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  • NZX Oversight & Engagement Report 2017

  • 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 Market Supervision

    NZX Oversight & Engagement Report

    02

  • Contents

    Investigations 04

    Enforcement 15

    Regulatory Initiatives 19

    Discipline Fund 23

    NZX Oversight & Engagement Report

    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 Service Providers (Registration and Dispute Resolution) Act 2008, Participants are required to be members of an approved independent external 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.

    NZX Oversight & Engagement Report

    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

    Trading Conduct

    Capital Adequacy

    Contract Notes

    Derivatives Other

    Market Participants

    20

    15

    10

    0

    5

    Derivatives Market Participants

    16

    14

    7

    2

    5 5

    4

    3

    2 11

    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.

    NZX Oversight & Engagement Report

    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

    Breaches Investigations

    Trading Conduct

    Client Assets

    Employee Trading

    Notifications/ Reporting

    Capital Adequacy

    Derivatives (other)

    Contract Notes

    Other

    14 14

    16

    99

    5 6

    55 44

    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.

    NZX Oversight & Engagement Report

    06

  • 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 prov

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