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New Zealand Securities Commission |
Last Updated: 17 November 2014
OVERSIGHT REVIEW OF NZX
1 January 2009 – 30 June
2010
SECURITIES COMMISSION
Level 8, Unisys House
56 The Terrace
PO Box 1179
WELLINGTON
Ph (04) 472 9830
Fax (04) 472 8076
April 2011
ISBN 978-0-478-36523-8 (print) ISBN 978-0-478-36524-5 (online)
TABLE OF CONTENTS
STRUCTURE OF NZX AND ITS SECURITIES MARKETS
........................................... 4
EXECUTIVE SUMMARY
.....................................................................................................
5
INTRODUCTION....................................................................................................................
7
MATTERS ARISING FROM THE REVIEW OF THE 2008 YEAR
................................ 8
MARKET CONDITIONS AND NZX ACTIVITIES OVER THE REVIEW PERIOD .
10
CO-REGULATION
...............................................................................................................
12
IOSCO PRINCIPLES
...........................................................................................................
13
MATTERS ARISING FROM THE REVIEW
PERIOD................................................... 14
LEGISLATIVE DEVELOPMENTS AND FUTURE OVERSIGHT REVIEWS ...........
29
CONCLUSION
......................................................................................................................
30
APPENDIX 1: GLOSSARY OF KEY TERMS AND ABBREVIATIONS ......................
33
APPENDIX 2: SCOPE OF REVIEW
..................................................................................
35
APPENDIX 3: PROCESS
.....................................................................................................
36
STRUCTURE OF NZX AND ITS SECURITIES
MARKETS
NZX Limited
Registered exchange
NZSX Market Equity securities Largest companies
NZAX Market
Equity securities
Non-standard Issuers
Small or medium companies
NZDX Market
Debt securities
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 fifth oversight
review of NZX to be conducted by
the Commission, focussed on NZX’s
arrangements for discharging its obligations (as specified in paragraph 12)
during the
period from 1 January 2009 to 30 June 2010 and developments, relating
to matters within the scope of the review, up to the date of
this
report.
2. Future oversight reviews of NZX’s regulatory performance
will be undertaken by the Commission’s successor
body, the FMA, pursuant
to the Securities Markets Amendment Act 2011 which will come into force on 1 May
2011.
3. We report on NZX’s regulatory performance in regard to the
following:
• supervision of Market Participants and enforcement of the Participant
Rules;
• supervision of Issuers and enforcement of the Listing Rules;
• internal practices and procedures associated with investigations,
price enquiries, complaints-handling and referrals;
• discipline practices, procedures and resources;
• arrangements for market infrastructure development and
maintenance;
• Special Division practices, procedures and resources;
• 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
• the impact, if any, of NZX’s expanding commercial activities
on its regulatory function.
4. The Commission’s overall conclusion is that NZX is
satisfying its obligations to operate its markets in accordance
with its Conduct
Rules.
5. The Commission findings are set out below.
Matters arising from the 2008 oversight review
Matters arising from the Review Period
8. The Commission makes the following general recommendations:
9. The Commission recommends that NZX undertake the following specific
actions:
• NZX carries out scheduled onsite inspections in accordance with its methodology.
The Commission notes that NZX is already underway with this.
2008 for consideration during 2011.
INTRODUCTION
10. This is the Commission’s fifth oversight review of NZX’s performance of its regulatory functions as a registered exchange under the Securities Markets Act 1988. It covers the period from1 January 2009 to 30 June 2010 and general developments, within the scope of the review, since the end of the Review Period. Future oversight reviews will be carried out by the Commission’s successor, the FMA (see paragraphs
115 to 118).
11. This review considered NZX’s performance in discharging its
regulatory functions by reference to the matters set
out in paragraph 3.
12. NZX is obliged, as a registered exchange under section 36G of the
Securities Markets Act 1988, to operate each of its
markets in accordance with
its Listing Rules and Participant Rules.
13. The Commission has statutory functions to review practices
relating to securities and activities on securities markets,
and to comment on
them. This requires the Commission to keep under review and comment on
NZX’s performance of its obligations
as a registered exchange.
14. NZX was asked to provide the Commission with a self-assessment
report in relation to its performance over the Review Period.
This formed the
basis of the review. The Commission undertook further examination of particular
areas seeking additional information
from NZX, interviewing Board members,
senior NZX staff members and the Chairmen of each of the NZMDT and the Special
Division and
reviewing files of NZX. Further information in relation to the
methodology is provided in Appendix 3.
15. Defined terms, the background to the review and the process that
was followed, are set out in the Appendices to this report.
16. Findings and observations are divided into the following sections:
• Matters arising from the review of the 2008 year
• Market conditions and NZX activities over the Review Period
• Co-regulation
• IOSCO Principles
• Matters arising from the Review Period
• Legislative developments and future oversight
reviews
MATTERS ARISING FROM THE REVIEW OF THE 2008 YEAR
|
Recommendations /Actions
|
NZX response
|
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Relationship of NZX’s expanding commercial activities to its
regulatory function
• As the NZX expands its commercial activities, the Commission
has concerns that there is a risk of potential
conflicts arising
between NZX’s commercial and regulatory functions.
|
Noted. NZX has appropriately managed conflicts of interest in
accordance with its Conflicts Management Policy dated January
2008.
NZX considers that dual delegation of the supervisory function from the
NZX Board to the Chief Executive Officer and the Head of Market
Supervision has
been effective during the Review Period and has been competently discharged with
no evidence that commercial concerns
have affected the regulatory exercise
of that delegation.
|
|
NZ Markets Disciplinary Tribunal
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NZX is in regular dialogue with the Chairman of NZMDT. NZX
considers that communications between NZX and NZMDT are robust and
effective.
Both NZX and NZMDT agree that a protocol is not necessary and in fact
could compromise the functions of both NZX and NZMDT. NZX and
NZMDT have open
dialogue about referrals being made in a manner that does not compromise the
operations of NZX or NZMDT, which preserves
NZX’s lawful discretions and
NZMDT’s independence.
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NZX’s risk-based approach to supervision
• Supervisory function to be resourced appropriately so that
feedback can be provided to market participants in a timely
way.
|
NZX firmly believes that there was adequate resourcing within the Market
Supervision Group during the Review Period to enable NZX
to carry out its
obligations in relation to the Conduct Rules. This included provision of
feedback to Market Participants in a timely
manner. NZX adhered to agreed
timetables and protocols in respect of its Market Participants, including
delivery of inspection reports.
|
Responsibility for the supervisory function
• The Commission has concerns relating to the dual delegation of responsibility for the supervisory function at NZX and the risk that this will create conflicts of interest that have the potential to compromise regulatory effectiveness.
NZX considers that dual delegation of the supervisory function from the
NZX Board to the Chief Executive Officer and the Head of Market
Supervision has
been effective during the Review Period and has been competently discharged with
no evidence that commercial concerns
have affected the regulatory exercise
of that delegation.
MARKET CONDITIONS AND NZX ACTIVITIES OVER THE REVIEW
PERIOD
Equities
18. The market capitalisation of shares listed on the NZSX as at 30
June 2010 was $49.6 billion. This was an increase of 2.5%
on 2009’s figure
of $48.4 billion. The smaller NZAX index decreased from $600 million to $390
million over the same period,
a fall of 35%. NZX advises that market activity
during the Review Period was consistent with global trends.
19. As at 30 June 2010, 152 Issuers were listed on the NZSX, compared with 156 at 30
June 2009. The NZAX had 27 Issuers at 30 June 2010, compared with 31 a year
earlier.
20. The total new equity raised on the NZSX and NZAX during the year
to 30 June 2010 was $2.85 billion, compared with $2.34
billion for the 2008/9
year.
Figure 1. NZSX market capitalisation
Source: NZX
Debt
21. The value of the NZDX at 30 June 2010 was $15.4 billion, a 4.4%
increase from the same time last year.
22. Fifty-nine Issuers were listed on the NZDX at 30 June 2010, compared with 61 at 30
June 2009.
23. Total new debt raised on the NZDX during the year to 30 June 2010
was $1.66 billion, compared with $3.27 billion for the
previous
year.
Figure 2. NZDX market capitalisation
Source: NZX
CO-REGULATION
24. NZX is the only registered exchange in New Zealand. Under the co-regulatory regime set out in the Securities Markets Act 1988, the Commission monitors the performance of NZX’s statutory responsibilities as described previously in paragraph
12.
25. As co-regulator, NZX is statutorily obliged to provide certain
information requested by the Commission and to refer matters
primarily relating
to poor market conduct to the Commission. In observing these responsibilities,
over the Review Period, NZX:
• responded to 40 requests from the Commission in respect of trading data (27 in
2009 and 13 in 2010); and
• referred 45 matters to the Commission pursuant to sections 36ZD
and 36ZL of the Securities Markets Act 1988. (2009 year:
23 referrals, including
11 share price enquiries, two insider trading breaches, three market
manipulation breaches, one misleading
information breach, one directors and
officers disclosure breach, one substantial security holder breach and four
continuous disclosure
breaches. 2010 year: 22 referrals, comprising nine
share price enquiries, one insider trading breach, one misleading
information
breach, three market manipulation breaches, six substantial security
holder breaches, and two continuous disclosure breaches).
26. NZX and the Commission are party to a Memorandum of Understanding
(MOU) on their respective obligations and responsibilities
to each other. NZX
has expressed concern that since August 2009 the two have failed to
observe the MOU’s requirement
to hold quarterly operational meetings.
Members of the NZX Board who were asked for comment in relation to the
operational relationship
between NZX and the Commission thought it had improved
since the Review Period. It was suggested that a more principles-based MOU,
calling for meetings as required, might be beneficial.
27. The Commission agrees that, overall, the relationship
between the parties has improved. It notes that as the
MOU is dated February
2003, it is timely to revisit the terms, especially, in the light of forthcoming
legislative changes.
IOSCO PRINCIPLES
28. In conducting the oversight review the Commission has been guided
by international best practice and in particular the
IOSCO Objectives and
Principles of Securities Regulation (October 2003). While there are
differences in each jurisdiction’s
approach, a number of standards can be
taken from an overall assessment of the IOSCO Principles and overseas law and
practice. These
suggest that a stock exchange should:
• develop rules for the conduct of listed issuers and market participants;
• develop and operate fair procedures for enforcing its rules;
• conduct a fair, orderly, informed and efficient market;
• maintain effective trading, clearing and settlement systems;
• have the capacity for carrying out its regulatory functions and enforcing its rules;
and
• have procedures for managing conflicts of interest.
29. In New Zealand, rules development is addressed under the
statutory approval and disallowance process for Conduct Rules
in the Securities
Markets Act 1988. The IOSCO Principles also address competition issues, which
are outside the remit of the Securities
Commission. Remaining matters are
addressed in this review.
MATTERS ARISING FROM THE REVIEW PERIOD Supervision of Participants and enforcement of the Participant Rules Risk-based supervision
30. In 2006, NZX moved from annual inspections of all Market
Participants to a risk- based approach to Participant supervision.
31. The Commission has been monitoring the effectiveness of the
risk-based approach in its oversight reviews of NZX since
the new method was
implemented. The Review Period commences in the third year of application of
the risk-based approach by NZX.
32. During the Review Period the processes undertaken by NZX in
applying the risk- based approach were reviewed and altered.
NZX redeveloped
its process for scheduling and conducting onsite inspections of Participants to
incorporate a new Capital and
Prudential Inspection and the risk profiles
of each Participant were updated and redesigned.
33. The Capital and Prudential Inspections are desk based inspections
which are carried out over a two week period. A Participant
is required to
provide information such as bank reconciliations, trading data, daily liquid
capital calculations and copies of breaches,
error and complaints logs for a
specified period following receipt of a request for such from NZX. The
Participant has five working
days to satisfy the request. NZX then commences a
desk based review of the material provided and issues the Participant with an
inspection
report within a further five working day period. Where breaches are
identified, Participants are given a timeframe within which
to comment on and
remedy the breach. The report also makes “good practice”
recommendations.
34. NZX advises that the Capital and Prudential Inspection is an additional surveillance measure to supplement the scheduled onsite inspections, the targeted “special” or spot onsite inspections that are carried out by NZX and the daily and monthly prudential capital monitoring that NZX undertakes of capital adequacy reporting required from Market Participants pursuant to the Participant Rules. NZX conducted 23 Capital and Prudential Inspections (inspecting all Participants) during the Review Period (19 in
2009 and four in 2010).
35. The Commission notes that, with the exception of three targeted spot onsite inspections and one oversight action undertaken by NZX, no scheduled onsite inspections were carried out by NZX during the period from 1 September 2009 to 3
October 2010. NZX advises that all inspections that were carried out were
completed in accordance with NZX protocols and timeframes.
NZX advises that
potential risk arising from this hiatus in scheduled onsite inspections was
managed by the implementation of the
Capital and Prudential Inspections (this
area being identified by NZX as the key area of risk for Participants in the
wake of the
GFC), by the receipt and assessment of information provided by
Market Participants wishing to be accredited to utilise the Clearing
and
Settlement System (including information that would have been gathered from the
Participant during an onsite inspection) and
by the
carrying out of three targeted spot inspections of Participants
where risk was identified and one intensive oversight process
in relation to
the Participant assessed by NZX to be the highest risk. NZX also submits that
as there have been no Participant failures
during the Review Period, nor since,
its method of managing the perceived risk arising from the lack of onsite
inspections was appropriate.
36. The Capital and Prudential Inspections, by definition, focus on
only one aspect of a Participant’s business. The
Commission supports
this programme as an additional component of NZX’s oversight of its
Participants during the Review Period
and beyond. However the Commission does
not consider that the desk-based prudential reviews are a full substitute for
more broad-based
onsite supervision and inspection. The Commission is concerned
that onsite inspections were not undertaken for a 13 month period
commencing
during the Review Period.
37. The Commission considers that onsite inspections are an
essential part of the methodology for NZX’s risk-based
approach to
supervision and the cessation of inspections during the period increased the
risk of non-compliance. The Commission
also notes that not all Participants
have been accredited as Clearing Participants which means that risk surveillance
carried out
by NZX in relation to those parties who are not Clearing
Participants was reduced during the Review Period. NZX advises that the
Participants not accredited as Clearing Participants were “Advising Only
Firms” which did not hold client funds or trade
on the market. NZX
categorises these types of Participant as lower risk than those that do hold
client funds or trade on the market.
38. In the Commission’s opinion resources should have been
maintained by NZX to enable scheduled onsite inspections
to be continued
alongside the Capital and Prudential Inspections and the accreditation process
that was undertaken in relation to
the Clearing and Settlement System during the
Review Period. The fact that there were no Participant failures during the
Review
Period does not mean that Participants did not breach the Participant
Rules. The success of the risk-based method of market surveillance
cannot be
assessed solely upon the failure, or not, of Participants during a period. To
do that would be to ignore non-compliance
with the Participant Rules that may
not result in the failure of a Participant but nonetheless may have an impact on
the integrity
of the market.
RECOMMENDED ACTION: NZX carries out scheduled onsite inspections in
accordance with its risk-based surveillance methodology. The
Commission notes
this is already underway.
39. NZX advise that the redesigned risk profiles were a continuing
response to the GFC and were undertaken to reweight the
perceived risk factors
for Participants. Higher risk weighting was given to financial vulnerability
and trading exposure to other
jurisdictions. The general risk categories remain
the same however the key identifiers of risk within each category is more
comprehensive.
40. Generally risk is broken down as follows (from highest
weighting to lowest weighting):
• Financial performance and liquid capital
• Size and structure of Participant
• Business type
• Complexity of business activities and operations
• Market environment
• Outcome of past inspections
41. NZX advises that its risk profiles are kept under review
and remain subject to amendments on a continuing
basis as further
Participant information becomes available and as new risks to Participants are
identified by NZX. NZX requests
updated information annually from
Participants. Information provided by Participants in relation to risk profiles
is tested via
onsite inspections.
42. Currently, following the launch of the Clearing and Settlement
System, NZX advises that it is reviewing the risk profiles
to update them with
new information and reweight the profiles to address a new category which
takes into account clearing
and settlement.
Participant Rules
43. The Participant Rules were reviewed by NZX during the
Review Period for amendments required as a result of
the launch of the
Clearing and Settlement System. The amendments became effective in August
2010.
44. During the Review Period, NZX considered the following matters
require review and possible amendment in relation to the
Participant Rules in
addition to those required for the Clearing and Settlement System:
from Participants for the Fidelity Guarantee Fund pursuant to the Participant
Rules) The Commission notes that the Clearing and Settlement
Rules do not
provide for compensation for parties other than Clearing Participants as the
Fidelity Guarantee Fund is intended to.
The Commission supports consultation
by NZX with stakeholders in relation to the ongoing availability and use of the
Fidelity Fund.
46. NZX advises, and the Commission concurs, that the proposed
amendments identified above were not able to be made to the
Participant Rules
during the Review Period due to the focus on processing amendments necessary for
the Clearing and Settlement System.
NZX advises that it will be considering
whether these proposed amendments should be implemented during 2011.
47. As a result of debt trading investigations during the Review
Period, NZX identified differing practices for reporting
crossings on the
NZDX and how margin and brokerage are reported via the trading system and on
a client’s contract note
in relation to trading on the NZDX. As a result
of these findings NZX advise that it is undertaking a review of these practices
in consultation with the SIA working group to establish whether the practices
are widespread or isolated incidents.
48. In late 2009 NZX conducted a review of Market Participants’
conduct in respect of IPOs. This arose from concerns
about IPOs in 2009 that
had either progressed but not been as successful as could reasonably have been
anticipated or did not proceed
at all. NZX had become concerned that
Participants were not acting in a manner which promoted participation in IPOs by
the market
and retail investors. As a result of consultation a guidance note
as to IPO good broking practice was prepared. Whilst drafted
in 2009 and
further refined in early 2010, the guidance note has not been introduced
formally to the market. NZX has advised the
Commission that it informed Market
Participants that this guidance may be introduced if practices do not improve.
NZX considers that
the best result is for Participants to engender changes
themselves in their practice without the “stick of additional
regulation”.
As there has only been one IPO in the New Zealand market
(completed in the first half of 2010) since development of the guidance
note,
NZX are still monitoring Participant practices.
49. The Commission agrees with NZX’s position in
relation to encouraging the development of good practices
where possible.
However, should further regulation be required, the Commission’s
preference would be for this to be achieved
through amendment to the Participant
Rules rather than by the publication of a guidance note. The Commission
understands that the
purpose of a guidance note is to clarify the purpose or
meaning of a rule, including the exercise of any discretion under the rule.
While the concept of “good broking practice” in the Participant
Rules is subject to broad interpretation, the Commission
does not believe it is
desirable for this to take the place of more transparent obligations where these
are needed. If further regulation
is required because the rules can be
interpreted in a manner that is not viewed as appropriate by NZX then the rules
should be amended.
50. Given the relatively low level of IPO activity the
Commission supports NZX’s continued monitoring of
practices.
Waivers and rulings
51. NZX advise that there were no changes to the method of processing
waiver and ruling applications during the Review Period.
NZX processed 22
waiver and ruling applications (18 in 2009 and four in 2010) in relation to
Market Participants during the Review
Period. Of these, NZX declined three
applications. This number of waivers is consistent with activity during 2008
during which
time 31 applications were processed with one being declined and one
being granted in part.
Complaints
52. During the Review Period, NZX processed, and where necessary
investigated, 19 complaints regarding the conduct of Market
Participants (13 in
2009 and six in 2010). Of these, one complaint was referred to the Commission
and one was referred to NZMDT.
NZX advises that during the Review Period
response times for some complaints were outside the target set by NZX due to the
need
to allocate resources to more urgent projects.
Breaches of the Participant Rules
53. During the Review Period, NZX identified 270 breaches of the Participant Rules.
NZX advised that identification of breaches is via Participant
self-reporting, complaints, NZX market surveillance and information
obtained in
the course of inspections. Serious breaches of the Participant Rules are
referred to NZMDT for disciplinary action.
Supervision of Issuers and enforcement of the Listing Rules
Listing Rules
54. In the previous Review Period a new policy on back-door and
reverse listings was adopted by NZX and implemented via
a guidance note
with the objective of improving 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. A back- door
listing takes place when a listed company, with little or no active business (a
trading shell), acquires an unlisted company which
is seeking to become listed.
A reverse listing involves a shell company that lists on the market with the aim
of identifying a business
to acquire. NZX advises that the required outcome has
been achieved, that effected parties receive a better standard of documentation
than was previously the case and that sufficient information is provided to the
market in respect of target companies and post-transaction
issuers.
55. In April 2009 changes were made to the Listing Rules which were
designed to enable Issuers to react flexibly and quickly
to difficult market
conditions, in particular in the critical area of capital raising. The changes
made are summarised below:
25%
in the case of NZAX Issuers); and
• Remuneration of directors by stocks - Amendments to NZSX Rules 3.5.1 and
7.3.7, and NZAX Rules 3.4.1 and 7.3.7. These amendments provided for Issuers
to pay directors with stock, subject to certain safeguards.
• Reduced timetables for rights issues - Amendments to NZSX Rules 7.10.2 and
7.10.10, and NZAX Rules 7.9.2 and 7.9.9. These amendments reduced the time
taken to complete rights offers from 28 business days
to 17 business
days.
• Employee share schemes and stock issuance – Amendments to NZSX Rule
7.6.1(f) and NZAX Rule 7.6.1(f)(i). These amendments removed the restriction
on share buybacks from employees (other than employees
who are also directors or
associated persons of directors of the Issuer in question).
56. These changes were implemented after a consultation process with
stakeholders and in liaison with the Commission and were
implemented subject to
review after one year. The Commission has undertaken a public consultation to
obtain feedback as to the effectiveness
of the changes. Submissions received by
the Commission did not
reveal evidence of abuse of these rule changes. NZX advises that from its
perspective the changes have been effective and were a
cogent and efficient
response to a serious financial situation.
57. The Listing Rules were also amended during the Review Period as a
result of the introduction of the Clearing and Settlement
System. Included in
that update to the rules were amendments to make the rules consistent with
legislative developments.
NZX proposals for further amendments to the Listing Rules
58. NZX submits that the Dual Listed Issuer regime in the rules is
too narrow and should be broadened beyond the ASX/Australia
so that a Dual
Listed Issuer includes any Issuer which NZX determines to be listed on, and
compliant with, any recognised exchange
with acceptable and comparable oversight
frameworks and information disclosure (e.g. such as TSX or FTSE). NZX believes
this flexibility
is necessary to attract such listings on the NZSX without
compromising any regulatory outcomes when such stocks are listed on exchanges
with robust regimes.
59. A potential weakness in the enforcement provisions of the Listing
Rules raised by NZX during the oversight review is that
breaches of the Listing
Rules which are determined by NZMDT can only be penalised by way of fining the
Issuer or suspension of the
Issuer from trading. NZX has expressed concern that
the discipline process therefore penalises shareholders rather than directors
who are responsible for the conduct. In relation to substantive continuous
disclosure breaches, suspected market manipulation and
insider trading, NZX
refers matters to the Commission which has jurisdiction in certain
circumstances to issue proceedings
against directors pursuant to the Securities
Markets Act 1988.
60. The Commission notes that where NZMDT imposes a financial penalty
on an Issuer, the directors of the entity should be
accountable to the
shareholders for any acts or omissions that brought about the breach. Beyond
this, direct liability for directors
in relation to breaches of the Listing
Rules would be available only if NZX were amend the Listing Rules to require
directors to
undertake to comply with the rules in the same manner as
Issuers.
Waivers and rulings
61. During the Review period 253 waiver and ruling applications in
relation to the Listing Rules were processed by NZX (209
in the 2009 year and 44
in 2010). 195 waiver and ruling applications were processed by NZX in 2008. Of
the applications made during
the Review Period, four were declined (in relation
to periodic reporting rules) and a further seven were withdrawn following NZX
advice that they would be declined. All waivers are subject to
conditions.
62. NZX advise that all waivers were delivered within NZX
timeframes and in accordance with NZX protocols.
63. Waiver applications are considered by a division of generally three lawyers in the
NZX Market Supervision Group, one of those being a senior team member, unless
the
waiver is of such a straightforward nature, or where there is ample
precedent, that it can be dealt with by one lawyer.
64. NZX advise that waivers sought during the Review Period were not
concentrated on any particular aspect of the Listing
Rules.
65. During 2010, NZX implemented a conditional waivers log, in
relation to conditions with fixed timeframes for satisfaction,
to use as a
method of monitoring adherence to conditions of waivers which have fixed
timeframes for compliance. NZX advise that
it is still trialling this new
initiative. Prior to the development of the conditional waivers log, NZX
relied on self reporting
by Issuers and the deterrence of potential disciplinary
action to ensure compliance with waiver conditions.
Complaints
66. During the Review Period NZX processed, and where necessary
investigated, 33 complaints in respect of the conduct of Issuers
(22 in 2009 and
11 in 2010). Of these, three matters were referred to the Commission. NZX
advise that all complaints were processed
in accordance with NZX protocols and
within NZX timeframes.
Continuous disclosure supervision
Consultation
67. NZX responded to concerns in the market regarding the operation
of the continuous disclosure regime by inviting Chief
Executives and Chief
Financial Officers of Issuers to a meeting in Auckland in May 2010 to discuss
their views as to the operation
of the continuous disclosure regime. As a
result of this meeting, consultation with the Commission and consideration of
the impact
of proposed securities law reforms, NZX produced an amended guidance
note to the market for consultation in October 2010.
68. On an annual basis NZX surveys Issuers who have not filed any
announcements to the market in the previous six months,
other than those
required due to periodic reporting obligations. NZX asks Issuers who are
captured to advise NZX whether they remain
in compliance with their continuous
disclosure obligations. This is a new surveillance tool.
Periodic reporting breaches
69. During the Review Period, NZX identified a number of periodic reporting breaches.
NZX made efforts to reduce this by sending out reporting schedules to Issuers
at the beginning of the year and by calling Issuers
ahead of time to enquire as
to upcoming reporting dates. NZX advise that this proactive method, combined
with successful referrals
of such breaches to NZMDT has resulted in the
reduction of breaches over the course of the Review Period in respect of
periodic reporting.
Price enquiries/ Continuous disclosure enquiries
70. There were 54 continuous disclosure enquiries undertaken by NZX during the Review
Period. From this, 19 price enquiries were made of Issuers and three matters
were
referred to the Commission. When price enquiries are made, both the letter of
enquiry and the letter of response from the relevant
Issuer are published to the
market by NZX.
Trading halts
71. NZX operates a system whereby trading halts are placed on
securities for between 10 and 15 minutes post announcement,
to allow
Market Participants time to digest market sensitive announcements and to
mitigate against volatility in the market
post announcement.
72. Trading halts are also implemented by NZX in accordance with the Listing Rules.
During the Review Period 90 trading halts were implemented by NZX (70 in 2009
and 20 in 2010).
Breaches of the Listing Rules
73. During the Review Period, NZX identified 28 breaches of the Listing Rules (21 in
2009 and seven in 2010). Breaches of the Listing Rules are primarily
identified via NZX market surveillance activities, Issuer self-reporting
or
complaints. Two Issuers were delisted in 2010 as a result of breaches of the
Listing Rules following findings of breach by NZMDT.
Allocation of human, technological and financial resources as it affects
performance of the regulatory functions of NZX
Human resources
74. In the Market Supervision Group, there is a team of between 19
and 21 people at any one time. During the Review Period,
NZX advise that
turnover in the Market Supervision Group of NZX was 24% compared to turnover of
9% across all of the NZX business.
NZX advises that turnover in the Market
Supervision Group was the result of a restructure in early 2009 aimed at
improving the skill
base in the surveillance and compliance areas of the Market
Supervision Group.
75. During the Review Period all employees in the Market Supervision
Group were full time with the exception of two lawyers
who commenced the Review
Period as part time employees becoming full time by the close of the Review
Period.
76. The Commission acknowledges that NZX, like other employers of
professionals, such as lawyers and accountants, faced recruitment
challenges
during the Review Period in relation to the Market Supervision Group as a result
of the lack of depth of suitably skilled
and experienced candidates in the
New Zealand market. NZX advises that as a result the recruitment
process in
many cases took longer than expected to fill some positions and
recruitment of candidates from offshore was necessary. The
outcome of the
recruitments during the Review Period was positive in NZX’s view, and
resulted in a team with increased experience
and qualification. NZX advises that
occasionally, as special projects require, workload can be managed via
secondment from legal
service providers.
77. NZX advise that it considers that the resourcing of NZX’s
Market Supervision Group was adequate to discharge its
obligations to ensure
compliance with the Conduct Rules and that resourcing of the Market Supervision
Group is a matter which is
actively monitored by the Board of NZX via dedicated
discussions between the Board and the Head of Market Supervision at each Board
meeting.
78. NZX was unable to provide the Commission with data which recorded
the proportion of time spent by supervision staff on
regulatory matters as
opposed to commercial matters as NZX does not record time spent on matters by
staff, outside of specific purposes,
such as work for which fees are levied,
e.g. waivers and rulings. Without that data it is very difficult for the
Commission to independently
conclude that there is satisfactory resource in the
Market Supervision Group.
RECOMMENDED ACTION: NZX to implement a means of recording actual human and
other resources devoted to market supervision in order
to increase transparency
of resourcing.
Technology
79. During the Review Period NZX undertook system testing of
an upgrade to its SMARTS market surveillance software.
The testing was
successful, and the upgrade has now been completed. The advantage of the new
SMARTS package from NZX’s perspective
is that the alert package is
constantly modified and improved by the SMARTS system provider from
information and research
that the provider undertakes. NZX advises
that the upgrade of the system provides more efficiency (in that NZX is no
longer
responsible for maintaining its own version of alerts) and the alerts
evolve with the market as SMARTS upgrades its alert package.
80. During the Review Period, NZX’s Trayport and MAP
systems were stable and maintained near perfect
“uptimes”.
81. NZX advises that SMARTS operated on the same hours of operation as Trayport.
NZX experienced a three hour outage in April 2010 due to an external SMARTS
system failure to allow NZX to connect to its remote server.
In such
circumstances, NZX advise that surveillance was undertaken manually and
by using other surveillance tools (e.g.
IRESS data feeds).
Financial resources
82. NZX advises that its Market Supervision Group does not have a
budget or firm financial targets and that the performance
of the Market
Supervision Group is not assessed against financial objectives.
Internal practices and procedures associated with investigations, price
enquiries, complaints-handling and referrals;
83. NZX advise that its complaints process did not change during the
Review Period and currently remains the same as throughout
the Review Period.
The Financial Service Providers (Registration and Dispute Resolutions) Act 2008
came into force at the
beginning of December 2010. This law requires, among other things, that
advisers (which include Participants) belong to an approved
dispute resolution
scheme. The Commission considers that the complaints procedure of NZX may
require amendment to acknowledge this
new legislation and the dispute resolution
options available to complainants.
84. NZX advise that whilst its complaints procedures will not be
updated on account of the new law there may be a need to
amend the Participant
Rules to ensure that any findings against a Participant as a result of the
dispute resolution process are reported
to NZX and it will also be updating its
website to provide further information. NZX advises it is consulting with
stakeholders in
relation to this matter.
RECOMMENDED ACTION: NZX to complete its review of any changes to be made
to the Participant Rules and its communications as a result
of the dispute
resolution provisions contained in the Financial Service Providers (Registration
and Dispute Resolutions) Act 2008
for consideration during
2011.
Discipline practices, procedures and resources
New Zealand Markets Disciplinary Tribunal
85. The NZMDT is an independent regulatory body established under the NZMDT
Rules.
86. The Tribunal’s principal role is to determine whether there
has been a breach of the NZX Conduct Rules in matters
referred to it by the NZX.
In the event that the Tribunal finds a breach, its secondary role is to assess
and impose penalties.
87. During the Review Period a new Listed Issuer member,
Alison Paterson, was appointed to the Tribunal in May
2010 following the
resignation of Mark Verbiest in January 2010, when he became a member of the
Commission. Victoria Heine and
Laurie Mayne also stood down as Legal
representatives. Stephen Kós QC has recently resigned from his
position
as chairman and member of NZMDT upon his appointment as a High Court
Judge. A new chairman will be appointed at the
Tribunal’s annual
general meeting in June 2011. A new issuer representative and a market
participant representative are also
in the process of being appointed.
88. The Tribunal advises that it was adequately resourced by NZX and
that funding has been sufficient to enable improvements
in the operational
processes of the Tribunal over the Review Period.
89. In the first six months of 2009 the Tribunal received one referral from NZX however following the appointment of a new Head of Market Supervision at NZX in August
2009, referrals since late 2009 have increased to a level that the Tribunal
felt was of the nature and level it would expect to see.
90. NZMDT notes in its 2009 Annual Report that NZX has
advised it that policy formation and input into policy
formation is not part
of the mandate of the Tribunal.
The Tribunal disagrees on the basis that it is a body established under the
NZMDT Rules with the specific purpose of being independent
of NZX and with the
express power to “suggest to NZX and consult with NZX on the amendment of
the Rules”.
91. NZX advises that it “considers that the determination of
NZX’s position on capital markets policy is solely the remit of the Board
of NZX.
The current position is that NZMDT is part of, and funded by NZX,
although operated independently. NZX believes the principal
function of NZMDT
is to enforce and provide remedies for breaches of the Conduct Rules referred to
it as an independent disciplinary
body. As such, NZMDT has an operational, and
not policy, focus. NZX does not believe it is appropriate for NZMDT to take
positions
on policy matters and for the funds of NZX (Discipline) Fund to be
applied towards defraying the expenses of NZMDT in this regard.
NZX believes
these funds would be better applied towards education initiatives and the
costs of disciplinary proceedings.”
92. NZX submits that it “does not see NZMDT as having a
policy function over and above the requirement to consult pursuant to NZMDT
Rules 1.3 and 1.4, where
the Tribunal can suggest Rule amendments to NZX. NZX
believes the intent and purpose of NZMDT Rule 4.1.1(h) was to give the Tribunal
the opportunity to suggest improvements to specific Rules where issues were
identified by the Tribunal in their day to day application.”
93. The Commission understands that this debate arose in 2009
when the Tribunal expressed a wish to examine the
workings of counterpart
bodies in other jurisdictions, to identify operational improvements that
could be recommended to
NZX. The debate was put to one side while new
securities legislation was developed, but was revived when the Tribunal provided
comments to the Ministry of Economic Development on a draft version of the
Financial Markets (Regulators and KiwiSaver) Bill 2010.
As introduced, that
Bill proposed the implementation of a publicly funded and independent Rulings
Panel to replace the NZMDT. The
particular circumstances giving rise to the
debate are therefore unique and unusual given that legislative change of
this nature occurs rarely. The Commission expects there will be ongoing
dialogue between NZX and NZMDT in relation to the practical
impact of
NZMDT’s interpretation of the NZMDT Rules and the jurisdiction of the
Tribunal. The Commission encourages NZX to
consider the unique and independent
role and experience of the Tribunal in discussing these matters with a view to
resolution.
Arrangements for market infrastructure development and
maintenance
94. During the Review Period the following developments in
market infrastructure occurred:
• Preparation for the launch of NZX Derivatives Market in September 2010
• Preparation for the launch of Clearing and Settlement System in September
2010
95. NZX advise that during the Review Period, three members
from the Market Supervision Group were engaged on projects
relating to the
Derivatives Market and the Clearing and Settlement System, either in a full time
or part time capacity. NZX
advise that this project work did not impact on the supervision function during
Review Period. We note the observations in paragraph 78.
96. NZX has obligations pursuant to the Authorised Futures Exchange
(NZX Limited) Notice 2010 to do all things necessary to
ensure that the
Derivatives Market operates in a fair, orderly and transparent manner; to have
adequate arrangements for supervising
the Derivatives Market including
arrangements for handling conflicts of interest, monitoring the conduct of
participants, enforcing
compliance with the relevant conduct rules and to
have sufficient resources to operate the Derivatives Market properly and for
the
required supervisory arrangement to be provided.1 NZX must report
annually to the Commission on how well it carries out its obligations. The
first reporting period in relation
to the Derivatives Market falls
outside the Review Period and therefore this Oversight Review will not report
in relation
to NZX’s supervision of the Derivatives Market. It is
anticipated that the FMA will include its report on NZX’s supervision
of
the Derivatives Market in future oversight reports of NZX as a regulated
exchange.
97. Oversight of the Settlement and Clearing System is undertaken by
the Reserve Bank and the Commission jointly pursuant
to the Reserve Bank
of New Zealand (Designated Settlement System—NZCDC) Order 2010 and is
not included in the oversight
of NZX as a regulated exchange.
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
98. During the Review Period the Board of NZX established the Policy,
Stakeholder and Risk Committee. The purposes of this
Committee are to: bring a
systematic approach to regulatory policy formation; ensure appropriate
governance structures and systems
are in place for the management of external
stakeholder and Participant risks; and deal with any other matters referred to
it by
the Board.
99. As identified in the previous oversight review report, the NZX
Conflicts Management Policy dated 20 January 2008 contemplates
that the dual
role of market operator and supervisor may lead to a conflict or perception of a
conflict between the regulatory and
commercial function of NZX, because
commercial interests have the objective to maximise value for shareholders
whereas the
regulatory obligation as a market operator is to utilise
resources to supervise its market.
100. To counteract the possibility of conflict or the perception of it,
the policy requires that commercial interests should
not be allowed to influence
supervisory decision making; that supervisory activity and information is to be
quarantined from commercial
activity, and that supervisory activity and decision
making must be consistent and transparent.
1 Section 7 of the Authorised Futures Exchange NZX Limited) Notice
2010.
101. The Board of NZX has delegated authority to both the Chief
Executive and the Head of Market Supervision to make decisions
in relation to
the regulatory functions of NZX.
102. In the 2008 oversight report the Commission noted its
concern that the dual delegation imbeds an inevitable
ongoing source of
conflicts of interest between the NZX’s commercial and regulatory roles.
The 2008 report also noted the
structure was not consistent with the
international best practice of formal separation of the commercial and
regulatory functions
of demutualised exchanges.
103. Whilst no issues have arisen during the Review Period in
relation to the dual delegation the Commission recommends
that future
oversight reviews of NZX continue to monitor and report on this matter because,
in the Commission’s opinion, the
dual delegation does not conform to best
practice internationally and as a result there is an ongoing possibility that
the existing
structure leaves the supervision function open to possible
compromise.
104. As the commercial activities of NZX, such as the information
businesses, grow and become a greater proportion of the overall
activities of
NZX it is foreseeable that greater focus and resource will be directed to those
areas. In that situation, it remains
important to ensure that the priority of
the market supervision function is maintained and resourced appropriately
The Commission
suggests this could be done by removing the dual
delegation structure and retaining a single delegation to the Head of Market
Supervision with a direct reporting line to the Board of NZX. In this way the
supervisory function would be empowered and the possibility
of erosion from the
commercial function of NZX diminished.
NZX’s commercial activities versus regulatory function
105. During the Review Period NZX further expanded its commercial
interests in various information and data services and markets.
106. During the Review Period NZX acquired the following businesses:
• Country-wide Publications Limited, an agricultural publishing service;
• CLEAR Group, a grain exchange and information business
• Australian Crop Forecasters Pty Limited, Melbourne
• M-Co, operator of New Zealand’s electricity and gas
markets.
107. The NZX 2010 Annual Report records the revenue mix moving to a
stable 40% Information, 40% Markets and 20% Infrastructure
over 2010. The
Chief Executive of NZX also made the statements in the 2010 Annual Report that
“NZX is truly integrated information, markets and infrastructure
company, not merely a ‘stock exchange’” and that
“NZX is a global leader in the provision of market
information”.
108. NZX has appropriately managed the conflicts of interest between
its commercial and regulatory functions throughout the
Review Period and the
Commission notes that during the Review Period, an alleged breach of the
Listing Rules by an NZX
subsidiary was referred to the Special Division by
the Market Supervision Group of NZX.
109. The Commission remains concerned with the risk of potential
conflicts that might arise between NZX’s regulatory and
commercial
functions as NZX expands its commercial activities. While the Commission is
not aware of any such conflicts during the
Review Period or at this time, it
considers that this structure and the outcomes from it should continue to be
scrutinised in future
oversight reviews of NZX.
Special Division of the NZMDT
110. The Special Division is an independent body established under the
NZMDT Rules which regulates NZX as an Issuer in the same
way that NZX regulates
other Issuers.
111. During the Review Period there were no changes to membership.
112. In June 2010 the Special Division undertook a review of the
procedures regarding the referral of SMARTS alerts by NZX to
the Special
Division. This review was undertaken to clarify when alerts and abnormal
trading activity (in circumstances where no
SMARTS alert has fired) in respect
of units of the funds managed by Smartshares Limited should be referred to the
Special Division
and resulted in amendments to the Special Division
procedures.
113. The Special Division advises that it is sufficiently resourced by
NZX to exercise its powers and functions in a manner
consistent with its
objective.
114. No significant matters arose concerning the Special Division during the Review
Period.
LEGISLATIVE DEVELOPMENTS AND FUTURE OVERSIGHT REVIEWS
115. The FMA will replace the Commission on 1 May 2011 pursuant to its founding Act, the Financial Markets Authority Act 2011, which will come into force on 1 May
2011. The Securities Markets Amendment Act 2011 will also come into force on 1
May 2011 providing a statutory oversight regime which places specific
reporting obligations on both the FMA and the NZX.
116. The Securities Markets Amendment Act 2011 provides that a
registered exchange must:
a) to the extent that it is reasonably practicable do all things
necessary to ensure that each of its registered markets is a fair,
orderly, and
transparent market; and
b) have adequate arrangements for operating its registered markets, including arrangements -
o for handling conflicts between the commercial interests of the registered exchange and the need for the registered exchange to ensure that the markets operate in the way referred to in paragraph (a); and
o for monitoring the conduct of exchange participants on or in relation to the markets; and
o for enforcing compliance with the relevant market rules; and
o that ensure there is a sufficiently independent adjudicative body
to adjudicate on contraventions of market rules that are
referred to it; and
c) have sufficient resources (including financial, technological, and
human resources) to operate its registered markets.
117. The registered exchange must, within three months of the end of
its financial year, give a report to the FMA and the Minister
of Commerce on the
extent to which it has complied, in the preceding financial year, with the above
obligations.
118. The FMA must provide a written report on the review to the
Minister of Commerce and the registered exchange, which
may be published
on the FMA’s website.
CONCLUSION
120. The Commission’s findings are set out below.
Matters arising from the 2008 year
Supervision of Participants and enforcement of the Participant
Rules
Supervision of listed issuers and enforcement of the Listing
Rules
Allocation of human, technological and financial resources as it affects
performance of the regulatory functions of NZX
Internal practices and procedures associated with investigations, price
enquiries, complaints-handling and referrals
Discipline practices, procedures and resources
Arrangements for market infrastructure development and
maintenance
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
NZX’s commercial activities versus regulatory function
Recommended Actions
135. NZX and the Commission have agreed the following actions arising out of the
Review Period.
• NZX carries out scheduled onsite inspections in accordance with
its methodology. The Commission notes that NZX is already underway
with this.
(page15)
APPENDIX 1: GLOSSARY OF KEY TERMS AND ABBREVIATIONS
Clearing and Settlement System the clearing and settlement
system operated by NZCDC, which is a wholly owned subsidiary of NZX.
Clearing Participant an organisation accredited by NZX to utilise the
Clearing and Settlement System. Commission the Securities Commission of New
Zealand. Conduct Rules The Participant Rules and Listing Rules of
NZX.
FMA Financial Markets Authority.
GFC Global Financial Crisis.
IOSCO International Organization of Securities Commissions.
IPO Initial public offering.
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.
Market Participant An organisation
accredited by NZX to participate in the securities markets that NZX
operates.
Market Supervision Group A group within NZX led
by the Head of Market Supervision comprising four teams – Issuer
Regulation, Participant Compliance,
Market Surveillance and Client and Market
Services.
NZAX New Zealand Alternative Stock Market.
NZCDC New Zealand Clearing and Depository Corporation
Limited.
NZMDT A disciplinary body constituted by NZX under the
NZMDT Rules (formerly called NZX Discipline.)
NZMDT Rules The New Zealand Markets
Disciplinary Tribunal Rules as made by NZX.
NZSX New Zealand Stock Market.
NZX NZX Limited.
Participant A Market Participant.
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 From, and including, 1 January 2009 to, and including,
30 June 2010.
SIA Securities
Industry Association, the representative body for Market Participants.
Special Division The division of the
NZMDT that exercises the powers and functions of NZX in relation to NZX or a
related entity as an Issuer.
Tribunal NZMDT.
APPENDIX 2: SCOPE OF REVIEW
Section 36G of the Securities Markets Act 1988 states that NZX must operate
each of its securities markets in accordance with approved
Conduct Rules for
that market. The Conduct Rules include Listing Rules and Participant Rules that
govern the conduct of persons authorised
to undertake trading activities on the
market.
NZX’s obligations under section 36G are to secure compliance with its
Listing Rules and Participant Rules, and to perform any
obligations that NZX is
subject to under those rules. To do this, NZX has a Market Supervision Group
with responsibilities for discharging
NZX’s regulatory function. The
NZMDT Rules establish a dedicated body, the NZMDT, to determine
questions of non-compliance
with the Listing Rules or Participant Rules.
Decisions can be appealed to the Appeal Panel. An independent body, the Special
Division
of the NZMDT, exercises the powers and functions of NZX in relation to
NZX as an Issuer and its related entities.
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. This oversight review was conducted under sections
10(b), 10(c) and 10(caa) of the Securities Act 1978.
In assessing NZX’s compliance with its supervisory functions as they existed during the
Review Period the Commission considered NZX’s performance in the
following areas:
• supervision of market participants and enforcement of the Participant
Rules;
• supervision of listed issuers and enforcement of the Listing
Rules;
• internal practices and procedures associated with
investigations, price enquiries, complaints-handling and
referrals;
• discipline practices, procedures and resources;
• arrangements for market infrastructure development and
maintenance;
• Special Division practices, procedures and resources;
• 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
• the impact, if any, of NZX’s expanding commercial activities
on its regulatory function.
APPENDIX 3: PROCESS
In conducting the review the Commission undertook:
• Discussions with senior NZX personnel and Board members, the chairman of
NZMDT and the chairman of the Special Division;
• A review of :
o A detailed report prepared by NZX covering topics that the
Commission had foreshadowed for this assessment;
o Information held in a cross-section of files of NZX;
o Information received from and about NZX in the context of the
oversight;
o The operation of the market
throughout the Review Period.
The oversight review is conducted subject to privacy and confidentiality
orders. These orders are intended to encourage free and
frank discussion
between the parties and to protect against disclosure of material to third
parties for the duration of the oversight
review.
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