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New Zealand Securities Commission |
Last Updated: 14 November 2014
OVERSIGHT REVIEW OF NZX
2007
SECURITIES COMMISSION
Level 8, Unisys House
56 The Terrace
PO Box 1179
WELLINGTON
Ph (04) 472 9830
Fax (04) 472 8076
E mail seccom@seccom.govt.nz
20 June 2008
TABLE OF CONTENTS
GLOSSARY OF KEY TERMS AND
ABBREVIATIONS............................................................3
STRUCTURE OF NZX AND ITS
MARKETS...........................................................................4
EXECUTIVE
SUMMARY...................................................................................................5
FINDINGS................................................................................................................................6
INTRODUCTION..........................................................................................................................7
NZX’S FRONTLINE
REGULATION...............................................................................................8
MARKET SUPERVISION
CHANGES............................................................................................8
POLICIES IN RESPECT OF CONTINUOUS
DISCLOSURE...........................................................10
EDUCATION AND
COMPLIANCE................................................................................................10
INVESTIGATIONS AND
ENFORCEMENT.........................................................................11
INFORMATION
ACCESS............................................................................................................11
IMPACT OF EXPANDING COMMERCIAL ACTIVITIES ON NZX'S
REGULATORY
FUNCTION..........................................................................................................13
THE SPECIAL
DIVISION.............................................................................................................13
MATTERS ARISING FROM THE REVIEW OF THE 2006
YEAR....................................................14
CONCLUSION............................................................................................................................16
APPENDIX..................................................................................................................................17
SCOPE OF
REVIEW..................................................................................................................17
BACKGROUND TO
REVIEW......................................................................................................18
PROCESS................................................................................................................................19
GLOSSARY OF KEY TERMS AND ABBREVIATIONS
Business Rules The rules made
by a securities exchange that govern the conduct of business
on securities
markets operated by the securities exchange and persons authorised to undertake
trading activities on those securities
markets.
Conduct Rules The Participant Rules and Listing Rules of NZX.
FSAP Financial Sector Assessment Programme, conducted by the
International Monetary Fund.
IOSCO International Organization of Securities Commissions.
IOSCO Principles IOSCO’s
Objectives and Principles of Securities Regulation (October 2003)
which are accepted as the international standards for securities regulation by
the International Monetary Fund and
the World Bank.
Issuer Any entity which is or has been listed on the NZSX, NZAX or the
NZDX.
Listing Rules Rules made by
NZX that govern the conduct of Issuers listed on NZX’s
markets, approved
as Listing Rules under the Securities Markets Act 1988.
MAP Market Announcement Platform.
Market Participant An organisation
accredited by NZX to participate in the markets that NZX
operates.
Market Supervision Group A group within NZX
led by the Head of Market Supervision comprising
two teams – NZX
Regulation and Compliance.
NZAX New Zealand Alternative Stock Market. NZSX New Zealand Stock Market.
NZX Discipline A disciplinary body constituted by NZX under the NZX Discipline
Rules.
NZX Discipline Rules The NZX Discipline Rules as made by NZX.
NZX Regulation A team within
NZX’s Market Supervision Group which focuses on regulation
of
Issuers.
NZX New Zealand Exchange Limited.
Participant Compliance A team within
NZX’s Market Supervision Group which focuses on regulation
of Market
Participants.
Participant Rules Rules made by
NZX that govern the conduct of business on securities
markets operated by
NZX and persons authorised to undertake trading activities on those markets,
approved as Business Rules under
the Securities Markets Act 1988.
Review Period 2007 calendar year.
Special Division The division
of NZX Discipline that exercises the powers and
functions of NZX in
relation to NZX or a related entity as a Listed Issuer.
STRUCTURE OF NZX AND ITS MARKETS
New Zealand Exchange Limited Registered exchange
NZSX Market Equity securities Largest companies
NZAX Market
Equity securities
Non-standard Issuers
Small or medium companies
NZDX Market
Debt securities
The Securities Commission does not review NZX’s commercial businesses
as part of the NZX oversight review.
EXECUTIVE SUMMARY
1. The Securities Commission has reviewed NZX’s
performance of its regulatory functions as a registered
exchange under
the Securities Markets Act 1988. This review, the third oversight review of
NZX conducted by the Commission,
focussed on NZX’s arrangements in the
2007 calendar year for discharging its obligations.
2. We report on NZX’s performance under the following headings:
• NZX’s frontline regulation
• Policies in respect of continuous disclosure
• The Special Division
• Matters arising from the review of the 2006 year
(i) Conflict management
(ii) NZX Discipline
(iii) The Special Division
(iv) The NZAX market
3. The Commission’s overall conclusion is that NZX is
satisfying its obligation to operate its markets in
accordance with its
conduct rules.
4. NZX’s performance as a registered exchange is good. The
Commission has made findings which are set out below.
5. The Commission has communicated its findings to NZX, NZX Discipline and the
Special Division.
6. NZX, NZX Discipline and the Special Division have agreed
to report to the Commission by 30 September 2008 in
regard to matters arising
from this review, and the Commission will publish such
responses.
Findings
NZX’s frontline regulation
7. The Commission is satisfied with the processes which NZX
uses in considering admission or approval of listed
issuers and market
participants to its markets. The Commission is satisfied that NZX is taking
appropriate action to minimise the
risk of non-compliance by listed issuers
and market participants in relation to their obligations under the Listing
Rules
and Participant Rules.
Policies in respect of continuous disclosure
8. The Commission is satisfied that NZX’s policies in
respect of its continuous disclosure rules are adequate
and that NZX
appropriately administers these policies, including its practices regarding
publication of market announcements. The
Commission believes that attachments
to announcements, particularly annual reports, should be disclosed on the NZX
website without
the need to make a request. NZX has publicly announced that new
features will be added to the website in the next several months.
Impact of expanding commercial activities on NZX’s regulatory
function
9. The Commission is concerned with the risk of potential conflicts
that might arise between its regulatory and commercial
functions as NZX expands
its commercial activities. While we are not aware of any such conflicts at this
time, we will continue
to review this issue in our future oversight review of
NZX.
The Special Division
10. The Commission believes that in one instance the Special Division
exceeded the scope of its role under the Listing Rules.
The Commission will
continue to review the Special Division’s exercise of its role in our
future oversight reviews.
Matters arising from the review of the 2006 year
Conflict management
11. NZX is aware that some parties, including the Commission, perceive
that NZX is subject to conflict between its commercial
and regulatory functions
and the risks that arise from such conflict. The Commission is satisfied that
NZX has taken satisfactory
practical measures to address this issue. We will
continue to review this issue in our future oversight review of NZX.
NZX Discipline
12. NZX Discipline has followed the Commission’s
recommendation that NZX Discipline should ensure that,
when determining
the procedure to apply to a proceeding before it, it treats all parties
evenly.
13. NZX Discipline has adopted a policy guideline on the naming of
market participants, which sets out the criteria for NZX
Discipline to use in
its determination of whether to publish the name of a market participant subject
to adjudication by NZX Discipline.
The Commission is satisfied that NZX
Discipline’s policy guideline has addressed the Commission’s
recommendation and
the Commission will continue to review the application of the
policy guideline in our future oversight reviews.
14. NZX Discipline and NZX are currently working collaboratively on the
amendments to the NZX Discipline Rules. The Commission
expects that the amended
rules will be implemented by December 2008.
15. NZX Discipline has communicated its resource needs to NZX. NZX is supportive of
NZX Discipline’s requirements.
16. The Commission is satisfied that the NZX website has the
appropriate information about NZX Discipline.
The Special Division
17. The Commission is satisfied that the NZX website has the
appropriate information about the Special Division.
The NZAX market
18. The Commission is satisfied with the changes made to the NZAX
market and the educational initiatives in regard to these
changes.
INTRODUCTION
19. This is the third oversight review of NZX’s performance of
its regulatory functions as a registered exchange under
the Securities Markets
Act 1988 and covers the 2007 calendar year.
20. The first review of NZX focussed on the activities of NZX more
generally. The report provided a general overview of the
business and
processes of NZX and its regulatory function. The subsequent reviews update
progress on issues arising from earlier
reviews and focus on specific
areas.
21. In particular, this review focussed on two specific areas: (i)
NZX’s policies in respect of its continuous disclosure
rules and its
administration of these policies, including its practices regarding
publication of market announcements; and
(ii) the impact of NZX’s
expanding commercial activities on its regulatory function. The Commission
considered in-depth
review and analysis would be valuable as to these two areas
in this review.
22. NZX has obligations under section 36G of the Securities Markets Act
1988 to secure compliance with its Listing and Business
Rules, and to perform
any obligations that lie on NZX under those rules.
23. The Commission has statutory functions to review practices relating
to securities and activities on securities markets,
and to comment on these. In
relation to NZX, performance of these functions requires the Commission to keep
under review and comment
on NZX’s performance of its obligations as a
registered exchange.
24. The Terms of Reference for the Commission’s review,
the scope of and the background to the review
and the process that
we followed, are set out in the Appendix to this report.
25. The report contains five sections with the following headings:
• NZX’s frontline regulation
• Policies in respect of continuous disclosure
• The Special Division
• Matters arising from the review of the 2006 year
(i) Conflict management
(ii) NZX Discipline
(iii) The Special Division
(iv) The NZAX market
NZX’S FRONTLINE REGULATION
26. Although NZX does not undertake active supervision of the Listing Rules, NZX
endeavours to minimize the risk of non-compliance by issuers.
27. NZX also endeavours to minimize the risk of non-compliance by participants with the
Participant Rules.
28. NZX seeks to minimize these risks of non-compliance through
providing issuer relations updates, guidance notes
on compliance trends,
compliance briefings and on- site inspection reports. NZX also communicates
regulatory guidance through the
Securities Industry Association and the Listed
Companies Association.
29. NZX continues its practice of giving public presentations
to potential issuers to promote capital markets. NZX
addresses potential
issuers about the benefits of listing created by the regulatory regime.
30. NZX grants waivers and makes rulings which also minimize
the risk of non- compliance with the Listing Rules.
Waivers and rulings
recognise that the Listing Rules cannot contemplate every commercial
arrangement.
31. To ensure that its staff effectively undertakes market supervision,
NZX provides staff training on law changes and internal
processes.
Market Supervision Changes
32. The Commission notes several changes to NZX’s market supervision
processes.
33. In 2006 NZX moved from annual inspections of Market Participants to
a risk-based approach to participant supervision. In
2007 NZX further refined
its procedures.
34. This risk-based approach involves NZX evaluating each Market
Participant’s compliance with the Rules and making
a risk assessment.
This assessment includes consideration of governance matters, financial
performance, activities, infrastructure
and compliance performance of the firm.
NZX uses the assessment to determine the risk of a firm’s non-compliance
with the
Rules, so that NZX can establish the appropriate frequency for
inspecting the firm.
35. This risk-based approach enables NZX to allocate its resources in
areas where it is most required in that firms with good
compliance records will
not undergo automatic annual on-site inspections, while firms at high risk of
compliance failure would be
more closely supervised. This process will not
fetter NZX’s ability to conduct regulatory visits to participants as NZX
deems
appropriate. This risk-based regime accords with international standards
of supervision.
36. The Commission will review the effectiveness of the risk-based
approach in our future oversight review of NZX.
37. The Commission notes that in 2006, NZX Participant Rule 17.10 was
amended to include self-reporting of breaches by participants
to NZX. NZX found
no increase in the number of reported breaches during 2006. However, NZX has
found that this obligation to self-report
breaches has increased the number of
matters brought to NZX’s attention during 2007.
38. During 2007, NZX found that some companies which were back-door or
reverse listed experienced financial and compliance difficulties.
Thus, NZX
undertook to review its policies on back-door and reverse listings. A back-door
listing involves a listed company with
little or no active business, a trading
shell, which acquires a private company which seeks to become listed. A
reverse listing
involves a shell company that lists on the market with the aim
of identifying a business to acquire. These listing vehicles provide
a means for
privately-owned companies to list without the need to meet full listing
disclosure requirements and can be less expensive
than conventional
listings.
39. NZX has adopted and implemented a policy on back-door and reverse
listings which seeks to improve the processes by requiring
(i) the production of
a profile for the post- transaction entity, (ii) director certifications in
respect of the information in the
profile and to certify that all material
information has been disclosed and (iii) a change in fees to align them with
those payable
in respect of a conventional listing.
40. During 2007 NZX employed a new trading platform which has more
flexibility in application to a wider range of trading products
than did the
previous platform. NZX has successfully implemented this new system.
41. For the reasons stated above, the Commission is satisfied with (i)
the processes which NZX uses in considering admission
or approval of listed
issuers and market participants to its markets and (ii) that NZX is taking
appropriate action to minimise
the risk of non-compliance by listed issuers and market participants in
relation to their obligations under the Listing Rules and
Participant
Rules.
POLICIES IN RESPECT OF CONTINUOUS DISCLOSURE
42. The Securities Markets Act 1988 requires public issuers to
disclose material information to the market. Accordingly,
NZX as a registered
exchange is obliged to have rules for its listed issuers to meet this
obligation. The NZX Listing Rules outline
an issuer’s obligation to
provide timely disclosure of material information that is not generally
available to the market.
NZX enforces these Rules by investigating suspected
rule breaches and exercising its remedies against issuers who fail to comply
with the Rules.
Education and Compliance
43. NZX has taken a number of measures to improve the timing and
quality of disclosures made by its listed issuers. NZX has
taken measures
targeted (i) to the market as a whole, (ii) to a particular sector of listed
issuers and (iii) to particular issuers.
44. Through media initiatives to the market, NZX has encouraged issuers
to comply with the continuous disclosure regime and
has emphasized the benefits
of being subject to such a regime.
45. NZX educates issuers at the time of their listing on the importance
of the continuous disclosure regime by having new issuers
meet with members of
the NZX staff who deal with issuer disclosure. During these meetings issuers
are introduced to the MAP system
and are given educational disclosure materials
and documents. NZX also regularly contacts the issuers in advance of the due
date
for filing periodic disclosures to ensure issuer compliance.
46. In addition to its overall educational initiatives, NZX responded
to external market events. In response to the failure
of a number of finance
companies, NZX wrote in August 2007 to listed finance companies or listed
parents of finance company subsidiaries,
to confirm that these issuers were
complying with their continuous disclosure obligations. NZX wrote again in
April 2008 to such
companies to confirm that these issuers were complying with
their continuous disclosure obligations, to request operating metrics
to ensure
that the market was fully informed, and to provide a rationale where a company
considered those metrics irrelevant.
47. Upon receipt of the issuer responses, NZX made market announcements
detailing these responses and noted that the inquiries
and responses were
opportunities for the listed issuers to demonstrate transparency and help
restore investor confidence in those
sectors. NZX has advised that it will
engage in on-going discussion with the listed finance companies in order to
ensure that the
market continues to be fully informed.
48. NZX focuses on compliance by particular issuers by reviewing the
security price movements ahead of any material disclosure
by an issuer and the
circumstances of material information which may have entered the market before
release by the issuer.
Investigations and Enforcement
49. The Commission is satisfied that NZX has a fair, consistent and
effective approach in handling continuous disclosure
matters from
investigation through to resolution. There are dedicated NZX personnel
who initially identify continuous
disclosure issues, conduct preliminary
investigations and then make referrals to the team which ultimately pursues the
matters with
the issuers.
50. The NZX teams involved conduct investigations, impose
deadlines for issuer responses, and decide on resolutions
based upon a
case-by-case assessment of each individual matter. The various teams ultimately
report to the same management.
Information Access
51. In assessing NZX’s disclosure practices, the Commission
also reviewed the availability of market information
disseminated by NZX on
its website and through its various other subscriber services.
52. In addition to providing securities quotations, market statistics,
volume information, end-of-day indices data and corporate
information on its
website free of charge, NZX provides real-time headlines of market announcements
made by issuers, third parties
and NZX and, on a twenty-minute delay, price
information and the full text of market announcements. While price information
is
actually not required to be disclosed under the securities laws or the NZX
Listing Rules, we focussed our review on the accessibility
of company
announcements.
53. Announcement history is available and searchable on the website.
Very often, there are attachments to these market announcements
which can
include the actual text of the market announcement provided by the issuer and
supplemental material. For example with
annual reports, the financial
statements are provided as an attachment. These attachments are not readily
available on the
website, however, they are available on request from NZX
free of charge. Users can email their request for an attachment to
NZX staff,
who will provide the attachment by email immediately.
54. NZX offers market information through various services for a fee.
NZX has a range of customers which include brokers, analysts,
financial data
vendors, fund managers, law firms, media and academics.
55. NZX provides real-time price information and announcements to its fee
paying subscribers.
56. NZX offers an information service which includes a function for
searching corporate announcements. This service also provides
the announcement
attachments.
57. As stated above, price information is not required to be disclosed
under the securities laws or the NZX Listing Rules.
We note that the
significant difference between the information that is available free of charge
on the website and the information
purchased by fee paying subscribers is that
subscribers can purchase real-time price information and company announcements
as well
as price depth.
58. While we recognise that commercially NZX derives revenue from its fee
based information services, we review the availability
of market information on
NZX’s website as part of our review of NZX’s market disclosure
obligations.
59. Globally, there is considerable debate among stock exchanges as to
the type of information and data which should be available
free of charge to the
public via the exchange websites and what information should be offered for a
fee.
60. There is a view that to establish a fair and transparent securities
market, all investors, whether retail, professional
or institutional, should
have equal access to market information in order to make informed investment
decisions. One way to achieve
this result would be to eliminate the disparity
in the availability of market information by providing real-time company
announcements
on the website.
61. There is an opposing argument that retail investors obtain their
market information differently to professional or institutional
investors, such
that retail investors seek advice from their professional brokers. Therefore,
the public website available to retail
investors would not have to provide the
same market information as fee based subscriber services, which are widely used
by professional
and institutional investors.
62. The Commission notes that among stock exchanges throughout the
world there is a mix of availability between real-time and
delayed company
announcements on websites. The Commission also notes that a number of major
stock exchanges throughout the world
offer delayed price information on their
websites and that some exchanges charge fees for information access as listing
fees to the
issuers, rather than to subscribers of the information service. The
Commission does not consider that it is inappropriate for NZX
to charge fees for
more timely access to information.
63. The Commission holds the view that the current process which
requires the website user to make a request of NZX to obtain
attachments to
announcements, creates an unnecessary burden on the user. In order to gain
the most comprehensive understanding
of a company announcement, a user should
have access to the whole of the announcement which includes any attachments.
Thus, the
Commission believes that attachments to announcements, particularly
annual reports, should be disclosed on the NZX website without
the need to make
a request.
64. NZX has publicly announced that new features will be added to the
website in the next several months.
65. The Commission notes that on 14 February 2008 NZX’s website
experienced outages at a time of extreme market volatility
in international
markets. The Commission is satisfied that NZX has undertaken changes to its
website which have increased the website
capacity to handle even such abnormally
high internet traffic.
66. The Commission is satisfied that NZX has robust procedures for
receiving issuer information and processing this information
for market
announcement within a rigorous deadline. These procedures involve dedicated
personnel who receive information from issuers,
determine if that information is
complete, identify the type of information to be announced, determine whether a
trading halt for
the specific
security involved is warranted, develop a descriptive announcement headline
and prepare the information for release.
IMPACT OF EXPANDING COMMERCIAL ACTIVITIES ON NZX’S REGULATORY
FUNCTION
67. The Commission notes that NZX has expanded its commercial
activities to include various information and data services.
NZX is seeking
approval in Australia to operate an ECN (electronic communication network) which
operates as a trade- matching system.
While we do not review NZX’s
commercial activities, we are concerned with the risk of potential conflicts
that might arise
between its regulatory and commercial functions as NZX expands
its commercial activities.
68. While we are not aware of any such conflicts at this time, we will
continue to review this issue in our future oversight
review of NZX.
THE SPECIAL DIVISION
69. The Special Division is an independent body established under the
NZX Discipline Rules which regulates NZX as a listed issuer
in the same way that
NZX regulates other listed issuers.
70. Under the Listing Rules, issuers must seek the approval of NZX for
an issuer’s notice of shareholder meetings. In
this approval process,
NZX determines whether the notice of meeting sufficiently discloses to
shareholders the issues to be addressed
at the meeting.
71. For matters involving NZX as an issuer, the Special Division has
the role which NZX has with other issuers. Thus, for
an NZX notice of meeting,
NZX must seek the approval of the Special Division.
72. One issue which arose in the course of this review was that the
Special Division, in the context of an NZX notice of special
meeting application
regarding the CEO share scheme, reviewed the merits of the CEO scheme rather
than limiting its review to whether
there was sufficient disclosure regarding
the CEO scheme for shareholder consideration.
73. The role of the Special Division in granting approval for this
notice of special meeting application was to determine whether
the scheme was
sufficiently disclosed in the notice and the accompanying appraisal report to
enable shareholders to understand the
effects of the scheme. While it was
appropriate for the Special Division to ask NZX questions about the scheme to
determine if it
was sufficiently disclosed, the Special Division’s review
appeared to reflect a merit based assessment of the elements of the
scheme.
74. The Commission is of the view that had the Special Division merely
required the basis of the remuneration to be explained
clearly to shareholders
and had examined the details of the basis of the remuneration for that purpose,
the Special Division would
have remained within its remit. However, it
went further. Based on
correspondence the Commission has seen, it is the Commission’s view that the
Special Division made an assessment of the merits of the scheme.
75. A merit based review is not within the remit of the
Special Division. The Commission believes that in this
instance the Special
Division exceeded the scope of its role under the Listing Rules.
76. The Commission will continue to review the Special Division’s
exercise of its role in our future oversight reviews.
MATTERS ARISING FROM THE REVIEW OF THE 2006 YEAR
77. The Commission raised a number of matters (as set out below in bold
type) in the course of the 2006 review. We report on
the progress on these
matters made by NZX, NZX Discipline and the Special Division.
Conflict management
• NZX should ensure that the Board is provided with relevant and
up-to-date information on conflict management in relation to for-profit
exchanges and that this information is subject to regular discussion at Board
meetings.
• NZX should ensure that the practical measures used to ensure the
practical separation between its commercial and regulatory functions
have
reference to the information in relation to for-profit exchanges the Board
receives on conflict management.
78. NZX is aware that some parties, including the Commission, perceive
that NZX is subject to conflict between its commercial
and regulatory functions
and the risks that arise from such conflict. The Commission is satisfied that
NZX has taken satisfactory
practical measures to address this issue. We will
continue to review this issue in our future oversight review of NZX.
79. NZX believes that it is fundamental to its commercial success that
it maintains a sound regulatory scheme to ensure market
integrity. The NZX
Board has adopted a conflict management policy and procedure which has been
implemented. The overall principles
are that, for commercial success, the
market must operate in a fair way; the perception of conflict must be managed;
commercial issues
must not be allowed to influence supervisory decision making;
supervisory activity and information must be quarantined from commercial
activity; supervision is conducted by a separate regulatory division which is
subject to a personal conflicts policy; the Board receives
regulatory briefings
from the Head of Market Supervision; and that supervisory activity must
be consistent and transparent.
The policy includes procedures for identifying
the specific types of conflict and managing the balance between the regulatory
and
commercial interests.
NZX Discipline
• NZX Discipline should ensure that, when determining the
procedure to apply to a proceeding before it, it treats all parties
evenly.
80. This recommendation has been followed.
• NZX Discipline should be seen to be transparent in exercising
its discretion whether to publish decisions which identify Market Participants
who have breached the Participant Rules. Where a Market Participant’s
details are not published, NZX Discipline should disclose
its reasons for
withholding this information.
81. NZX Discipline has adopted a policy guideline on the naming of
market participants, which sets out the criteria for NZX
Discipline to use in
its determination of whether to publish the name of a market participant subject
to adjudication by NZX Discipline.
Since the policy implementation in September
2007, there have been only two completed matters involving market participants,
and
in one of those matters NZX Discipline exercised its discretion to publish
the name of the market participant. The Commission is
satisfied that NZX
Discipline’s policy guideline has addressed the Commission’s
recommendation and the Commission will
continue to review the application of the
policy guideline in our future oversight reviews.
• NZX and NZX Discipline should review the NZX Discipline Rules in
order to give NZX Discipline input into its own Rules, and amendments
arising
from this review should be included in the amendments which are presently being
considered by NZX Discipline.
82. NZX Discipline and NZX are currently working collaboratively on the
amendments to the Discipline Rules. The Commission
expects that the amended
rules will be implemented by December 2008.
• NZX Discipline should review its resource requirements and
structure, and communicate its needs to NZX, so that delays in dealing
with
non-urgent work are minimised or removed.
83. NZX Discipline has reviewed its resource requirements for
administrative support and structure and has communicated its
needs to NZX.
NZX is supportive of NZX Discipline’s requirements.
• NZX should provide more information about the role, membership
and mandate of NZX Discipline on its website. In particular, the contact
details
for NZX Discipline should be included on the NZX website.
84. The Commission is satisfied that the NZX website has the
appropriate information about NZX Discipline.
The Special Division
• NZX should increase the amount of information it provides about
the Special Division and make it easier to find. In particular, the
contact
details for the Special Division should be included on the
‘Contacts’ and ‘Supervision of NZX’ pages
of the NZX
website.
85. The Commission is satisfied that the NZX website has the
appropriate information about the Special Division.
The NZAX Market
86. Following a review of the NZAX market in 2006, several changes to
this market were implemented in late 2006 in relation
to tick size (the
increment by which a security price is increased or decreased) and trading
hours.
87. A further change was implemented on 19 March 2007 which was the
removal of the anonymous call auction. The anonymous call
auction allowed
participants to submit bids anonymously prior to the opening of the market.
However, this function was not being
used. Also in March 2007, the NZAX
Listing Rules were changed to align more closely with the structure of the NZSX
Listing Rules.
88. As a result of these changes, NZX updated the staff materials,
trained the staff on the changes to the NZAX rules and updated
its website to
reflect the rule changes.
89. The Commission is satisfied with the changes made to the NZAX
market and the educational initiatives in regard to these
changes.
CONCLUSION
90. The Commission’s overall conclusion is that NZX is
satisfying its obligation to operate its markets in
accordance with its
Conduct Rules.
91. The Commission expects that future reviews of NZX will follow a
similar format to the 2007 oversight review, in that they
will focus on
particular issues regarding NZX’s performance of its statutory functions.
The Commission believes that annual
reviews of NZX are valuable because they
allow the Commission and the market to receive information about NZX’s
performance
on a regular basis.
92. The Commission’s findings recorded as a result of
this review, the actions and responses to these findings
by NZX, NZX
Discipline and the Special Division, and relevant intervening matters, will be
reviewed next year.
APPENDIX Scope of review
1. Section 36G of the Securities Markets Act 1988 says that NZX must
operate each of its securities markets in accordance
with approved rules for
that market. The Conduct Rules include Listing Rules, and Business Rules that
govern the conduct of persons
authorised to undertake trading activities on the
market.
2. NZX’s obligations under section 36G are to secure compliance
with its Listing and Business Rules, and to perform
any obligations that lie on
NZX under those rules. To do this, NZX has established a Market Supervision
Group with responsibilities
for discharging NZX’s regulatory function. The
NZX Discipline Rules establish a dedicated body, NZX Discipline, to determine
questions of non-compliance with the Listing or Business Rules. Decisions can be
appealed to the Appeal Panel. An independent body,
the Special Division of NZX
Discipline, exercises the powers and functions of NZX in relation to NZX as a
Listed Issuer and its related
entities.
3. The Commission has statutory functions to review practices
relating to securities and activities on securities markets,
and to comment on
these. In relation to NZX, performance of these functions requires the
Commission to keep under review and comment
on NZX’s obligations as a
registered exchange. The oversight review was conducted under sections 10(b),
10(c) and 10(caa) of
the Securities Act 1978.
4. The Commission’s Terms of Reference for the review were:
The Securities Commission (“the Commission”) is conducting an
oversight review of New Zealand Exchange Limited (“NZX”)
under
sections 10(b), 10(c) and 10(caa) of the Securities Act 1978. The purpose is to
review NZX’s performance of its co-regulatory
function, in particular its
obligations under section 36G of the Securities Markets Act 1988 and, in respect
of futures and options
dealers, NZX’s regulation of dealers under its
Futures and Options Participant Rules.
In particular, the Commission will review the following aspect of
NZX’s activities:
(a) NZX’s policies in respect of its continuous disclosure rules and
its administration of these, including its practices regarding
publication of
market announcements.
The Commission’s review will consider any new developments, and any
issues arising in the course of the review, in relation
to the following
areas:
(a) the management and operation of the NZAX market, including
resources, practices and procedures, and the ongoing maintenance
of that
market;
(b) the processes undertaken by NZX in considering the admission
or approval of listed issuers and market participants to
its markets, and any
particular issues which arise as a result of those processes; and
(c) NZX’s role in minimising the risk of non-compliance by
listed issuers and market participants in relation to their
obligations under
the Listing Rules and Participant Rules.
The review may also consider any issues arising in the course of the
review in respect of the following areas:
(a) supervision of market participants and enforcement of the
Participant Rules;
(b) supervision of listed issuers and enforcement of the Listing
Rules;
(c) allocation of human, technological and financial resources as it
affects performance of the regulatory functions of NZX;
(d) internal practices and procedures associated with
investigations, price enquiries, complaints- handling and referrals;
(e) discipline practices, procedures and resources;
(f) arrangements for market infrastructure development and maintenance; (g) Special Division practices, procedures and resources;
(h) corporate governance arrangements, including board
composition, policy setting, crisis response and oversight
of executive
management, with reference to regulatory standards relating to governance of
demutualised exchanges under IOSCO and
other international principles;
and
(i) the impact, if any, of NZX’s expanding commercial
activities on its regulatory function.
The Commission’s review will consider the progress made by NZX (up
to the date of the Commission’s report on this oversight
review) towards
implementing the Commission’s recommendations set out in its report dated
28 June 2007.
AND accordingly, will obtain, consider and
utilise information for the purposes of any recommendation, report
or
comment the Commission may decide to make under sections 10(b), 10(c) or
10(caa) of the Securities Act 1978 in relation to the above
matters.
SUBJECT to the Commission’s discretion to amend these
Terms of Reference as it may consider fit.
December 2007
Background to review
5. In 2002 the Securities Markets and Institutions Bill
created a co-regulatory regime for registered exchanges. NZX is the only
registered exchange in New Zealand. Under the co-regulatory
regime it is
intended that the Commission monitors the performance of NZX’s statutory
responsibilities.
6. In 2003 the International Monetary Fund conducted a Financial
Sector Assessment Programme (FSAP) review of New Zealand.
The FSAP measured New
Zealand’s framework of securities regulation and its operation against the
Objectives and Principles of Securities Regulation published by the
International Organization of Securities Commissions. The IOSCO Principles
include principles for self-regulatory
organisations.
7. One of the recommendations in the FSAP report was that the
Commission develop a formalised oversight plan for regulated
exchanges,
providing for risk assessment criteria and periodic inspections that take into
account best practices for self- regulatory
organisations and exchanges. It
recommended that there should be public disclosure summarising the objectives of
the oversight plan
and of the key findings of such reviews. The Government
response noted that the Commission had decided to develop a formal oversight
plan for regulated exchanges and had informed NZX.
8. Demutualisation and listing of stock exchanges has been an
emerging phenomenon overseas in the past decade. In all cases
we have seen,
regulatory structures have been put in place accompanying such moves, reflecting
the core importance of stock exchanges
to countries’ capital markets and
broader economies. In New Zealand these regulatory structures include an
ownership cap,
regulatory review of exchange rules, and oversight by the
Commission. Different approaches have been taken in various jurisdictions
overseas. The approach taken in New Zealand was settled after consideration of
international models existing at the time, and the
particular circumstances of
the New Zealand markets. It has not been a part of this review to reconsider
these arrangements.
9. However, as encouraged by the FSAP review, we have looked to the
emerging high- level standards in overseas jurisdictions
to gain an insight into
best practices for exchanges. We have taken into account the report of the FSAP
inspectors, the IOSCO Objectives and Principles of Securities Regulation,
and the methodology used for assessing compliance with these standards, in
particular the principles applying to self-regulatory
organisations.
10. The Commission has also looked to the legal obligations of
exchanges in similar jurisdictions to gain an understanding of
the expectations
that overseas investors in particular are likely to have for the conduct of a
registered exchange. While there
are differences in the approaches taken by
each jurisdiction, there are a number of standards that can be taken from an
overall assessment
of the IOSCO Principles and overseas law and practice. These
suggest that a stock exchange should:
(a) meet and maintain adequate standards of integrity and fitness to operate a market;
(b) develop rules for the conduct of listed issuers and market participants; (c) develop and operate fair procedures for the enforcement of its rules; (d) conduct a fair, orderly, informed, and efficient market;
(e) maintain effective trading, clearing, and settlement systems;
(f) have adequate capacity to carry out its regulatory functions and enforce its rules; and
(g) have procedures in place to manage conflicts of interest.
11. Development of rules is addressed in New Zealand under the
statutory approval and disallowance process for conduct rules.
The IOSCO
Principles also address competition issues, which are outside the remit of the
Securities Commission. The remaining
matters have been addressed in this
review.
12. The oversight review conducted this year is the third oversight review of NZX
conducted by the Commission. The review focussed on the 2007 calendar
year.
Process
13. The Commission requested information from NZX under section
36ZK of the Securities Markets Act. Section 36ZK says
that a registered
exchange must give the Commission (or any person authorised by the Commission)
information, assistance,
and access to the exchange’s facilities if the Commission reasonably
requests it to carry out its functions.
14. The Commission sent questionnaires to NZX, NZX Discipline
and the Special Division seeking information the Commission
considered
necessary to effectively evaluate NZX’s performance of its regulatory
functions. The questionnaires covered the
areas identified in the Terms of
Reference.
15. The Commission requested copies of any procedures manuals and
process documents that evidenced NZX’s policies and
procedures for each of
the areas covered by the questionnaires. Where written procedures and
policies were not available,
we requested written explanations and
information from NZX in response to each specific information
request.
16. NZX provided information in response to the questionnaires,
including procedures manuals and process documents where relevant.
Questions
relating to NZX Discipline and the Special Division were answered by the Chairs
of those bodies.
17. Commission staff selected and reviewed a sample of NZX’s
files across a range of regulatory activities.
18. Commission staff conducted interviews with NZX personnel and Board members.
Commission staff also interviewed the Chairman of NZX Discipline and
the Chairman of the Special Division. Twelve interviews
were conducted and the
interviews were recorded.
19. Confidentiality and privacy orders were in place throughout the review.
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