Compliance: Theory and Practice in the Financial Services Industry
12C. ASX 24 Futures Broking
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Introduction |
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Admission and Accreditation |
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General Obligations of Participants |
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Client Documentation |
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Client Segregated Accounts |
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Trading Rules |
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Confirmations |
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Error Trades |
We looked at the ASX 24 Operating Rules relevant to front running in lecture 3; market manipulation, order records and client order precedence in lecture 4; and confidentiality, telephone taping and self-reporting obligations in lecture 9.
| ASX 24 Markets and Clearing Houses | |
| • | ASX 24 (formerly the Sydney Futures Exchange) - trades futures and options contracts |
| • | ASX Clear (Futures) - clears and settles futures and options contracts |
| • | Austraclear – government securities, debt securities and money market instruments |
Click here to access the ASX 24 Operating Rules, Clearing Rules and Austraclear Regulations.
| Admission Requirements | |
| • | Trading Participants – must be a body corporate which is incorporated as a company or registered as a foreign company under the Corporations Act acting in its own right and not as a trustee, or a partnership (OR 1000(b) and 1500-1506). If not a clearing participant, it must have its obligations guaranteed by a clearing participant (OR 1000(i)). |
| • | Clearing Participants - must be a corporation unless the ASX 24 Board gives special approval otherwise and cannot be an individual (CR 4.1). Must satisfy specific financial requirements; be in "good standing"; of good character, high business integrity and financial probity; and otherwise a fit and proper person to be a clearing participant (CR 4.4). |
There is a separate sub-category of trading participants, call "principal traders". These are trading participants who are limited to trading on their own behalf.
To be admitted as a trading participant, an applicant must satisfy the Exchange that it is of high business integrity (OR 1000(d)). Procedure 1000(d) sets out the requirements of the Exchange in this regard.
The former SFE used to require all advisers to be recognised and accredited as "registered representatives" and all traders to be registered and accredited as "approved SYCOM traders" but those designations and requirements were dropped in the re-write of the SFE Operating Rules in the lead up to the FSR transition date of 11 March 2004.
| OR 1400 – Ongoing Requirements | |
| A trading 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 trading participant under the Rules; |
| (c) | comply with the Rules, directions, decisions and requirements of the Exchange; |
| (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 the Exchange; and |
| (e) | notify the Exchange of the matters set out in the Procedures in the time and manner set out in the Procedures. |
Under Procedure 1400(e), a trading participant must notify the Exchange of: (a) any change of name or address; (b) any change of directors, licence or other authorisation and certain other details; (c) any regulatory action; (d) the amount and period of cover of its professional indemnity insurance; and (e) any claims notified to its insurers.
| MIR 3.1.13(1) - Acting in Accordance with Client Instructions and Client’s Best Interests | |
| A market participant must: | |
| (a) | act on behalf of a client only in accordance with that client's instructions, unless to do so would be contrary to the Rules; and |
| (b) | not act in a manner which has, or is intended to have, a detrimental effect, on the client's best interests. |
For these purposes, the expression "client" includes a related body corporate or a division of the market participant which is separate from the market participant’s futures division (MR 3.1.13(2)).
Breach of MIR 3.1.13 attracts a maximum penalty of $100,000.
| MIR 2.2.3 – Prohibited Employment |
| A market participant must not employ any person who has been a market participant (or a director, partner, employee or representative of a market participant) if that person has to the knowledge of the first mentioned participant taken part or been concerned in any failure to comply with the Market Integrity Rules or the Operating Rules, which failure has been found to have occurred by ASIC or the Exchange (as the case may be). |
For these purposes, the words "to employ" and cognate expressions include agreeing or arranging with a person for that person to act as the market participant's representative to advise or solicit instructions from other persons or to trade on the market participant's behalf in relation to dealings in futures contracts (MIR 2.2.3(2)).
Breach of MIR 2.2.3 attracts a maximum penalty of $1,000,000.
| Client Agreements | |
| • | A market participant must have in force, prior to the commencement of trading for a client, a duly signed agreement with that client, containing the prescribed minimum terms (MIR 2.2.5(1)). |
| • | A trading participant must include the minimum terms specified in the Procedures in client agreements in the circumstances set out in the Procedures. The client agreement may include other terms and conditions agreed between the trading participant and the client, provided those terms are not inconsistent with the terms set out in the Procedures. To the extent of any inconsistency, the terms set out in the Procedures will prevail (OR 3801). |
The prescribed minimum terms under MIR 2.2.5(1) include:
(a) the client will upon the participant's request, provide all information and documentation relevant to the client's trading on the Exchange, to the participant and the participant is authorised by the client to provide the information and documentation to ASIC;
(b) various acknowledgements in relation to margin calls;
(c) an acknowledgment by the client that the client's telephone conversations with the participant can be recorded by the participant;
(d) an acknowledgement of the right of the participant to refuse to deal on behalf of the client; and
(e) various acknowledgements about termination and closing out of positions.
MIR 2.2.5(1) does not apply to a principal trader or where the client is another market participant, as such an agreement is deemed in place and does not require to be signed (see Operating Rule Procedure 3801). It also doesn't apply where the market participant is performing execution business only and has an agreement in place with the client that incorporates the provisions set out in the International Uniform Brokerage Execution Services ("Give-Up") Agreement 2008 (both client and trader versions) (MIR 2.2.5(2)).
Breach of MIR 2.2.5 attracts a maximum penalty of $100,000.
Under ASX 24 Operating Rules Procedure 380, a client agreement required under MIR 2.2.5 in relation to futures market contracts must incorporate the following minimum terms:
(a) the client and participant are bound by the ASX 24 Operating Rules and the customs, usages and practices of the ASX 24's markets;
(b) the client will upon the participant's request, provide all information and documentation relevant to the client's trading on the Exchange, to the participant and the participant is authorised by the client to provide the information and documentation to the Exchange;
(c) any benefit or right obtained by any participant upon registration of a contract with ASX Clear (Futures) by way of assumption of liability of ASX Clear (Futures) under any contract or any other legal result of such registration is personal to the participant and the benefit of such benefit or right does not pass to the client;
(d) the client has no rights whether by way of subrogation or otherwise, against any person or corporation other than the participant in relation to all trades conducted on the Exchange by the participant and all contracts registered by the participant with ASX Clear (Futures);
(e) an appointment by the client of the managing director of ASX Clear (Futures) as the client’s attorney to do all things necessary to transfer any open position held by the participant on the client’s behalf to another participant where the participant status of the participant has been suspended or terminated; and
(f) an acknowledgement by a client who has access to electronic order facilities about the use they can make of Exchange data.
OR 3801 and the accompanying Procedure do not apply to a principal trader or where the client is another trading participant, in which case an agreement containing this term is deemed to have been entered and come into effect immediately upon the trading participant accepting the first instruction from the client to enter a contract on the Exchange’s markets. They also do not apply where the trading participant is performing execution business only and has an agreement in place with the client that incorporates all the terms of an agreement determined by the Exchange to be appropriate for use when a trading participant is performing execution business only. For these purposes, the Exchange has determined that the provisions set out in the International Uniform Brokerage ("Give-Up" Agreement) (both client and trader versions) approved from time to time by the Futures Industry Association and Futures and Options Association is appropriate for use by a trading participant when performing execution business only.
| MIR 2.2.6(a) - Requirement to Have Account | |
| A market participant who holds client monies must comply with the following: | |
| (i) | All money received by the market participant from its clients or by a person acting on behalf of the client under the Market Integrity Rules or Operating Rules must be deposited in an account operated by the market participant and designated as a clients' segregated account. |
| (ii) | If the account is operated outside Australia and the law in force in the jurisdiction where it is maintained requires the account to be designated in a particular way, the market participant must designate the account in that way. |
| (iii) |
Where omnibus accounts are operated by a market participant (eg on behalf of another broker), a house account and client account are to be maintained separately at all levels in the chain to the clearing and settlement facility level. |
| (iv) | A market participant must not net off the client account against the house account. |
For the purpose of Rule 2.2.6, the expression "client" excludes a related body corporate or a division of the participant (MIR 2.2.6(l)).
A market participant is prohibited from making any agreement with a client that the client's money is not to be held or does not need to be held in a segregated account for the benefit of the client (MIR 2.2.6(g)).
A market participant is also prohibited from using a clients' segregated account to meet any initial or variation margin liabilities which relate to trading by that participant on its own behalf or on behalf of a related corporation (MIR 2.2.6(j)).
Breach of MIR 2.2.6 attracts a maximum penalty of $1,000,000.
| MIR 2.2.6(b) - Type of Money to be Paid into Account | |
| Only the following monies are permitted to be paid into a clients' segregated account: | |
| (i) | all money received by the market participant from its client or by a person acting on behalf of its client; |
| (ii) | interest on the amount from time to time standing to the credit of the account; |
| (iii) | interest or other similar payments on an investment, and the proceeds of the realisation of an investment; and |
| (iv) | any other money as required by the Market Integrity Rules or Operating Rules or the law to be paid by the market participant into a clients' segregated account. |
| MIR 2.2.6(c) - When Money Must be Paid into Account |
| The money must be paid into a clients' segregated account on the day it is received by the market participant, or on the next business day. |
| MIR 2.2.6(d) - Permitted Withdrawals | |
| Withdrawals from a clients' segregated account made in any of the following circumstances are permissible: | |
| (i) | paying margins and the settling of dealings; |
| (ii) | making a payment to, or in accordance with the written direction of, a person entitled to the money; |
| (iii) | defraying brokerage and other proper charges; |
| (iv) | paying to the market participant money to which the market participant is entitled, whether at law or pursuant to the Market Integrity Rules or Operating Rules; and |
| (v) | making a payment that is otherwise authorised by law. |
A market participant is required at all times to maintain such accounting records as accurately indicate each withdrawal from a clients' segregated account (MIR 2.2.6(k)).
| MIR 2.2.6(h) - Permissible Investments | |
| Where a market participant invests money from a clients' segregated account, the following kinds of investments may be made: | |
| (i) | investment in any manner in which trustees are for the time being authorised by law to invest trust funds; |
| (ii) | investment on deposit with an eligible money market dealer; |
| (iii) | investment on deposit at interest with an Australian ADI or an approved foreign bank; |
| (iv) | the acquisition of cash management trust interests; |
| (v) | investment in a security issued or guaranteed by the Commonwealth or a State or Territory; |
| (vi) | investment on deposit with a licensed clearing and settlement facility; or |
| (vii) | an investment in accordance with the specific direction of a client. |
MIR 2.2.6(i) requires that a market participant must, prior to investing any amount, obtained the client's written agreement to the following matters:
(a) the making of the investment;
(b) how earnings on the investment are to be dealt with;
(c) how the realisation of the investment is to be dealt with;
(d) how any losses made on the investment are to be dealt with; and
(e) the fee (if any) that the participant proposes to charge for the investment,
and that such investment must be readily realisable and no less than 50% of monies invested must be on 24 hour call.
| MIR 2.2.6(f) - Top-up Requirement | ||
| (i) | Where 5 clear business days (inclusive of the day of the call) after a call has been made on a client for initial or variation margin in accordance with the Operating Rules, or such call should have been made in accordance with those Operating Rules, the call which was or should have been made has not been satisfied by payment of monies into a clients' segregated account or lodgement of cover, then the market participant shall pay into the clients' segregated account an amount of money not less than either: | |
| (A) | the liability of the client under such a call; or | |
| (B) | the amount which the market participant would be obliged to call the client on the day after 5 clear business days (inclusive of the day of the call) has elapsed, whichever is the lesser. | |
| (ii) | Subject to MIR 2.2.6(f), such monies may only be withdrawn in accordance with MIR 2.2.6(d) and only after such monies have been received by the market participant. | |
| (iii) | A market participant must pay into the clients' segregated account after 5 clear business days any amount (which has not been met by the client) which arises as a result of debit balances of a client resulting from realised losses or otherwise. | |
| MIR 3.1 – Improper Trading Practices | |
| A market participant must not: | |
| • | withhold an order with an intent to obtain a counterparty/counterparties (MIR 3.1.8); |
| • | withdraw orders in whole or in part for the benefit of another person (MIR 3.1.9); |
| • | arrange the details of a potential trade between two or more parties whether or not orders are entered into the trading platform, unless market participants have been made generally aware of all relevant details of the potential trade, or unless specifically permitted otherwise under the Market Integrity Rules (MIR 3.1.10(1)); or |
| • | execute or attempt to execute trades with the intent to exclude other market participants or their representatives (MIR 3.1.11). |
See generally OR 4013 and accompanying Procedures for the phases of trading on the ASX 24 market.
The prohibition against withholding orders in MIR 3.1.8 is subject to MIR 3.3.1(1)(a) (pre-negotiated business orders) and 3.4.1(b) (block trades).
The prohibition against pre-arranging trades in MIR 3.1.10(1) is also subject to MIR 3.3.1(1)(b) (pre-negotiated business orders) and 3.4.1(a) (block trades). A market participant is also not prevented from arranging the details of a potential trade under MIR 3.1.10(1) where orders may be aggregated under MIR 3.1.6 (MIR 3.1.10(2)).
Rules for "pre-negotiated business orders" (the ASX 24 equivalent of special crosses) are set out in OR 4401 and accompanying Procedures. Rules for "block trades" are set out in OR 4820 and accompanying Procedures.
Breach of MIR 3.1.8 attracts a maximum penalty of $1,000,000 and MIR 3.1.9-3.1.11 attracts a maximum penalty of $100,000.
| MIR 2.2.2(1) – Concentration of Risk |
| A market participant other than a principal trader must not permit any one client to represent such a percentage of the trading by the market participant as may prejudice or diminish the ability of the market participant to meet its obligations under the Market Integrity Rules and at law. |
For these purposes, "client" includes all persons, partnerships and corporations related to, associated with or affiliated with the client or otherwise financially dependent upon the client (MIR 2.2.2(2)).
Breach of MIR 2.2.2 attracts a maximum penalty of $100,000.
| • | Nothing in ASX 24 Market Integrity Rules or Operating Rules. |
| • | Governed by CA requirements. |
| MIR 2.2.4(3) – Error Records | |
| A market participant must maintain a separate record of error trades for a period of not less than 5 years from the date of a trade, containing the following information: | |
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a description of the trade including the deal number supplied by the Exchange (if any); |
| • | the name of the representative responsible for the error trade; |
| • | the name of the representative responsible for the execution of the trade; |
| • | a detailed explanation as to how the trade occurred, including details of the original client order (if any) which precipitated the error; |
| • | any subsequent action taken by the participant in relation to that trade; and |
| • | the financial result of the trade. |
There is a procedure for cancelling error trades before settlement in OR 3200. Effectively this requires quick agreement between the brokers involved. If they can’t agree or if the broker executing in error does not want to employ that process, the error trade gets taken on as a house trade and then a reversing trade done.
The former SFE Procedures 2.2.23 used to state that participants should have a policy to close out errors as soon as they become aware of the error and that traders should not use client orders to work a "positive error". ASIC has said that it will seek to follow the published interpretations contained in pre-existing SFE procedures, including Procedure 2.2.23, but will look to review them and issue replacement ASIC Guidance Notes in due course (see Regulatory Guide 214 Guidance on ASIC market integrity rules for ASX and ASX 24 markets, at para 57-58).
Regulators tend to look very closely at error accounts. They can be a repository of all sorts of improper trades eg attempts by house traders to hide bad trades as execution errors, improper trading on employee or related accounts, attempts to pre-arrange trades that don’t come off etc. Compliance should monitor error accounts closely.
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