIR and OR are to the ASX MIR and the ASX OR respectively (references to the Competition MIR are to the ASIC Market Integrity Rules (Competition in Exchange Markets) 2011). We looked at the ASX MIR and OR relevant to insider trading and Chinese Walls in lecture 3; market manipulation, order records, client order precedence, dealing as principal, dealing for employees and short selling in lecture 4; and confidentiality, telephone taping and self-reporting obligations in lecture 9.

 


Introduction

ASX Markets and Clearing Houses
•     Australian Securities Exchange (ASX)
  •     Cash market transactions – equity securities, loan securities, warrants and AQUA products
  •     Derivatives market  transactions – exchange traded options (ETOs), low exercise price options (LEPOs) and certain futures
•     ASX Clear – central clearing of all ASX traded products
•     ASX Settlement – settlement of ASX cash market transactions and operator of the CHESS registration system

Click here to access the ASX Operating Rules and the ASX Clear Operating Rules.

There is a lot of educational material about the various products traded on the ASX markets on its web site. This can be accessed through the education menu on the ASX website.

AQUA products comprise exchange traded funds, exchange traded commodities and other structured products.

The ASX market trades options over the S&P/ASX 200 index and futures over the S&P/ASX 50 and S&P/ASX 200 A-REIT indices. All other futures contracts (including interest rate, commodities and energy derivatives and futures over certain other equity indices) trade on the ASX 24 market. We will look at the rules applying to that market in lecture 12 next week.

For general introductory reading on ASX products, see its guides: Getting Started in Shares, Understanding Trading and Investment Warrants, Options - a Simple Guide, Understanding Options Trading, Low Exercise Price Options Explanatory Booklet and Introduction to Index Futures and Options.

For a better understanding of the different rules applied by the ASX, see ASX Rules Framework.

For an explanation of the CHESS registration system, see CHESS - Clearing House Electronic Subregister System.

Classes of ASX Participants
•    Trading participant (see OR 1000 and 1100)
•    Non trading market participant (see OR 1000)
•    General clearing participant (see CR 3)
•    Direct clearing Participant (see CR 3)
•    Principal trader (see OR 1001)
•    Market maker (see OR 3440)

A 'trading participant' is a market participant which has trading permission in respect of one or more ASX products.

A body can, however, be admitted as an ASX market participant (a 'non trading market participant') without having such a trading permission. These bodies execute through third party brokers.

A 'general clearing participant' is a participant that clears for itself, its own clients, market participants and their clients and other participants and their clients. A 'direct clearing participant' is a participant that clears for itself and its own clients and its wholly owned group entities and their clients but not for anyone else.

A trading participant who is not also a clearing participant must enter into and maintain a clearing agreement with a clearing participant (OR Schedule 1.1020).

A 'principal trader' is a market participant with trading permission for one or more ASX products which limits it to trading on its own behalf (OR 7100).

A 'market maker' is a trading participant registered by ASX under OR 3440 which is required to make a market in assigned classes of ASX derivatives market contracts (OR 7100).

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Admission and Accreditation

OR 1000 - Market Participant Admission Requirements
For an applicant to be eligible for admission as a market participant, the applicant must lodge an application in the form prescribed by ASX and satisfy ASX that it:
•     is a body corporate carrying on business in its own right and not as a trustee of a trust;
•     holds an AFSL which authorises it to carry on its business as a market participant (unless such a licence is not required by the Corporations Act);
•     is of high business integrity;
•     has adequate resources and processes to comply with its obligations a market participant under the Operating Rules;
•     has adequate resources and processes to prevent any action or inaction which might result in a market for a product not being both fair and orderly or which might interfere with the operational efficiency or proper functioning of the trading platform; and
•     has in place and will maintain adequate clearing arrangements in accordance with Rule 1003 and Schedule 1.

 

MIR 2.1.1(1) - Management Structure
A market participant must, in relation to its conduct, and that part of its business that it conducts, on or in relation to the ASX market, wherever the conduct occurs or the business is located and regardless of the number of offices operated or intended to be operated by the market participant, have appropriate management structures in place to ensure that:
•     it has operations and processes in place that are reasonably designed, implemented, and that function, so as to achieve compliance by the market participant with the Market Integrity Rules and the ASX Operating Rules;
•     the design, implementation, functioning and review of those operations and processes are subject to the supervision of one or more responsible executives; and
•     each responsible executive has sufficient seniority and authority within the market participant to exert control, leadership, influence and supervision over those operations and processes.

Breach of MIR 2.1.1 attracts a maximum penalty of $1,000,000.

Under MIR 2.1.1(2), a market participant must keep accurate records of its management structure and its allocation of responsibilities among its responsible executives.

Under MIR 2.1.2, a market participant must give to ASIC a document that sets out its management structure and its allocation of its responsibilities among its responsible executives, within 10 business days of becoming a market participant. It must also notify ASIC in writing, within 10 business days, of any significant change in the management structure or its allocation of its responsibilities among its responsible executives shown in that document.

See generally ASX Market Rules Guidance Note 6: Management Requirements. Note that ASIC has said that it will seek to follow the published interpretations contained in pre-existing ASX Market Rules guidance notes, including Guidance Note 6, but will look to review them and issue replacement ASIC Guidance Notes in due course (see ASIC Regulatory Guide 214 - Guidance on ASIC market integrity rules for ASX and ASX 24 markets, at para 57-58).

MIR 2.3.1(2) - Responsible Executives
A market participant must not appoint a person as a  responsible executive unless:
•     the person has skills, knowledge and experience that are appropriate having regard to the supervisory role that the person will perform as a responsible executive in the business of the market participant; and
•     the person has attained a mark of at least 65% in an examination approved by ASIC under MIR 2.3.1(3), in the 12 months preceding the date the market participant appoints the person as a responsible executive, and satisfied the 'compliance education requirements' since then.

Breach of MIR 2.3.1 attracts a maximum penalty of $20,000.

Under MIR 2.3.1(1), a market participant must notify ASIC within 10 business days of appointing a new responsible executive, or of a person ceasing to be a responsible executive.

The 'compliance education requirements' means the successful completion of 8 hours compliance education during the period from 1 July each year to 30 June in the following year (MIR 1.4.3).

Under MIR 2.3.4, a market participant must ensure that, during the period from 1 July each year until 30 June the following year, each of its responsible executives meets the 'compliance education requirements' pro-rata to the number of complete months during that period in which that person is a responsible executive of the market participant. Breach of MIR 2.3.4 attracts a maximum penalty of $20,000.

Under MIR 2.3.5, a market participant must provide a written notification to ASIC by 31 July each year that contains: (a) the name of each person who was a responsible executive of the market participant during the period from 1 July in the preceding calendar year to 30 June in the calendar year in which the notification is provided; (b) if the person was a member of a professional body or bodies during that period, the name of that body or those bodies; (c) a statement in relation to each person that the market participant confirms that, during that period, the person has or has not satisfied each of the requirements of MIR 2.1.4(1) (good fame and character), 2.3.1(2)(a) and (b) or (c) (skills, knowledge, experience and qualifications), 2.1.5(2) (unprofessional conduct), 2.3.3(1)(d) (annual representation) and 2.3.4 (continuing education), while the person was a responsible executive of the market participant during that period; and (d) if they have not, an explanation of the reason that the person has not satisfied the requirement. The market participant must retain copies of the records upon which the notification is based for 7 years from the end of the period to which the notification relates. Breach of MIR 2.3.5 attracts a maximum penalty of $20,000.

MIR 2.5 - Designated Trading Representatives
•     A trading participant must ensure that all trading in a trading platform by the trading participant is carried out either by DTRs or in accordance with the automated order processing requirements (MIR 2.5.1).
•     Each DTR must  be suitably qualified and experienced to deal in the products in which they submit orders on behalf of the trading participant (MIR 2.5.5(b)).
•     Prior to submitting trading messages on behalf of a trading participant, each DTR must have demonstrated to the trading participant knowledge of the dealing rules governing the process of dealing and reporting market transactions on the trading platform, and the relevant practices of the ASX (MIR 2.5.5(c)).

Breach of MIR 2.5.1 attracts a maximum penalty of $1,000,000.

MIR 2.5.3 reinforces MIR 2.5.1 by providing that a trading participant must ensure that only its DTRs submit trading messages into the trading platform through the trading participant’s system, unless the trading is conducted in accordance with the automated order processing requirements.

A trading participant must have at least one DTR in respect of the products for which the trading participant has trading permission (MIR 2.5.2) and must allocate a unique identifier to each DTR (MIR 2.5.6).

A trading participant must also maintain a record of the name, contact details and DTR identifier of each of its DTRs, while the person remains a DTR of the trading participant and for 7 years thereafter (MIR 2.5.7).

In 2015, Macquarie Securities (Australia) Limited was penalised $110,000 by the Markets Disciplinary Panel for failing to prevent a non-DTR from submitting trading messages though the non-automated order processing component of its automated order processing system, into the ASX trading platform (see ASIC Media Release 15-377MR).

MIR 2.4 - Retail Client Adviser Accreditation
•     A market participant must ensure that each of its representative who provides financial product advice to a retail client in relation to options market contracts, futures market contracts or warrants holds the relevant accreditation required by MIR 2.4 (MIR 2.4.1):
  •     Level 1 accredited derivatives adviser may advise on subscribing for, buying, selling or exercising warrants; writing options but only for the purposes of closing out a position or writing covered call options; taking options; exercising options; and certain covered call option writing strategies set out in MIR 2.4.3 - other than LEPOs and futures options (MIR 2.4.2).
  •     Level 2 accredited derivatives adviser may advise generally on warrants and derivatives market contracts and related trading strategies - other than futures and futures options (MIR 2.4.4).
  •     An accredited futures adviser may advise generally on futures and futures options and related trading strategies (MIR 2.4.5).
•     To be a Level 1 or 2 accredited derivatives adviser, you must obtain the requisite pass mark in the prescribed examinations and be nominated for, and accepted by, ASIC for accreditation (MIR 2.4.7 and 2.4.8).
•     To be an accredited futures adviser, you must be a level 2 accredited derivatives adviser and successfully complete an educational module or subject approved by ASIC (MIR 2.4.6).

Breach of MIR 2.4.1 - 2.4.5 attracts a maximum penalty of $100,000.

Under MIR 2.4.21, a market participant must ensure that all of its accredited advisers comply with any continuing professional education requirements approved by ASIC in accordance with MIR 2.4.21(2).

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General Obligations of Participants

OR 1400 – Ongoing Requirements
A market participant must at all times comply with the following general requirements:
(a)   continue to satisfy the applicable admission requirements;
(b)   comply with any conditions imposed on a market participant under the Rules;
(c)   comply with the Rules, directions, decisions and requirements of ASX;
(d)   not dispose, transfer, lease, assign or encumber any rights or obligations under the Rules, except as expressly permitted by these rules or with the prior written approval of ASX; and
(e)   notify ASX of the matters set out in the Procedures in the time and manner set out in the Procedures.

Under Procedure 1400(e), a market participant must notify ASX, among other things, of: (a) any change of name or address; (b) any appointment, removal or resignation of a director; (c) any change to any licence or other authorisation which authorises it to carry on its activities as a participant; (d) any material change in information concerning its business as a participant from that previously provided to ASX; and (e) any notification it receives from ASIC or another exchange, clearing and settlement facility or other regulatory body that action is being, or may be, taken against it or its employees that relates in any way to its activities as a market participant.

Responsibility for Trading Messages
•     A trading participant is responsible for the accuracy of details, the integrity and bona fides of all trading messages containing their unique identifier that are submitted in a trading platform, regardless of whether a DTR of the trading participant was involved in their submission (MIR 2.5.4).
•     If a trading message embedded with a trading participant's unique identifier is submitted, the trading message is taken for all purposes under the Market Integrity Rules to have been submitted in a trading platform by or with the knowledge of the trading participant (MIR 5.5.1).
•     A trading participant must maintain and enforce at all times appropriate security arrangements which are designed to prevent unauthorised entry of trading messages (OR 1401(c)).

 

Maintenance of Orderly Market
A market participant must:
•     not do anything which results in a market for a product not being both fair and orderly, or fail to do anything where failure has that effect (MIR 5.9.1 and OR 3101(a));
•     not take advantage of a situation arising as a result of a breakdown or malfunction in ASX’s procedures or systems or an error in any trading message submitted by ASX (OR 3101(b));
•    

if it is a trading participant, ensure that a representative of the trading participant is available to receive communications from other trading participants or from ASX during the times set out in the Procedures (OR 3101(c)).

Breach of MIR 5.9.1 attracts a maximum penalty of $1,000,000.

MIR 5.9.1 is reinforced by MIR 2.5.5(d)(ii), which provides that a trading participant must ensure that each of its DTRs does not intentionally take advantage of a situation arising as a result of: (a) a breakdown or malfunction in the ASX’s procedures or systems; (b) an error made over the National Voiceline System; or (c) an error in entries made by the ASX within a trading platform.

ASX Operating Rules Procedure 3101 requires a representative to be contactable during the open session state for the market and, in the case of cash market products, during the closing single price auction session state.

MIR 2.1.3 - Supervisory Procedures
A market participant must have appropriate supervisory policies and procedures to ensure compliance by the market participant and each person involved in its business as a market participant with the Market Integrity Rules, the ASX Operating Rules and the Corporations Act.

Breach of MIR 2.1.3 attracts a maximum penalty of $1,000,000.

The predecessor to this MIR (ASX Market Rule 3.6.3) required a market participant to comply with any standards prescribed by the ASX for the purposes of that rule. Under Procedure 3.6.3, ASX prescribed the following standards for the purpose of that rule: (a) Australian Standard AS 3806-2006 on Compliance; (b) Australian Standard AS NZ 4360-2004 on Risk Management; (c) Australian Standard AS ISO 10002-2006 on Customer Satisfaction; (d) ASIC Regulatory Guides 104 and 105; and (e) Securities & Derivatives Industry Association and Securities Institute Best Practice Guidelines for Research Integrity. We looked at the latter guidelines in lecture 9.

MIR 2.1.4 – Good Fame and Character Requirement
(1)   A market participant must ensure that any employee or other person who is or will be involved in the business of the market participant in connection with the ASX Market and, in the case of a body corporate, each director or controller, is of good fame and character and high business integrity having regard to MIR 2.1.4(2).
(2)   In assessing whether a person is of good fame and character and high business integrity for these purposes:
  (a)   a person will not be of good fame and character if he or she is disqualified from managing a corporation under the Corporations Act or under the law of another country, or is an insolvent under administration or its equivalent in another country; and
  (b)   a person may not be of good fame and character or high business integrity if the person has been:
    (i)   charged with or convicted of any offence;
    (ii)   disciplined or adversely mentioned in a report made by, or at the request of, any government or governmental authority or agency;
    (iii)   adversely mentioned in a report made by, or at the request of, the ASX, a clearing facility, a settlement facility or any other exchange, market operator or clearing and settlement facility; or
    (iv)   disciplined by the market operator, a clearing facility, a settlement facility or any other exchange, market operator or clearing and settlement facility.

Breach of MIR 2.1.4 attracts a maximum penalty of $1,000,000.

See also ASX Market Rules Guidance Note 7: Management Requirements - Good Fame and Character - Reliance on APRA Requirements. Note that ASIC has said that it will seek to follow the published interpretations contained in pre-existing ASX Market Rules guidance notes, including Guidance Note 7, but will look to review them and issue replacement ASIC Guidance Notes in due course (see ASIC Regulatory Guide 214 - Guidance on ASIC market integrity rules for ASX and ASX 24 markets, at para 57-58).

MIR 2.1.6 - Responsibility for Individuals Involved in Business
A market participant is responsible for all actions and omissions of its employees.

 

MIR 2.3.2 – Ongoing Responsibilities in Relation to Responsible Executives
A market participant must ensure that each of its responsible executives:
(a)   supervises the design and implementation activities and the functioning and review of the operations and processes referred to in MIR 2.1.1 for the relevant activities of that responsible executive; and
(b)   is accountable to the market participant for the effective design, implementation, functioning and review of the operations and processes referred to in (a).

Breach of MIR 2.3.2 attracts a maximum penalty of $20,000.

MIR 1.4.3 defines "relevant activities" to mean, in relation to a particular responsible executive, the operations and processes of that part of the market participant's business which the document given to ASIC under MIR 2.1.2(1) or (2), or notification given to ASIC under MIR 2.1.2(3), identifies as being under the supervision of that responsible executive, while that responsible executive remains responsible in respect of that part of the business.

MIR 2.1.5 also requires that a market participant ensure that its responsible executive do not engage in "unprofessional conduct" (as defined). Breach of MIR 2.1.5 attracts a maximum penalty of $1,000,000.

See generally ASX Market Rules Guidance Note 27: Ongoing Compliance & Supervision - Responsibilities of Responsible Executives. Note that ASIC has said that it will seek to follow the published interpretations contained in pre-existing ASX Market Rules guidance notes, including Guidance Note 27, but will look to review them and issue replacement ASIC Guidance Notes in due course (see ASIC Regulatory Guide 214 - Guidance on ASIC market integrity rules for ASX and ASX 24 markets, at para 57-58).

MIR 2.3.3 – Annual Review and Sign-off by Responsible Executives
A market participant must ensure that each of its responsible executives:
(a)   maintains the currency of his or her knowledge of the Market Integrity Rules, the ASX Operating Rules and the Corporations Act related to the business that the market participant conducts in the market;
(b)   by 10 July each year, performs a review as at 30 June of that year, including all matters reasonably considered by the responsible executive to be necessary in the circumstances, of the supervision and control procedures involved in the business of the market participant and other relevant documentation concerning the market participant’s compliance with the Market Integrity Rules and the ASX Operating Rules for the 12 month period ending on 30 June that year;
(c)   by 10 July each year, determines whether, based on the enquiries referred to in (b), the controls over the operations and processes of the relevant activities have been, during the period referred to in (b), and continue to be, reasonably designed, implemented and functioning to achieve compliance by the market participant with the Market Integrity Rules and the ASX Operating Rules;
(d)   by 10 July each year, provides a signed and dated representation to the market participant as to whether:
  (i)   the requirements of (a) and (b) have been met for the period referred to in (b); and
  (ii)   the controls over the operations and processes of the relevant activities have been, for the period referred to in (b), and continue to be, reasonably designed, implemented and functioning to achieve compliance by the market participant with the ASX Operating Rules and the Market Integrity Rules.

Breach of MIR 2.3.3 attracts a maximum penalty of $20,000.

Under MIR 2.3.3(2), a market participant must retain copies of the representation referred to in (d) above, and of the documentation concerning the market participant’s compliance with the Market Integrity Rules and the ASX Operating Rules on which the representation is based, for 7 years from the date the representation is provided to the market participant.

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Client Documentation

Mandatory Client Documentation
•     Written client agreements containing the prescribed minimum terms are required for retail clients who deal in:
  •    option market contracts;
  •    warrants; and
  •    partly paid securities.
•     ASX Explanatory booklets have to be given to all retail clients who deal in options or LEPOs or who purchase warrants. Also have to be given to wholesale clients, but only if requested.
•     Written client agreements containing the prescribed minimum terms are required for retail and wholesale clients who deal in futures market contracts.
•     Additional written disclosures may be required about execution and clearing arrangements, depending on the circumstances.

While the documents to be given to retail clients for warrants and partly paid securities are described as "client agreements", they are really more in the nature of risk disclosure statements (see below).

MIR 3.1.7(1) – Client Agreements for Options Market Contracts
Before entering into a market transaction in respect of an options market contract on behalf of a retail client, a market participant must enter into a written agreement with the client under which:
(a)   the client and the market participant agree on the instruments (the "ASX Derivatives Market Contracts") in which the market participant may deal on behalf of the client;
(b)   the client acknowledges that the client has received and read a copy of any current explanatory booklets published by the ASX in respect of the ASX Derivatives Market Contracts;
(c)   the client acknowledges that the client is acting:
  (i)   as principal; or
  (ii)   as an intermediary on another’s behalf and are specifically authorised to transact the ASX Derivatives Market Contracts by the terms of:
    (A)   a licence held by the client;
    (B)   a trust deed (if the client is a trustee); or
    (C)   an agency contract; and
(d)   the market participant discloses, and the client acknowledges:
  (i)   that notwithstanding that the market participant may act in accordance with the instructions of, or for the benefit of, the client, any contract arising from any order submitted to the market, is entered into by the market participant as principal;
  (ii)   that the market participant may, in certain circumstances permitted under the ASX Operating Rules or the Corporations Act, take the opposite position in a transaction in the ASX Derivatives Market Contracts, either acting for another person or on its own account;
  (iii)   if the client will or may be required to pay to the market participant commissions, fees, taxes or charges in connection with dealings in the ASX Derivatives Market Contracts for the client:
    (A)   the fact that the client is required to pay such commissions, fees, taxes and charges; and
    (B)   the manner in which the client will be notified of the rates of such commissions, fees, taxes and charges;
  (iv)   that the market participant may record telephone conversations between the client and the market participant and if there is a dispute between the client and the market participant, the client has the right to listen to any recording of those conversations;
  (v)   if the market participant may refuse to enter into market transactions for the client, or limit the market transactions it enters into for the client, that the market participant will notify the client of any refusal or limitation as soon as practicable;
  (vi)   that the trading participant is not required to act in accordance with the client’s instructions, where to do so would constitute a breach of the ASX Operating Rules, the Clearing Rules or the Corporations Act; and
  (vii)   that each options market contract registered with a clearing facility is subject to operating rules and any practices, directions, decisions and requirements of that clearing facility.

Breach of MIR 3.1.7 attracts a maximum penalty of $100,000.

A market participant must set out in a client agreement entered into under MIR 3.1.7(1) any minimum period of notice to terminate the agreement and any other limitations on the right to terminate the agreement (MIR 3.1.7(2)).

A market participant must retain a copy of each client agreement entered into under this Rule for at least 7 years following the date on which the agreement is terminated (MIR 3.1.11).

Under ASX Operating Rules Procedure 3801 and Appendix 3801-2, a client agreement for an option transaction must also incorporate the following minimum terms:

(a) the client and the market participant are bound by the ASX Operating Rules and the customs, usages and practices of the ASX;

(b) the client must pay to the market participant commissions, fees, taxes and charges in connection with dealings for the client in ASX derivative market contracts at the rates determined by the market participant from time to time and notified to the client in writing;

(c) the client will take all reasonable steps to deliver information or documentation to the market participant, or cause information or documentation to be delivered to the market participant concerning option transactions which are requested by a person having a right to request such information or documentation and the market participant is authorised to produce the information or documentation to the person making the request;

(d) the client acknowledges that the market participant may at any time refuse to deal in, or may limit dealings in, the ASX derivative market contracts for the client and the trading participant is not required to act in accordance with the client's instructions, where to do so would constitute a breach of the ASX Operating Rules, the ASX Clear Operating Rules or the Corporations Act;

(e) termination does not affect the existing rights and obligations of the client or the market participant at termination;

(f) if ASX prescribes amended minimum terms for a client agreement for the ASX derivative market contracts for the purposes of the Rules (the "new terms"), to the extent of any inconsistency between these minimum terms and the new terms, the new terms will override the terms of the client agreement and apply as if the client and the market participant had entered into an agreement containing the new terms; and

(g) the market participant will provide a copy of the new terms to the client as soon as practicable after ASX prescribes the new terms.

Again this must be retained for at least 7 years following the date on which the agreement is terminated (ASX OR Procedure 3802).

Specific client agreement requirements also apply to the clearing arrangements for options market transactions. Before entering into an options market transaction for a client, where the market participant is the clearing participant for the transaction, the market participant must have entered into a clearing agreement with the client as required under the Clearing Rules or, in the case of a wholesale client, satisfied itself that the client has executed and lodged with the clearing facility a wholesale client agreement as required under the ASX Operating Rules (MIR 3.1.13). Where the market participant is not the clearing participant for the transaction, the market participant must have previously confirmed with the clearing participant that the client has entered into a client agreement with the clearing participant required under the Clearing Rules or, in the case of a wholesale client, satisfied itself that the client has executed and lodged with the clearing facility a wholesale client agreement as required under the ASX Operating Rules (MIR 3.1.12).

Under ASX OR 3803, where a market participant is required under the MIR to satisfy itself that a wholesale client has executed and lodged with the approved clearing facility a wholesale client agreement, that agreement should be on the terms set out in ASX OR Procedures Appendix 3803.

Under ASX OR 3805, if a trading participant accepts an order for a person and that person has lodged, or is taken to have lodged, a Wholesale Client Agreement with the Approved Clearing Facility, that person, the trading participant and the trading participant’s clearing participant (if applicable) are taken to have entered into an agreement in accordance with the terms of that Wholesale Client Agreement.

MIR 3.1.8(1) – Client Agreements for Warrants
Before entering into a market transaction in respect of warrants on behalf of a retail client, a market participant must enter into a written agreement with the client under which the market participant discloses, and the client acknowledges that they are aware that:
(a)   a warrant has a limited life and cannot be traded after its expiry date;
(b)   warrants do not have standardised terms of issue and it is the responsibility of the client to become aware of the terms of issue of any warrant in which the client chooses to invest; and
(c)   warrants may be subject to adjustments after their initial issue and it is the client’s responsibility to become aware of any adjustments which may have been made to any warrant in which the client chooses to invest.

Breach of MIR 3.1.8 attracts a maximum penalty of $100,000.

The client agreement must also include an acknowledgement from the client that the client has received and read a copy of any current explanatory booklet issued by the ASX in respect of warrants (MIR 3.1.8(2)).

A market participant is not required to enter into a client agreement under MIR 3.1.8(1) before entering into a market transaction to sell warrants (MIR 3.1.8(3)).

A market participant must retain a copy of each client agreement entered into under this Rule for at least 7 years following the date on which the agreement is terminated (MIR 3.1.11).

Under ASX Operating Rules Procedure 3801 and Appendix 3801-3, a warrant client agreement must also include an acknowledgement from the client that admission to trading status of a warrant does not imply that ASX or the Securities Exchanges Guarantee Corporation Limited gives any guarantee or warranty as to the viability of the warrant-issuer or guarantor and that failure of the warrant-issuer or the guarantor (if applicable) to fulfil their obligations does not give rise to a claim against ASX, handling market participants or the Securities Exchanges Guarantee Corporation Limited. Again this must be retained for at least 7 years following the date on which the agreement is terminated (ASX OR Procedure 3802).

MIR 3.1.9(1) – Client Agreements for Partly Paid Securities
Before entering into a market transaction in respect of partly paid securities on behalf of a retail client, a market participant must enter into a written agreement with the client under which the market participant discloses, and the client acknowledges that they are aware, that:
(a)   a partly paid security is a security which may require the client to make a further payment or payments at some time in the future;
(b)   it is the responsibility of the client to obtain and read a copy of the prospectus, product disclosure statement or information memorandum issued by an issuer which sets out the particular features of, and rights and obligations attaching to, a partly paid security before the client places an order to buy a partly paid security;
(c)   the client may be required to make further payments on a partly paid security and that a failure to make a further payment by the specified date(s) may result in an issuer of a partly paid security or their associates or agents taking action, including legal action, against the client to recover the outstanding payments and/or may result in the forfeiture of the client’s entitlement to the partly paid security;
(d)   in certain circumstances the client may be required to make a further payment on a partly paid security despite the fact that the client may have disposed of a partly paid security prior to the date that a further payment falls due;
(e)   the client should monitor announcements made by the issuer of a partly paid security and that it is the responsibility of the client to inform themselves of the dates or circumstances that a further payment falls due and the last day that the client can dispose of the partly paid security before the client becomes required to make a further payment;
(f)   the amount of a further payment may be unrelated to the financial performance of a partly paid security and that the amount of the further payment may exceed the intrinsic value of a partly paid security at the time a further payment falls due.

These provisions were introduced as a result of the BrisConnections matter, where a number of retail clients purchased significant numbers of partly paid securities in BrisConnections for very small outlays (in some cases less than one cent per security), without appreciating that they carried an obligation to pay two further instalments of $1 per share.

Breach of MIR 3.1.9 attracts a maximum penalty of $100,000.

A market participant is not required to enter into a client agreement under MIR 3.1.9(1) before entering into a market transaction to sell partly paid securities (MIR 3.1.9(2)).

A market participant must retain a copy of each client agreement entered into under this Rule for at least 7 years following the date on which the agreement is terminated (MIR 3.1.11).

Under ASX Operating Rules Procedure 3801 and Appendix 3801-4, a partly paid security client agreement must also include an acknowledgement from the client that an obligation on the client in relation to a partly paid security, including an obligation to make a further payment, does not give rise to a claim against ASX or the Securities Exchanges Guarantee Corporation Limited. Again this must be retained for at least 7 years following the date on which the agreement is terminated (ASX OR Procedure 3802).

MIR 3.1.2 – Documents to be Given to Option, LEPO and Warrant Clients
Before a market participant accepts an order from a person for the first time to:
(1)   enter into an options market transaction, the market participant must give the person a copy of any current explanatory booklet in respect of options market contracts published by the ASX;
(2)   enter into an options market transaction in respect of LEPOs, the market participant must give the person a copy of any current explanatory booklet in respect of LEPOs published by the ASX; or
(3)   purchase a warrant, the market participant must give the person a copy of any current explanatory booklet in respect of warrants published by the ASX,
together with any updates to that explanatory booklet published by the ASX.

Breach of MIR 3.1.2 attracts a maximum penalty of $100,000.

MIR 3.1.2(4) provides that a market participant is not required to give these documents to a wholesale client, unless the person expressly requests it.

Click here for a copy of the ASX explanatory booklets for options, LEPOs and warrants: Understanding Options Trading, Low Exercise Price Options Explanatory Booklet and Understanding Trading and Investment Warrants. There is also an explanatory booklet for shares (Getting Started in Shares) and index futures and options (Introduction to Index Futures and Options), but there is no obligation under the MIR to give those booklets to clients.

See generally ASX Market Rules Guidance Note 23: New Clients or Clients Trading in New Products for First Time - Dispatch of ASX Explanatory Booklets for guidance on how these booklets can be given to clients and ASX Market Rules Guidance Note 5: New Clients - Electronic Client Agreements for Derivative Market Transactions for guidance on when a client agreement for options, futures or warrants can be entered into electronically. Note that ASIC has said that it will seek to follow the published interpretations contained in pre-existing ASX Market Rules guidance notes, including Guidance Notes 5 and 23, but will look to review them and issue replacement ASIC Guidance Notes in due course (see ASIC Regulatory Guide 214 - Guidance on ASIC market integrity rules for ASX and ASX 24 markets, at para 57-58).

MIR 3.1.6(1) – Client Agreements for Futures Market Contracts
Before entering into a market transaction on behalf of a client in respect of a futures market contract, a market participant must enter into a written agreement with the client under which the market participant discloses, and the client acknowledges:
(a)   that trading in futures market contracts and options market contracts incurs a risk of loss as well as a potential for profit;
(b)   that the client has read and understood the details of the contract specifications of futures market contracts and options market contracts in which the market participant will deal on behalf of the client;
(c)   that the client should consider:
  (i)   its objectives, financial situation and needs; and
  (ii)   whether dealing in futures market contracts and options market contracts is suitable for its purposes;
(d)   that notwithstanding that the market participant may act in accordance with the instructions of, or for the benefit of, the client, any futures market contract or options market contract arising from any order submitted by the market participant, is entered into by the market participant as principal;
(e)   that upon registration of a futures market contract or options market contract with the clearing facility in the name of a clearing participant, the clearing participant incurs obligations to the clearing facility as principal, even though the futures market contract or options market contract may have been entered into on the client’s instructions;
(f)   that the clearing participant may obtain benefits or rights upon registration of a futures market contract or options market contract with the clearing facility by novation of a contract under the clearing rules or other legal results of registration and those benefits, rights or legal results may or will be personal to the clearing participant and may or will not pass to the client;
(g)   that the market participant is not required to act in accordance with the client’s instructions, where to do so would constitute a breach of the ASX Operating Rules, the Clearing Rules or the Corporations Act;
(h)   that the market participant may, in certain circumstances permitted under the ASX Operating Rules or the Corporations Act, take the opposite position in a market transaction, either acting for another person or on its own account;
(i)   that the market participant may call for payment of money or the provision of other security in connection with the obligations incurred by the market participant in respect of futures market contracts and options market contracts entered into for the account of the client and:
  (i)   the fact that the client will be required to pay the money or provide the security; and
  (ii)   the arrangements for paying the money or providing the security, including, without limitation, the time by which the client must pay the money or provide the security;
(j)   the nature of any events that will constitute a default by the client in connection with the agreement that are:
  (i)   prescribed under the ASX Operating Rules; and
  (ii)   agreed between the market participant and the client;
(k)   the nature of any rights the market participant may have against the client in an event of default disclosed in accordance with paragraph (j) that are:
  (i)   prescribed under the ASX Operating Rules; and
  (ii)   agreed between the market participant and the client;
(l)   if the client will or may be required to pay to the market participant commissions, fees, taxes or charges in connection with dealings in futures market contracts and options market contracts for the client:
  (i)   the fact that the client is required to pay such commissions, fees, taxes and charges; and
  (ii)   the manner in which the client will be notified of the rate of such commissions, fees, taxes and charges;
(m)   that the market participant may record telephone conversations between the client and the market participant and that if there is a dispute between the client and the market participant, the client has the right to listen to any recording of those conversations;
(n)   if the market participant may refuse to enter into market transactions for the client, or limit the market transactions it enters into for the client, that the market participant will notify the client of any refusal or limitation as soon as practicable;
(o)   that money or property, other than property to which CA Division 3 of Part 7.8 applies, deposited with, or received by, the market participant in connection with dealings in futures market contracts and options market contracts for the client will be segregated by the market participant in accordance with the ASX Operating Rules and the Corporations Act; and
(p)   that the client’s monies and the monies of other clients will or may, as applicable, be combined and deposited by the market participant in a clients' segregated account and may be used by the market participant to meet the default of any client of the market participant.

Breach of MIR 3.1.6 attracts a maximum penalty of $100,000.

A market participant must set out in a client agreement entered into under MIR 3.1.6(1) any minimum period of notice to terminate the agreement and any other limitations on the right to terminate the agreement (MIR 3.1.6(2)).

A market participant must retain a copy of each client agreement entered into under this Rule for at least 7 years following the date on which the agreement is terminated (MIR 3.1.11).

Under ASX Operating Rules Procedure 3801 and Appendix 3801-1, a futures client agreement must also incorporate the following minimum terms:

(a) the client and the market participant agree that the terms of their relationship in respect of futures contracts and option contracts and any dealings between them concerning futures contracts and option contracts are subject to, and that they are bound by, the Corporations Act, the ASX Operating Rules, the ASX Clear Operating Rules and the procedures, customs, usages and practices of ASX, ASX Clear Pty Limited and their related entities, as amended from time to time, in so far as they apply to futures contracts and option contracts;

(b) the client will take all reasonable steps to deliver information or documentation to the market participant, or cause information or documentation to be delivered to the market participant concerning market transactions which are requested by a person having a right to request such information or documentation and the market participant is authorised to produce the information or documentation to the person making the request;

(c) the client acknowledges that any benefit or right obtained by a clearing participant upon registration of a futures contract or option contract with the approved clearing facility by novation of a contract under Rule 5 of the ASX Clear Operating Rules or any other legal result of registration is personal to the clearing participant and the benefit of that benefit, right or legal result does not pass to the client and that the client has no rights, whether by way of subrogation or otherwise, against ASX or the approved clearing facility in relation to any dealings by the market participant (or any clearing participant) in futures contracts or option contracts;

(d) the client must pay to the market participant commissions, fees, taxes and charges in connection with dealings in futures contracts and option contracts for the client at the rates determined by the market participant from time to time and notified to the client in writing;

(e) the client irrevocably appoints severally ASX, ASX Clear Pty Limited, and every director, manager and assistant manager for the time being of ASX or ASX Clear, at the option of ASX or ASX Clear (as applicable) to do all acts and execute all documents on the client's behalf for the purpose of exercising the powers conferred on ASX under Rule 28.4 and ASX Clear under Rule 12 of the ASX Clear Operating Rules;

(f) termination does not affect the existing rights and obligations of the client or the market participant at termination;

(g) if ASX prescribes amended minimum terms for a client agreement for the purposes of the Rules (the "new terms"), to the extent of any inconsistency between these minimum terms and the new terms, the new terms will override the terms of the client agreement and apply as if the client and the market participant had entered into an agreement containing the new terms; and

(h) the market participant will provide a copy of the new terms to the client as soon as practicable after ASX prescribes the new terms.

There are additional terms for futures contracts over an underlying commodity which is a grain contract specified in an addendum to Appendix 3801-1.

Again this must be retained for at least 7 years following the date on which the agreement is terminated (ASX OR Procedure 3802).

MIR 3.1 – Disclosure of Execution and Clearing Arrangements
Before accepting an order to enter into a market transaction, a market participant must have:
•     if the market participant does not have trading permission to execute that market transaction, given the client a document which clearly discloses the execution arrangements in place for that market transaction (MIR 3.1.3);
•     if the market transaction is a cash market transaction and the market participant:
  (a)   is not a clearing participant who is permitted under the Clearing Rules to clear that transaction; or
  (b)   is a clearing participant who is permitted under the Clearing Rules to clear that transaction, but has an arrangement with another clearing participant to clear that transaction, and such transaction is cleared under the arrangement,
  given the client a document which clearly discloses the clearing arrangements in place for that transaction (MIR 3.1.4);
•     if the market transaction is a futures market transaction, the client does not have a direct relationship with a clearing participant and the market participant:
  (a)   is not a clearing participant who is permitted under the Clearing Rules to clear that transaction; or
  (b)   is a clearing participant who is permitted under the Clearing Rules to clear that transaction, but has an arrangement with another clearing participant to clear that transaction, and such transaction is cleared under the arrangement,
  given the client a document which clearly discloses the clearing arrangements in place for that transaction (MIR 3.1.5).

A market participant must retain a copy of these disclosures for at least 7 years (MIR 3.1.11).

Under ASX OR 3800, before accepting an order to enter into a cash market transaction for an equity security, loan security or warrant if the market participant: (a) is not a clearing participant, who is permitted under the Clearing Rules to clear the transaction; or (b) is a clearing participant who is permitted under the Clearing Rules to clear the transaction, but has an arrangement with another clearing participant to clear that transaction, and such transaction is cleared under the arrangement, the market participant must have given the client a document which contains a statement to the effect that an agreement is deemed to have been entered into between the appropriate relevant clearing participant and the client (with the trading participant having the relevant clearing participant's authority to enter into that agreement accordingly) upon the terms set out in the disclosure statement and that such deemed agreement comes into existence immediately upon the receipt by the trading participant of an order by the client to enter into a cash market transaction.

ASX Market Rules Guidance Note 4
Each market participant should:
•     adopt and follow effective policies and procedures for accepting new clients and opening new accounts;
•     document those policies and procedures and have copies available for reference by client advisers and other relevant staff;
•     ensure staff are adequately trained on those policies and procedures;
•     regularly review those policies and procedures to ensure they remain up-to-date and effective; and.
•     regularly conduct compliance reviews to ensure those policies and procedures are being adequately implemented.

Click here for a copy of ASX Market Rules Guidance Note 4: New Clients. Note that ASIC has said that it will seek to follow the published interpretations contained in pre-existing ASX Market Rules guidance notes, including Guidance Note 4, but will look to review them and issue replacement ASIC Guidance Notes in due course (see ASIC Regulatory Guide 214 - Guidance on ASIC market integrity rules for ASX and ASX 24 markets, at para 57-58).

ASX MR GN 4 - Suggested Procedures
•     The account opening and verification functions should be separated so as to ensure that the same person does not collect and verify client information.
•     A client’s identity should be verified using information obtained from at least two different sources, with Austrac’s 100 point requirements as a guide.
•     A written record of the client identification checks should be created and kept for at least 7 years.
•     "Do not accept the first order from a new client unless all client information is obtained and verified. If this has not occurred, obtain payment or control of securities (as the case may be) before acting on the person’s instructions. If those instructions (if followed) would have a significant effect on the market for that security, do not accept the order until the client information is obtained and verified."???
•     Have in place procedures for assessing a client's financial means and creditworthiness.
•     Additional enquiries be made where the client -
  •     is reluctant to provide information about themselves or some or all of the verifications requested;
  •     wishes to conduct business in cash or only by way of facsimile;
  •     is based overseas and wishes to pay for their first transaction with a foreign denominated cheque rather than an EFT;
  •     gives as their only address a post office box;
  •     is a minor, a bankrupt or other person or entity which does not have the capacity to transact business on its own account; or
  •     has a name matching one on the "prescribed persons or entities" list.

As to the first bullet point, Guidance Note 4 notes that this is a fraud control measure and a means to prevent staff establishing fictitious accounts. It suggests that for small organisations, where it is not practical to separate the account opening and verification functions, these should be reviewed by a senior person.

The precursor to Guidance Note 4 (ASX Business Rules Guidance Note 13/97) use to sensibly suggest that where a person purports to act on behalf of another person, the written authorisation of that person to the other should be obtained in writing. In respect of a company, written confirmation on company letterhead should be obtained of the authority of a person to act on the company’s behalf, if the person cannot demonstrate that they are an officer of the company. Guidance Note 4 now simply suggests that for proprietary companies, a search of company directors be obtained.

In relation to the second indented bullet point (persons wishing to conduct business in cash only), you should have procedures prohibiting dealings in cash without Compliance sign-off. Significant amounts of cash may indicate suspect activity (eg money laundering, drug dealing or tax evasion).

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Client Trust Accounts

MIR 3.5.1 and 3.5.2 - Maintenance of Accounts
A market participant must establish:
•     one or more clients' trust accounts for money received by the market participant in connection with dealings in cash market transactions or options market transactions; and
•     either one or more clients' trust accounts or clients' segregated accounts for money received by the market participant in connection with dealings in futures market transactions or options market transactions over an underlying financial product which is a futures market contract.

MIR 3.5 supplements the Corporations Act provisions governing the keeping and treatment of client money and client property by a market participant. These provisions were covered in lecture 9.

Breach of MIR 3.5.1 or 3.5.2 attracts a maximum penalty of $1,000,000.

See also ASX Market Rules Guidance Note 12: Client Money & Property - Client Funds, which summarises the obligations of market participants when they receive, or have access to, money that the client has deposited into an account with a third party. Note that ASIC has said that it will seek to follow the published interpretations contained in pre-existing ASX Market Rules guidance notes, including Guidance Note 12, but will look to review them and issue replacement ASIC Guidance Notes in due course (see ASIC Regulatory Guide 214 - Guidance on ASIC market integrity rules for ASX and ASX 24 markets, at para 57-58).

A market participant must perform a daily reconciliation of the aggregate balance held by it at the close of business on each business day in clients’ trust accounts maintained pursuant to MIR 3.5.1 or 3.5.2 (MIR 3.5.9(a)) and in clients’ segregated accounts maintained pursuant to MIR 3.5.2 (MIR 3.5.8), compared to the corresponding balance as recorded in the participant’s accounting records. It must also perform a weekly reconciliation of the individual balances held by it on trust for each person on whose behalf money is held in a trust account maintained pursuant to MIR 3.5.1 or 3.5.2 and the corresponding balance as recorded in its accounting records (MIR 3.5.9(b)) and a quarterly schedule showing the respective amounts held in the participant’s trust account on behalf of clients together with the names of the particular client in respect of each amount (MIR 3.5.11). Any deficiencies in client moneys identified by the reconciliation must be notified to ASIC within 2 business days (MIR 3.5.10).

MIR 3.5.3 and 3.5.4 - Where Accounts Kept
The accounts must be:
•     with an Australian ADI in Australia which has been rated by an approved ratings agency as being at least short term investment grade;
•     where the money is received in a foreign country, in an overseas branch of an Australian ADI with such a rating in that country; or
•     for foreign clients only, in a foreign bank approved by ASIC in writing.

Breach of MIR 3.5.3 attracts a maximum penalty of $1,000,000.

MIR 3.5.6 - Liquidity Requirement - Futures Segregated Accounts
If a market participant invests money from a clients' segregated account maintained under MIR 3.5.2 pursuant to CA s981C(a), that investment must be readily realisable and at least 50% of money so invested must be invested on 24 hour call terms.

Breach of MIR 3.5.6 attracts a maximum penalty of $1,000,000.

MIR 3.5.7(1) - Top-up Requirement - Futures Segregated Accounts
If a client does not satisfy, either through payment or the provision of security, a request by the market participant to meet:
(a)  

an initial margin call in relation to positions in futures market transactions held by the market participant on behalf of the client; or

(b)   a call in relation to the close out, settlement or daily settlement of open contracts,
within 48 hours following the call for payment, the market participant must pay into the clients’ segregated account the lesser of:
(c)   the amount of the request; or
(d)   the amount which the market participant would be obliged under the ASX Operating Rules to request from the client on the following day.

Under MIR 3.5.7(2), an equivalent provision also applies to requests by a market participant for payment or the provision of security relating to derivatives traded on a market operated by a person other than the ASX.

Breach of MIR 3.5.7 attracts a maximum penalty of $1,000,000.

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Trading Rules

Trading Must Occur On-Market Unless Excepted
•     A participant must not enter into a transaction in an equity market product other than under the rules of a market, unless the transaction is entered into pursuant to:
  •     the terms of an equity market product, including a redemption; or
  •     a primary market action, including an off-market bid for equity market products or an issue, allotment or subscription of new equity market products (Competition MIR 7.1.1).
•     Under the rules of a market means executed on an order book or reported to a market operator in accordance with the Competition MIR and the operating rules (including written procedures made under the operating rules) of the relevant market (Competition MIR 1.4.3).
•     A participant must not enter into a transaction in an equity market product unless the transaction is entered into by matching of a pre-trade transparent order on an order book (Competition MIR 4.1.1(1)) or it is a block trade, large portfolio trade, a trade with price improvement, a permitted trade during the pre-trading hours period or the post-trading hours period, or an out of hours trade (Competition MIR 4.1.1(2)).
•     Transactions in equity market products executed on ASX must be executed in a trading platform or reported to ASX in accordance with the Operating Rules, except as otherwise permitted in writing by ASX (OR 3002).
•     Cash market transactions (other than for equity market products) and derivatives market transactions must be executed in a trading platform in accordance with the Operating Rules, except as otherwise permitted in the Operating Rules or permitted in writing by ASX (OR 3002).

Breaches of Competition MIR 7.1.1 and 4.1.1 both attract a maximum penalty of $1,000,000.

"Equity market products" are securities, interests in managed investment schemes, options to acquire by way of issue securities or interests in managed investment schemes under a rights issue, and CHESS depository interests listed on ASX. These are the products subject to the Competition MIR.

The terms "block trade", "large portfolio trade", "trade with price improvement", "permitted trade during the post-trading hours period", "permitted trade during the pre-trading hours period" and "out of hours trade" are defined in Competition MIR 4.2.1-4.2.6 respectively. All of these are effectively required to be reported to a market operator under Competition MIR 7.1.1.

For examples where "off market" transactions are permitted under the ASX Operating Rules, see OR 3320 (transactions outside trading hours), 4060 (crossings), 4810 (special crossings) and 4800 ("exchange for physical" transactions).

Dealing in Suspended Cash Market Products
•     A participant must not match an order or execute a transaction in circumstances where the relevant equity market product is in a trading suspension on all markets on which that equity market product is quoted (Competition MIR 7.2.1).
•     A trading participant must not deal in cash market products which have been suspended from official quotation or trading unless the cash market product is an equity market product that is quoted on another equity market and is not in a trading suspension on that equity market (MIR 5.10.4).

Breaches of Competition MIR 7.2.1 and ASX MIR 5.10.4 all attract a maximum penalty of $100,000.

Dealing in Unquoted Cash Market Products
•     Except as otherwise permitted in MIR 5.10.2 (see below), a trading participant is prohibited, either in its own office or elsewhere, from making quotations or dealing in a new issue or placement of cash market products (except loan securities):
  •     made for the purpose of qualifying a company for admission to the official list of the ASX; or
  •     for which official quotation will be sought,
  until those products have been granted official quotation (MIR 5.10.1).
•     A trading participant may deal in new securities issued by a listed entity for which official quotation will not be sought 24 hours after the entity has advised the ASX of the details of the issue (MIR 5.10.3).

Breach of MIR 5.10.1 attracts a maximum penalty of $100,000.

See ASX Business Rules Guidance Note 7/01: Dealing in Equity Securities of Unlisted Entities for the guidelines to be followed when a trading participant deals in equity securities of an unlisted entity.

MIR 5.10.2 - Permitted Dealings in Cash Market Products Not Yet Granted Official Quotation
•     Underwriting or sub-underwriting a new issue or placement of cash market products.
•     Disposing of cash market products comprised in an underwriting or sub-underwriting shortfall.
•     Dealing in cash market products which have been issued on a pro rata basis to holders.
•     Placing cash market products issued by a listed entity as consideration for acquiring assets under a prior firm placement arrangement with the vendor of the products.
•     Placing new cash market products for which official quotation will be sought, where investors are informed in writing that trading participants cannot deal in the products either as principal or agent until official quotation has been granted.
•     Accepting orders to sell new cash market products for which official quotation will be sought, where the trading participant takes all reasonable steps to ensure that the products are not sold before official quotation.
•     Accepting orders to sell issued cash market products which are of the same class as existing quoted products and where the issue has been notified to the ASX and released to the market.
•     Dealings in ETF securities issued under a subscription application.

Note that the permitted exceptions in the fourth, fifth, sixth and seventh bullet points are expressed not to apply to dealings in loan securities, but then the prohibition in MIR 5.10.1 also doesn't apply to loan securities.

MIR 5.10.5 - Disclosure of Shortfall
A market participant, an employee or a director of a market participant or a company which is a partner of a market participant who or which will be required to acquire cash market products as underwriter or sub-underwriter must not offer such cash market products to clients unless:
(a)   unless they first inform the clients concerned of the closing date of the issue or offering of the cash market products and the reasons for the acquisition; or
(b)   the offer to the client is made more than 90 days from the closing date.

Breach of MIR 5.10.5 attracts a maximum penalty of $100,000.

The reference to "will be required to acquire" seems to be speaking in the future tense before the underwriting has closed. However, the heading to the rule implies that the rule only applies if there is a shortfall – ie after the underwriting has closed. It is also unclear why the broker discloses "the reasons for the acquisition" and what should be disclosed in that regard. In keeping with the heading for the rule, it is submitted that the broker should be disclosing the fact that they are dealing as principal and disposing of a shareholding they acquired as an underwriting shortfall.

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Best Execution

Competition MIR 3.1.1 - Best Execution Obligation
When handling and executing an order for a client a participant must take reasonable steps to obtain the best outcome for that client, meaning:
•     for a retail client who has not given a contrary instruction under MIR 3.1.1(3), the best total consideration; and
•     for a wholesale client who has not given a contrary instruction under MIR 3.1.1(4), any combination of price, costs, total consideration, speed, likelihood of execution or any other relevant outcome.

Breach of Competition MIR 3.1.1 attracts a maximum penalty of $1,000,000.

Where contrary instructions are given under Competition MIR 3.1.1(3) or (4), the participant must take reasonable steps to handle and execute the order in a way which satisfies the instructions.

Contrary instructions under Competition MIR 3.1.1(3) and (4) must be clear and unambiguous; in writing, or if provided to the participant verbally, recorded by the participant and retained for a period of 7 years; and not contained within the terms and conditions of a client agreement or any other standard form agreement provided by the participant to the client. In the case of a retail client, they must be specific to an order. In the case of a wholesale client, they may be standing instructions or specific order by order instructions.

In the case of a standing instruction by a wholesale client, the instruction must be periodically reviewed to ensure it remains possible for the participant to satisfactorily perform the instruction or otherwise must only be acted upon by the participant for a period of 12 months (Competition MIR 3.1.5).

A participant must not take steps to encourage or induce a client to provide contrary instructions under Competition MIR 3.1.1(3) or (4) (Competition MIR 3.1.2(1)).

A participant must not charge a client, or propose to charge a client, brokerage, commission or other fees for executing an order on a market that differs from the brokerage, commission or other fees the participant would charge if the order was executed on another market, unless the difference is related to the actual cost of executing orders on a market (Competition MIR 3.1.3).

A participant must establish, document and implement adequate policies and procedures to ensure that it complies with Competition MIR 3.1.1 (Competition MIR 3.2.1). It must comply with those policies and procedures (Competition MIR 3.2.2) and review them whenever there is a material change in relevant circumstances (Competition MIR 3.2.3).

A Participant must, if it receives a reasonable request from a client to do so, demonstrate to the client within a reasonable time after receiving the request that the client's orders have been executed in accordance with the Participant's best execution policies and procedures (Competition MIR 3.4.1). It must also keep records for a period of 7 years which enable the participant to demonstrate such compliance (Competition MIR 3.4.2).

Before accepting a client order from a client for the first time, a participant must make certain prescribed disclosures about its best execution obligation and update those disclosures whenever there is a material change. These disclosures must be in writing and retained for 7 years. However, a participant is not required to make these disclosures to a wholesale client if the client and the participant agree that disclosure is not required, and the terms of that agreement are clear and unambiguous, in writing and retained by the Participant for a period of 7 years, and not part of a standard client agreement or any other standard form agreement provided by the participant to all its wholesale clients or to a class of its wholesale clients (Competition MIR 3.3.1).

A participant must not take steps to encourage or induce a client to agree that the Participant is not required to disclose the matters referred to in Competition MIR 3.3.1 (Competition MIR 3.1.2(2)).

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Confirmations

MIR 3.4.1(1) and (2) - Requirement for Confirmations
Subject to MIR 3.4.3 (see below), a market participant must give a confirmation to a client in respect of each market transaction entered into on a client's instructions or on a client's managed discretionary account. The market participant must send to, or cause to be sent to, the client a confirmation:
(a)  in writing;
(b)  electronically; or
(c)  in another form permitted by ASIC,
as soon as practicable after the market participant enters into the market transaction.

Breach of MIR 3.4.1 attracts a maximum penalty of $100,000.

See generally ASX Market Rules Guidance Note 3: Reporting to Clients - Confirmations. Note that ASIC has said that it will seek to follow the published interpretations contained in pre-existing ASX Market Rules guidance notes, including Guidance Note 3, but will look to review them and issue replacement ASIC Guidance Notes in due course (see ASIC Regulatory Guide 214 - Guidance on ASIC market integrity rules for ASX and ASX 24 markets, at para 57-58).

MIR 3.4.3 – Exception for Wholesale Clients
A market participant is not required to comply with MIR 3.4.1 in respect of a client that is not a retail client, provided the market participant:
(a)   has notified the client before entering a trading message on the client’s behalf that market transactions effected for the client are subject to:
  (i)   the directions, decisions and requirements of the ASX, these Rules, the ASX Operating Rules, the Clearing Rules and, where relevant, the Settlement Rules;
  (ii)   the customs and usages of the market; and
  (iii)   the correction of errors and omissions; and
(b)   unless the client has agreed not to receive such notifications, notifies the client as soon as practicable:
  (i)   if the market participant entered into the client’s market transaction as principal, that the market participant entered into the market transaction as principal; and
  (ii)   if the client’s market transaction was executed as a crossing, the execution code of the execution venue for the crossing.
A market participant must keep a record of the notification referred to in (1)(a).

Breach of MIR 3.4.3 attracts a maximum penalty of $100,000.

MIR 3.4.1(3) – Contents of Confirmations
A confirmation must:
(a)   include all of the information required to be included in a confirmation under the Corporations Act;
(b)   include a statement that it is issued subject to:
  (i)   the directions, decisions and requirements of ASX, these Rules, the ASX Operating Rules, the Clearing Rules and where relevant, the Settlement Rules;
  (ii)   the customs and usages of the market; and
  (iii)   the correction of errors and omissions,
  unless the market participant has obtained and retained an acknowledgment from the client that the conditions set out in (i), (ii) and (iii) apply to the issue of confirmations to that client;
(c)   if the market transaction is to be cleared by another party which is a clearing participant, include the name of the market participant which executed the trade and the clearing participant which clears it;
(d)   state the time by which all documents and information which the market participant or clearing participant will require to settle the market transaction must be provided by the client:
  (i)   in the case of a sale of cash market products, the date by which the client must provide all documents and security holder information (including, if applicable, the relevant holder identification number or personal identification number and/or shareholder reference number) required by the relevant clearing participant to meet its clearing obligations;
  (ii)   if applicable, the date by which the client must provide the consideration specified in the confirmation; and
  (iii)   if applicable, the date by which the net consideration to the client falls due;
(e)   state the amount of money which the client must pay, or which the client will receive, on settlement of the market transaction and, if the client is required to pay an amount of money, the time by which that money must be paid;
(f)   where the market transaction involved a crossing, include a statement to that effect;
(g)   include any disclosure required under MIR 3.2.3 (dealing as principal); and
(h)   if the confirmation is a confirmation in respect of:
  (i)   a conditional sale of a cash market product and the corresponding confirmation in respect of the conditional purchase of the relevant cash market product; or
  (ii)   the entry into of an options market contract over a cash market product which is, at the time, traded on a conditional basis,
  be endorsed as conditional and state the condition and the effect of non-fulfilment of the condition.

Breach of MIR 3.4.1 attracts a maximum penalty of $100,000.

In relation to (f) above, a crossing occurs where a market participant acts for both the buyer and the seller in the one transaction. In 2016, CommSec was penalised $700,000 by the Markets Disciplinary Panel and voluntarily refunded $1.1 million in brokerage to more than 25,000 clients, in part for breaching MIR 3.4.1(f). Between 1 August 2010 and 13 February 2014, CommSec issued 114,841 confirmations to retail clients whose orders were executed as crossings but which did not contain the required statement that the transactions had involved a crossing. See ASIC Media Release 16-289MR.

MIR 3.4.2 - Accumulation and Price Averaging

If a market participant is required by MIR 3.4.1 to give a confirmation to a client and the market participant enters into multiple market transactions for the purpose of completing a client’s order, the market participant may accumulate those market transactions on a single confirmation and specify the volume weighted average price for those market transactions provided that:

(a)   the client authorised in writing the accumulation and price averaging of two or more market transactions in a confirmation at or before the time the order was placed; and
(b)   if requested by the client, the market participant gives to the client a statement of all the individual prices of the cash market products or derivatives market contracts, as applicable, which are accumulated and averaged under this Rule.

Breach of MIR 3.4.2 attracts a maximum penalty of $20,000.

Competition MIR 7.3.1 similarly empowers a participant to produce single trade confirmation for multiple transactions executed across different markets, subject to the same provisos as mentioned in (a) and (b) above.

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Managed Discretionary Accounts

MIR 2.4.22 - Accreditation
A market participant must ensure that a managed discretionary account for a retail client which involves dealing in derivatives market transactions or warrants is operated by an accredited adviser with the appropriate accreditation under these Rules.

Breach of MIR 2.4.22 attracts a maximum penalty of $1,000,000.

An ASX participant who operates a managed discretionary account for retail clients is caught by ASIC Regulatory Guide 179: Managed discretionary account services and must have an AFSL that authorises the operation of such accounts.

MIR 3.3.2 - Excessive Transactions

A market participant must not enter into market transactions on a managed discretionary account for a retail client where the size or frequency of the market transactions may be considered excessive having regard to the investment objectives, financial situation and needs of the client and the relevant markets.

Breach of MIR 3.3.2 attracts a maximum penalty of $1,000,000.

ASX Market Rules Guidance Note 29 – Compliance Expectations
"Operation of MDAs has the potential to be a high-risk activity for a market participant requiring close attention to the management, control and supervision of discretionary account activity. ... Each market participant must have in place effective mechanisms to manage compliance and supervisory policies and procedures reasonably designed to achieve compliance by the market participant with the rules relating to MDAs. ... Where a MDA is operated, ASX would expect an internal compliance program would be monitoring trading on those MDA accounts."

See generally ASX Market Rules Guidance Note 29: Managed Discretionary Accounts. Note that ASIC has said that it will seek to follow the published interpretations contained in pre-existing ASX Market Rules guidance notes, including Guidance Note 29, but will look to review them and issue replacement ASIC Guidance Notes in due course (see ASIC Regulatory Guide 214 - Guidance on ASIC market integrity rules for ASX and ASX 24 markets, at para 57-58).

Ali v Hartley Poynton Ltd [2002] VSC 113 reinforces the point in Guidance Note 29 about the need for effective supervision of employees operating managed discretionary accounts. That case involved a claim against Hartley Poynton for improper trading on a client's discretionary account. The judge noted that there was no proper supervision or control of the way in which the employee managing the account had carried out his trading activities, notwithstanding that the employer was on notice that the employee needed close supervision because of earlier misconduct. The judge found for the plaintiff and awarded exemplary damages against Hartley Poynton for its "conscious contumelious disregard" for the rights of the plaintiff.

See also ASIC Media Release 15-022MR, where ASIC banned a former representative of Macquarie Equities Limited (MEL) in 2015 from providing financial services for five years after he engaged in unauthorised discretionary trading on his clients' accounts and created records on behalf of clients that falsely indicated that he had provided advice to the clients prior to trading when he had not. MEL had prohibited its representatives from engaging in discretionary trading on behalf of clients since 2004.

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Error Trades

•     There is a facility in OR 3200 et seq and the related Procedures for cancellation of error trades automatically (if it is within the 'extreme cancellation range') or with the agreement of the other broker to the trade (if it is within the 'qualifying cancellation range').
•     Normally however error trades are corrected by entering into equal and opposite trades.
•     Error trades are on principal account and therefore normal principal trading rules apply.
•     Important to have good procedures around error accounts and to monitor them closely.

See generally ASX Market Rules Guidance Note 14: Trade Errors, Cancellations and Dealing. Note that ASIC has said that it will seek to follow the published interpretations contained in pre-existing ASX Market Rules guidance notes, including Guidance Note 14, but will look to review them and issue replacement ASIC Guidance Notes in due course (see ASIC Regulatory Guide 214 - Guidance on ASIC market integrity rules for ASX and ASX 24 markets, at para 57-58).

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Complaint Registers

MIR 4.2.2(1) – Requirement to Keep Records of Complaints
A market participant must keep the following records of complaints received from clients:
(a)   a copy of all written complaints;
(b)   a copy of all written correspondence between the market participant and the clients and a written summary of any oral communication in connection with a written complaint; and
(c)   any correspondence or documents relating to the resolution of a complaint through any complaints resolution scheme.

These records must kept for at least 5 years from the date of the last correspondence in relation to the complaint (MIR 4.2.2(2)).

Breach of MIR 4.2.2 attracts a maximum penalty of $1,000,000.

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