FMA gives NZX a hurry-up to get house in order

A Financial Markets Authority review has given market operator NZX a hurry-up to put its whole house in order.   

The FMA review – the first since the Securities Markets Amendment Act came into effect last year – found NZX met its statutory obligation to run fair, orderly and transparent markets, but fell down in other areas such as:

# Potential conflicts of interest with the corporate counsel also acting as head of market supervision (HOMS).

# In compliance enforcement, the absence of documented criteria for consistent decision-making, low number of referrals to the NZ Markets Disciplinary Tribunal and the slow progress of investigations.

# Insufficient market supervision resources despite a "significant" workload.

NZX CEO Tim Bennett tried put a positive spin on the report.

He says in a statement that the NZX had taken action in two of the three identified areas, claiming  "it’s clear we’re on the same page" as the FMA.

Yesterday, NZX announced it was creating distinct regulatory and market teams.

The FMA report says NZX will address the issues by the end of the year and "on that basis FMA does not require NZX to submit any action plan" under the act.

FMA CEO Sean Hughes said in a press release: “FMA has set out a number of expected actions which NZX is already implementing. 

"NZX is also actively considering our recommendations to improve its compliance arrangements.”

The FMA will report on NZX's progress.

As part of the review process NZX conducted an internal review, which found it was meeting its obligations and statutory requirements. But the FMA's assessment was qualified, with exceptions.

Previous reviews of NZX have revealed dual delegations are open to "inevitable" potential conflicts of interest between its commercial and regulatory roles.

The FMA report said having a joint HOMS and corporate counsel reduced the "quarantine" between supervisory and commercial decision-making.

"FMA accepts that, as noted in NZX's conflict management policy, NZX's commercial and regulatory objectives are strongly aligned, but also that the perception of conflict can be damaging and must be managed accordingly.

"As NZX expands and pursues new opportunities, the areas of potential conflict will increase."

The review also said NZX needed to review its market supervision appointments, to ensure there was enough staff and experience to meet the workload.

The FMA report also sought improvements in:

# NZX board monitoring of compliance with obligations.

# Management information and oversight of market supervision.

# Managing potential conflicts of interest.

# The composition of the tribunal.

NZX said in a statement it has already taken action in two of the three main areas of concern – creating and resourcing a more explicit division between NZX’s market supervision and commercial legal functions – during the first half of 2012.

Work on the third area, formally documenting the existing decision-making steps in the enforcement process, is under way.