Download - NZX Oversight & Engagement Report · NZX Oversight & Engagement Report 03. Investigations We become aware of matters that may require investigation in a number of ways. Usually this

NZX Oversight & Engagement Report2017

NZX Oversight & Engagement Report

NZX Regulation (NZXR) performs various regulatory

functions for NZX’s markets, including investigating

and enforcing breaches of NZX’s market rules.

Our regulatory work is increasingly focused on

improving practices and providing guidance and

support for Issuers and Participants, to ensure our

markets remain fair, orderly and transparent.

This report is the first in an annual series,

intended to provide insight into our

investigation, monitoring and

enforcement work, and our engagement

with Issuers and Participants. It includes

information on:

Our approach to enforcement

Our investigation and enforcement

activity for the year to 31 December

2016, including complaints received by

NZX

Engagement we have had with Issuers

and Participants about compliance with

NZX’s market rules

Initiatives undertaken during the year in

support of broader market regulation

How we utilised the various enforcement

tools available to us

This report is also being provided to the

NZ Markets Disciplinary Tribunal in

connection with NZX's annual regulatory

reporting requirements under NZMDT

Rules 12.1.1 and 12.1.2.

NZX takes a risk-based approach to its regulatory

functions. This includes applying a risk framework

to assist us to prioritise our oversight and monitoring

activities.

Although taking appropriate enforcement action

remains critical to the regulation of our markets, it

is only one aspect of the work we do.

During 2016, we published Our Approach to

Enforcement, which replaced NZX's previous

Enforcement Policy. This document reflects our

emphasis on proactive engagement and best

practice behaviour.

We consider that being a pragmatic regulator is

vital to supporting participants in our markets, to

have the knowledge and tools they need to comply

with NZX’s market rules, which in turn supports

confident and informed investor participation.

We saw effective results in compliance from our

engagement with Issuers and Participants in 2016.

That engagement has given us a better

understanding of the risk profile of individual

organisations, their industries, and the context for

decisions and behaviour we observed in the market.

We will continue these engagement efforts in 2017.

Joost van Amelsfort

NZX Head of MarketSupervision


02

Contents

Investigations 04

Enforcement 15

Regulatory Initiatives 19

Discipline Fund 23


03

Investigations

We become aware of matters that may require investigation in a number of ways. Usually this

results from our own compliance monitoring and surveillance work, on-site inspections, capital

adequacy reviews and targeted investigations. We also receive enquiries and complaints from

members of the public, and referrals from other regulators.

We do not commence an enquiry into every matter that comes to our attention. It depends on

a number of factors, including NZX’s enforcement priorities, the severity of the alleged breach

and the impacts it may have on investors and the market, the available evidence, relevant

precedent, whether other regulators have jurisdiction over the conduct, and the regulatory

outcome that we may achieve if we took enforcement action.

During the year ended 31 December 2016, NZXR conducted 256 investigations. This represents a

significant body of work and is an increase on the 28 complaints considered and 206 NZXR enquiries

conducted in 2015.

Total investigations in 2016 (256)

Complaints (31)NZXR Enquiries (225)

Breach (3)

Breach (134)

No Breach (82)

No Breach (28)

Ongoing (0)

Ongoing (9)

PARTICIPANT INVESTIGATIONS

NZXR’s Participant Compliance team investigates the conduct of Participants.

In 2016, the team conducted 76 investigations and considered one complaint which covered a broad

range of areas.1 2

1. Many complaints in respect of broker services are resolved directly with Participants themselves. Under the Financial ServiceProviders (Registration and Dispute Resolution) Act 2008, Participants are required to be members of an approved independentexternal dispute resolution scheme to which consumer complaints can be also directed.

2. NZX Clearing did not receive any complaints in respect of Clearing Participants or Depository Participants in 2016.


04

There was an increase in engagement with Participants during 2016. Engagement focused on ensuring

Participants were identifying compliance issues on a timely basis, and had adequate risk management

arrangements.

PARTICIPANT RULE and DERIVATIVES MARKET RULE INVESTIGATIONS

Notifications/ Reporting

Employee trading

Client Assets

TradingConduct

Capital Adequacy

Contract Notes

Derivatives Other

Market Participants

20

15

10

0

5

Derivatives Market Participants

16

14

7

2

5 5

4

3

211

CLEARING and SETTLEMENT RULE INVESTIGATIONS

0

4

8

12

Transfer of Securities

Settlement Obligations

Margin Obligations

4

1

11

Investigations

A significant proportion of the investigation activity in 2016 related to clearing and settlement

obligations, trading conduct and obligations relating to the management of client assets. This activity

reflects the importance of these areas to the fair, orderly and transparent operation of NZX’s markets.


05

Of the 76 investigations conducted by Participant Compliance, 64 breaches were identified.

PARTICIPANT RULE and DERIVATIVES MARKET RULE BREACHES

0

5

10

15

20

BreachesInvestigations

TradingConduct

Client Assets

Employee Trading

Notifications/ Reporting

Capital Adequacy

Derivatives (other)

Contract Notes

Other

14 14

16

99

56

5544

3 33 3

7

CLEARING and SETTLEMENT RULE BREACHES

0

4

8

12

Transfer of Securities

Settlement Obligations

Margin Obligations

4

9

1

Breaches

Trading conduct

Trading conduct is a key area of focus for NZXR. In 2016, NZXR conducted a number of investigations into

employee and Participant trading. Breaches in respect of employee trading predominantly related to pre-

trade approvals, trading for a prescribed person of another firm, and inadequate employee training.

Throughout 2016 NZXR also reviewed numerous trading scenarios to identify whether the Participant had

acted in accordance with the Participant Rules relating to orderly markets and market manipulation. The

breaches of the Rules relating to trading conduct included some minor breaches relating to crossings and

reporting of short sales, as well as more significant matters such as that outlined in the case study below.


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Case Study one – disorderly market

On 5 November 2015, between 14:51 and 15:09, a trading algorithm used by a client of

Macquarie Securities (NZ) Limited entered 220 on-market buy orders for Westpac Banking

Corporation shares, of which 196 traded. The client was using direct-market access (DMA),

which enabled it to enter orders directly into NZX’s trading system.

The client had incorrectly selected NZX, rather than the ASX, as the trading venue when

entering the orders. Over the course of several minutes, the price of Westpac’s shares climbed

more than 19% to an intraday high of $40.00, resulting in a disorderly market in those securities.

NZX contacted Macquarie about the trading after alerts were triggered in NZX’s surveillance

system (SMARTS). NZX had also received a call from another Participant querying the trading.

As the error had a significant market impact, NZX was able to exercise its discretion to cancel

188 of the trades that had been executed.

We were concerned that the filters Macquarie had in place were inadequate to prevent the

relevant trading by its client.

We referred Macquarie to the NZ Markets Disciplinary Tribunal (the Tribunal) for breaches of

various Rules relating to its obligations to ensure the accuracy of trading information, the

maintenance of an orderly market and in respect of DMA trading. The Tribunal ordered a fine

of $40,000, a public censure, and the payment of the Tribunal’s and NZXR’s costs.

NZXR’s view

Promoting and maintaining an orderly market is a fundamental Participant obligation. If

Participants provide trading via DMA to their clients, this obligation also applies to the conduct

of those third parties. Participants are required to have appropriate filters, screens and security

measures in place to ensure that information entered into the trading system is accurate. These

obligations are of critical importance as they directly support the integrity of the market. We

view breaches of these obligations as being particularly serious.

Outcome

Macquarie made several changes to its filter settings and it investigated additional filter

protections it could implement to avoid this kind of scenario happening again. This included

liaising with the relevant client to determine the underlying causes, the trading strategy that

was being employed, and identifying other steps the client could take to prevent similar errors

occurring.

Clearing and settlement

Breaches of the Clearing and Settlement Rules in 2016 related to two broad areas: failure to meet initial

margin obligations, and failure to meet cash settlement or collateral obligations. These breaches were

often a result of inadvertent human error or errors by the Participant’s bank. None of the breaches of

these obligations were found by NZXR to reflect a Participant liquidity issue, or be indicative of broader


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market integrity concerns. NZXR continues to work with Participants to make sure they provide margin

and collateral accurately, and at the required time.

Case Study two – Clearing and Settlement – margin calls

In 2016, we investigated a Clearing Participant for repeated failture to meet its settlement and

margin obligations under the Clearing and Settlement Rules.

These types of breaches are often minor when considered in isolation. In this case, however,

we were concerned that the conduct was indicative of more significant shortcomings in the

Participant’s procedures and internal controls. We had previously engaged with the Participant

on several occasions, and provided guidance on improvements that it could make to its

processess and systems.

Following our investigations, we determined to seek a fine and private censure of the

Participant. A settlement arrangement was submitted to the Tribunal and approved. The

Participant was fined $20,000, ordered to pay the Tribunal's and NZXR's costs and privately censured.

NZXR's view

In this case, the breaches did not result in investor harm or expose the Clearing House or the

market to material financial risk. When such minor breaches occur, we prefer to take a

pragmatic approach and work collaboratively with Participants to identify possible

improvements to their processes and systems. We have a low tolerance, however, for repeat

rule breaches due to operational or human error, or which evidence insufficient controls. The

sanctions we sought were considered appropriate to ensure the Participant took a holistic

approach to identify, and rectify, the procedural and operational gaps in its arrangements for

settlement and margin calls.

Outcome

We met with the Participant again as part of the 2016 inspection programme, together with a

representative from the Clearing House. Through that engagement, and subsequent

collaboration, the Participant implemented an action plan which enhanced its internal

procedures, process monitoring and cash buffers to prevent a reoccurrence. We will continue

to actively monitor compliance through our ongoing risk assessment work and inspection programme.

Client assets

The breaches relating to management of client assets were primarily caused by failures to ensure that

client fund accounts were not overdrawn. These breaches were largely a result of inadvertent

administrative errors, and were of very short duration. As the relevant Participants held assets that were

greater in aggregate than their payment obligations, such breaches did not expose clients to actual risk.


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ISSUER INVESTIGATIONS

NZXR’s Issuer Compliance team investigates the conduct of Issuers listed on NZX’s markets.3

In 2016, the team conducted 149 investigations and considered 30 complaints. This included engagement

with Issuers where conduct did not amount to a breach, but NZXR considered that best practice guidance

would be useful or engagement would otherwise benefit NZX’s regulatory function.4

The focus of investigation activity was heavily weighted towards disclosure practices, with almost 40%

relating to continuous disclosure and 24% relating to the obligation to release administrative information.

This reflects the importance of disclosure to the functioning of the markets.

ISSUER INVESTIGATIONS

0

10

20

30

40

50

60

Continuous

disclosureAdminstrative

information

Content of

periodic reports

Miscellaneous Timing of

periodic reports

Corporate

Governance

59

35

21

18

97

Of the 149 investigations conducted, 70 breaches were identified.

3. In 2017, NZX’s Issuer Regulation team and Enforcement teams were merged. Prior to that merger, investigations of issuers wereconducted by the Enforcement team.

4. In future reports, NZXR will separate investigations of potential breaches from engagement for the purposes of best practice discussions.


09

ISSUER BREACHES

0

10

20

30

40

50

60

Continuous

disclosure

Administrative

information

Content of

periodic reports

Miscellaneous Timing of

periodic reports

Corporate

governance

Breaches

Investigations59

13

35

26

21

1518

9 97

25

Continuous disclosure

The relatively high number of continuous disclosure investigations NZXR conducted in 2016 reflects

NZXR’s proactive engagement in respect of disclosure practices. This focus reflects the importance of

timely disclosure of material information to maintaining the integrity of the markets, and access to

information to enable investors to make informed investment decisions. Breaches of continuous disclosure

obligations largely related to the timing of market announcements.

NZXR acknowledges that each Issuer’s operating environment is different. Those differences, and the

need to assess what effect on price a reasonable investor would expect to observe if the information was

generally available, means that it will not always be entirely clear when a disclosure obligation has been

triggered. In some cases an Issuer may require time to consider relevant information further before being

in a position to release information to the market.

During the year, NZXR observed continued improvement in Issuers’ understanding of the scope of their

continuous disclosure obligations. This had followed engagement by NZXR with Issuers on how those

obligations apply in a number of scenarios, including developing information or information which reflects

a trend, deviations from published forecasts, and matters which may span a length of time.


10

Continous disclosure – intra-day announcements

In 2016, there were a number of occasions where Issuers released announcements containing

material information during a trading day. The announcements often impacted the share price

of the relevant Issuer.

The key obligation for Issuers is to release material information immediately to the market,

subject to certain prescribed exceptions.

The release of material information by an Issuer intra-day does not necessarily mean they have

breached the Listing Rules. It can, however, have an impact on investors who may have traded

just before the announcement.

Issuers should have in place processes that deal with situations where they may need to release

material information intra-day, and should aim to ensure disclosure is made before trading

commences if possible. Certain situations can be anticipated and planned around, for example,

annual meetings/investor information, and the signing of material contracts.

In other circumstances, where new information has been brought to the attention of the Issuer

and the Issuer is contemplating the matter but cannot release the information prior to market

open, NZXR encourages Issuers to consider the use of a trading halt to prevent trading on

asymmetrical information. Issuers should contact NZXR to discuss the possibilities of trading

halt applications when needed.

Administrative announcements

Issuers are subject to various notification obligations under the Listing Rules. In 2016, NZXR observed a

number of breaches caused by late submission of notifications.

Breaches in relation to administrative information primarily arose as a result of the late provision of

allotment notices for issues of new securities. These breaches were largely minor, and NZXR considers its

ongoing engagement on this issue has been increasingly effective. NZXR sought infringement notices in

respect of two of these breaches, as detailed in the section titled “Enforcement” below.

Other relatively common breaches included late notification of changes in directors and senior managers,

or where changes to an Issuer’s name took effect through the Companies Office more quickly than

anticipated. NZXR provided further guidance on its expectations directly to relevant Issuers and to the

market via NZX’s quarterly Issuer Update.

NZXR is pleased to see that overall Issuers are engaging more proactively if they have queries about

managing administrative announcements.


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Periodic reporting

A significant number of investigations made into periodic reporting by Issuers related to non-disclosure

of net tangible asset information. NZXR sought to address this in two ways: first, by collaborating with

NZX’s Client & Data Services (CDS) team to update the relevant reporting template, and secondly, by

corresponding directly with all Issuers to remind them of this obligation.

ENGAGEMENT

NZXR’s engagement with Issuers and Participants has moved from being primarily driven by breaches and

scheduled inspections, to being focused on guidance and best practice, in order to support Issuers and

Participants to be compliant with applicable NZX Rules. As a result of this NZXR has increased its

understanding of Issuers’ and Participants’ businesses and their operating environment.

The benefits of this approach have included an increase in early engagement, and more effective

engagement, by Issuers and Participants.

Case Study three – early engagement by an Issuer

An Issuer, which was subject to specialised periodic reporting requirements under a waiver,

self-reported that it was unlikely to be able to comply with those reporting obligations due to

circumstances out of its control.

NZXR’s view

It was clear from the engagement we had with the Issuer that it was using its best endeavours

to comply with its obligations. As we were able to discuss the nature of the breach, we

determined that any breach would not have a significant impact on investors or on the market.

Early engagement allowed us to contextualise the Issuer’s subsequent market announcement,

and enabled us to have collaborative discussions with the Issuer about alternative solutions it

could implement to avoid a repeat of the issue.

Outcome

In this case, we determined not to take any further regulatory action and the Issuer was invited

to consider seeking a review of the terms of its waiver, which could mitigate the risks of a future

breach.


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Case Study four – early engagement by a Participant

A Participant’s system provider had a major hardware failure. As a result, a number of the

provider’s clients globally were affected, including the Participant. This led to delays over the

course of several days that affected the ability of the Participant to undertake its daily reporting

and reconciliation processes.

Although the Participant did not know if this was a breach of any NZX Rules, the Participant

chose to proactively self-report the matter to us. We were updated regularly until the matter

was resolved.

NZXR’s view

The Participant cooperated fully with our requests for information, and its approach to dealing

with us was open and transparent. As a result, we were able to observe the Participant’s

internal response to the event as it unfolded.

Outcome

No breach was found in this case and the Participant’s approach evidenced the strong working

relationship it had with our Participant Compliance team. This approach gave us comfort that

it had appropriate response strategies to deal with its compliance obligations in such events.

COMPLAINTS

NZXR receives complaints via two main channels – direct complaints from members of the public, and

complaints referred to NZX by other regulators, such as the Financial Markets Authority (FMA).

COMPLAINTS RECEIVED YEAR ON YEAR

50

40

30

20

10

0

20162015

20142013

44

2728

31


13

There was a slight increase in the total number of complaints received by NZXR in 2016 on the prior year.

The majority of complaints received by NZXR alleged a breach of continuous disclosure obligations by Issuers.

Complaints received by NZXR which allege a breach of NZX’s market rules, are investigated in accordance

with NZX’s enforcement policy (as set out in Our Approach to Enforcement).

During 2016, NZXR also received a number of complaints that related to share price movements and

operational matters, such as share consolidations and the payment of dividends in currencies other than

New Zealand dollars. In such cases, NZXR engages with NZX’s Surveillance and CDS teams and

endeavours to provide complainants with relevant information.

NZXR also received a number of complaints about matters not regulated by NZX’s market rules, including

complaints relating to alleged insider trading. Where possible, NZXR refers these complaints to

regulators that do have the appropriate powers to consider whether a breach of legislation or other

obligations has occurred, however, in some cases there is no further action that can be taken.

In 2016, we received three complaints regarding conduct by Issuers which we subsequently determined

was a breach of NZX's Rules. In two of those cases, NZXR was already aware of the relevant matter

through its own market surveillance activity.

OUTCOME OF COMPLAINTS

Non breaches

28

Breaches3


14

Enforcement

We take into account a number of factors when considering what enforcement outcome is

appropriate if we identify a breach of NZX’s market rules. While not an exhaustive list, such

factors include:

The impact of the breach

The market rule that has been breached

The person or entity that has breached the rule

The effect that enforcement action could have on the market, the regulatory outcome we

would seek to achieve by taking enforcement action, and whether other remedial action is

possible or has been taken

OVERVIEW OF KEY NZXR ENFORCEMENT ACTIVITY IN 2016

Enforcement activity Market ParticipantsDerivatives MarketParticipants Issuers

Matters where breaches were referred to the Tribunal 51 0 42

Infringement notices issued 23 0 2

Breaches resolved (including obligations letters) 49 8 64

1 This includes three breaches combined into one NZMDT referral (NZMDT 05/16)2 This includes three breaches combined into one referral, and an appeal (NZMDT 03/16 and NZMDT 04/16)3 One infringement notice was subsequently disputed and revoked.

REFERRALS TO THE TRIBUNAL

NZXR referred nine market rule breaches to the Tribunal in 2016, through five proceedings. This

represented a reduction in the number of referrals made in 2015, primarily as a result of an overall

reduction of minor breaches where a referral or an infringement notice was considered an appropriate

enforcement outcome.

NZXR made some significant referrals to the Tribunal during 2016, some of which are highlighted in the

case studies below.


15

Case Study five – Pyne Gould Corporation – periodic reporting andcorporate governance

In 2016, we referred Pyne Gould Corporation Limited to the Tribunal for a number of periodic

reporting and corporate governance breaches. The reporting breaches stemmed from

significant delays by PGC in publishing its 2015 Annual Report, 2016 Half Year Report and

preliminary financial statements. The corporate governance breaches followed the resignation

of one of PGC’s independent, New Zealand-resident directors.

In considering our enforcement response, we had particular regard to the length of the

breaches, PGC’s compliance history, the impact of the breaches on PGC’s shareholders, and the

effect of the breaches on the perception of market integrity and investor confidence. In light

of these factors, we sought a significant fine and public censure of PGC. This approach also took

into account earlier guidance by the Tribunal that it would increase penalties for repeat

offenders and breaches of periodic reporting requirements.

PGC was fined $300,000, ordered to pay the costs of the Tribunal and NZXR, and publicly

censured. This determination was upheld on appeal.

NZXR’s view

Breaches of periodic reporting requirements and corporate governance requirements are

breaches of fundamental Listing Rule obligations and are an enforcement priority. Financial

information is critical to maintaining market integrity and an informed market. The requirement

for independent directors on a board and certain committees, gives investors confidence that

their interests are being represented.

The conduct was aggravated in this case, with PGC previously having been fined for periodic

reporting breaches. PGC shareholders were also directly impacted by the breach, with trading

in PGC’s shares being suspended for nearly eight months.

Outcome

This case highlights both the need for Issuers to manage their audit processes to ensure

deadlines are met, and the importance of board succession planning. We reiterated these key

messages to the market following the Tribunal’s determination.

The original and appeal determinations by the Tribunal can be found at the below link under

NZMDT 3/2016 and 4/2016:

https://nzx.com/NZMDT/tribunal-decisions


16

Case Study six – Participant executes trades without due care

In February 2016, a Trading Participant experienced an early morning systems issues that

affected client orders going into the trading system. Although the system issues were resolved

before market trading commenced, a number of DMA orders had yet to be put into the trading

system. This was due to the Participant’s filters, which required DMA orders to be manually

assessed and approved. In order to ensure the relevant orders were entered before the market

opened, an employee of the Participant entered all queued DMA orders without prior review.

As a result, some of the resulting trades saw share prices move by approximately 10%.

NZXR’s view

We were particularly concerned that human error caused this breach, rather than there being

any inadequacy in the Participant’s processes. Employees who fail to comply with trading

policies expose Participants to the risk of creating disorderly markets. We sought assurances

from the Participant on the effectiveness of its staff training, and to ensure that its staff

correctly implemented processes for DMA order review and entry.

Outcome

Following our investigations, we decided to seek a fine and private censure of the Participant

for failing to consider the impacts of the relevant orders being placed, and the actual market

impact that would occur on the execution of the order. A settlement arrangement was

submitted to the Tribunal and approved. The Participant was fined $20,000, ordered to pay the

Tribunal’s and NZXR’s costs and privately censured.

INFRINGEMENT NOTICE REGIME

The decline in the number of matters referred to the Tribunal also reflects the impact of the infringement

notice regime, which was introduced in February 2016. Under the regime, NZXR can issue infringement

fines of up to $10,000 for minor breaches of NZX’s market rules.5 The changes provide a more effective

enforcement tool for NZXR, which avoids the cost and time that might otherwise be incurred if the breach

required a formal Tribunal determination, but still permits a financial penalty to be imposed.

NZXR issued four notices in total, with one subsequently revoked by NZXR on appeal.

5. Penalty Band 1 breaches under the NZ Markets Disciplinary Tribunal Rules.


17

Infringement notices

Infringement notices reduce the time and cost otherwise associated with a referral to the

Tribunal. It allows us to achieve an effective regulatory outcome for minor rule breaches.

Examples of when we might issue an infringement notice include multiple or repeat breaches

of an administrative rule, breaches which are minor but which justify a more significant response

than us issuing a formal reminder of Rules obligations, and breaches where the notice would

likely be effective to prevent future breaches.

When considering whether an infringement notice may be appropriate, we will take into

account our enforcement priorities and policy, and the regulatory outcome we might achieve.

OTHER ENFORCEMENT TOOLS

NZXR has other enforcement tools available, in addition to Tribunal referrals and infringement notices.

The tool NZXR uses in the event of a rule breach depends on the circumstances of the breach and the

regulatory outcome we want to achieve by taking enforcement action. The full range of enforcement

tools utilised by NZXR is set out on NZX’s website.

When NZXR considers its response to breaches, one of the things it focuses on is how the Issuer or

Participant can prevent repeat breaches. NZXR continues to engage with Issuers and Participants to

better understand why breaches arise. As part of NZXR’s response to rule breaches, NZXR has increased

its focus on setting best practice expectations, and providing guidance on process enhancements, that

mitigate the risk of repeat breaches. NZXR will continue to consider use of its powers to impose

additional requirements on Issuers and Participants, if this would assist to ensure compliance with the

market rules or address a particular risk to investors or clients.

In 2016, NZXR did not exercise any powers to delist any Issuer, or suspend or revoke any Issuers’ listing

or Participants’ accreditation.

During the year, NZXR issued 32 obligations letters to Issuers and 14 obligations letters to Participants.

Obligations letters are a standalone enforcement outcome. They formally record details of the relevant

breach, remind the Issuer or Participant of its compliance obligations, and may require the recipient to

review its policies or processes. NZXR expects that the use of obligations letters may decline in future,

given the introduction of the infringement notice regime and NZXR’s increased focus on compliance

outcomes and engagement.


18

Regulatory Initiatives

ENGAGEMENT AND GUIDANCE IN 2016

Issuers

NZXR’s continuing emphasis on engagement with Issuers was reflected in the sessions held at the NZX

Issuer Forum in October 2016, and subsequent Issuer workshops in Wellington and Christchurch.

During the year, NZXR also undertook significant direct engagement with Issuers on a group and

individual basis. This included general sessions on understanding the Listing Rules, through to

presentations on specific Rule requirements.

NZXR also contributed to the Consensus Guidance consultation document released in November 2016.

This followed feedback from the market seeking further guidance on how Issuers should manage their

continuous disclosure obligations in the context of analyst coverage and consensus estimates. This work,

and the useful submissions provided by the market, will continue to inform NZXR’s approach to guidance

on continuous disclosure more broadly.

NZXR also spent considerable time in 2016 developing Practice Notes, the first batch of which were

published in January 2017 and can be found on NZX’s website.

NZXR undertook a number of other initiatives to support its monitoring and enforcement work. These included:

1. Revising NZXR’s enforcement policy into the publication Our Approach to Enforcement, which

outlines NZXR’s preferred approach to enforcing NZX's market rules

2. Contributing to the development and implementation of NZX’s revised price enquiry process, which

involves the introduction of a confidential enquiry letter. These changes assist NZX to determine

whether an Issuer subject to a price enquiry remains in compliance with its continuous disclosure

obligations, while maintaining confidentiality of the Issuer’s information. Additionally, NZXR considers

that this aligns with its efforts to better understand Issuers’ businesses and operating conditions

3. Embedding changes from the review of the Tribunal Rules. The changes to the Rules took effect from

29 February 2016 and required NZXR to review its settlement processes, the documents produced

for the respondent and Tribunal, and (most significantly) the application of the revised penalty bands

Participants

Participant Rules reviewDuring 2016, NZX continued its Participant Rules review consultation process. That review reflected

market developments and trends, as well as engagement that NZXR has had with Participants on

compliance issues and matters which have been the subject of enforcement action. The themes of that

review included, among other things:

1. Introducing additional surveillance tools

2. Changes to the monitoring of Participants’ capital positions

3. The proposed introduction of voice recording to enhance NZX’s surveillance and monitoring capabilities


19

NZX is targeting implementation of these rule changes in Q3 2017, together with revised guidance to

support Participants’ compliance planning.

Participant inspection programme

The 2016 inspection programme focused on compliance monitoring, and the effectiveness of

Participants’ internal controls and oversight, in relation to target areas, including:

Client Assets

Employee Trading

Market Misconduct

Capital Adequacy

Direct Market Access

Derivatives Order

records

Compliance Monitoring

Plan

Governance &

Supervision

Fraud prevention

The programme also included enhancements to capital monitoring, which focused on areas that have

historically posed the highest level of risk for Participants, or which have been the subject of increased

levels of non-compliance.

NZXR identified a number of breaches through its inspection programme which subsequently resulted in

enforcement action. The process also allowed NZXR to identify high quality risk and compliance activity,

and engage with Participants on best practice expectations.

ANTICIPATED WORK STREAMS IN 2017

Looking forward to 2017, our engagement with Issuers and Participants will continue to be a high priority.

NZXR will continue to target key risks and to structure engagement to support compliance with NZX’s

market rules.

Issuers

During 2017, NZXR’s focus will continue to be on continuous disclosure obligations (and disclosure more

broadly). This will include a focus on:

1. The timing of announcements

2. The treatment of developing information

3. How Issuers understand and manage market expectations

In addition, NZXR is intending to publish several additional batches of Practice Notes on a range of topics

in 2017, and will contribute to the publication of the amended Continuous Disclosure Guidance Note. NZX

will also continue to engage with Issuers through its annual NZX Issuer Forum and workshops held in

other centres.

NZXR’s strategy for engagement with Issuers in 2017 will also extend to developing case studies for

publication. These case studies are intended to increase the transparency of NZXR’s investigation and


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monitoring work with Issuers. This will enhance Issuers’ understanding of the types of enquiries NZXR is

likely to make, and increase the confidence and knowledge of investors and other participants in NZX’s markets.

Participants

Trading Conduct guidance noteDuring 2017, NZX will finalise its Trading Conduct Guidance Note. The note addresses considerations

relating to trading conduct under both the Participant Rules and the Derivatives Market Rules.

The purpose of the Guidance Note is to provide information for Participants in respect of trading on

NZX’s markets, including:

1. The key principles that NZX considers underpin the role of Participants who trade on those markets

2. Describing acceptable market practices, best practice and recommendations on procedures relevant

to order execution

3. Details of the types of conduct or behaviour that may potentially breach NZX market rules or result

in regulatory scrutiny

Participant inspection programmeNZXR’s 2017 inspection programme will include, among other things, a focus on Participants’

understanding and implementation of the Participant Rule changes, good trading practices, and areas

where NZXR has observed trends of non-compliance. NZXR will continue its approach of proactively

working with Participants to identify and implement best practice improvements.


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Discipline FundThis section details the use of the proceeds of the Discipline Fund, as set out in the Discipline Fund accounts.

Proceeds of the Discipline Fund may be used in accordance with Tribunal Rule 9.5.1. These uses of the

Discipline Fund include:

1. Seminars and other education initiatives in respect of regulation of NZX’s Markets

2. Redrafting NZX’s markets rules and any other rules and regulations of NZX, the Clearing House or the

Depository

In 2016, NZXR utilised approximately $80,000 of the Discipline Fund for the purposes of the Participant

Rules review. NZXR anticipates that further funds will be utilised from the Discipline Fund as we

commence the review of the Main Board Listing Rules in 2017.

The amount spent on market education in 2016 increased on the prior year. NZXR anticipates such

expenditure to also increase in 2017 in line with its engagement efforts.

12 Months to 12 Months to 12 Months to 12 Months to 12 Months to 12 Months to

31-dec-11 31-dec-12 31-dec-13 31-dec-14 31-dec-15 31-dec-16

Fines and costs 196,617 179,838 152,000 602,565 364,126 437,808

Expenses of NZ MarketsDisciplinary Tribunal

Executive Counsel costs 63,216 34,714 41,126 77,060 63,292 46,236

NZ Markets Disciplinary TribunalMember costs 101,567 88,554 97,155 256,659 126,080 103,670

Legal Advisory costs - - - 15,860 13,387 10,066

Rules Review costs - 2,310 32,449 8,872 30,935 103,076

Disbursements 5,295 1,497 1,170 1,420 7,446 1,202

Educational Expenditure 5,000 - - - - -

Other Incidentals 1,524 2,027 97 252 921 5

Market Education - - - - 12,583 18,708

Bad Debts - 22,703 - 6,000 8,350 -

Total Expenses 176,603 151,805 171,997 366,124 262,994 282,963

Interest Income 70 1,270 1,283 2,677 13,807 9,237

Tax expense 32,183 132,663

Surplus (Deficit) for the period 20,084 29,303 (18,714) 239,118 82,757 31,419

Accumulated Surplus (Deficit) 179,842 209,145 190,431 429,549 512,305 543,724


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NZX Limited

Level 1 / NZX Centre

11 Cable Street

PO Box 2959

WELLINGTON

Tel: +64 4 472 7599

[email protected]

www.nzxgroup.com

Download - NZX Oversight & Engagement Report · NZX Oversight & Engagement Report 03. Investigations We become aware of matters that may require investigation in a number of ways. Usually this

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