FMA gives NZX a glowing report
The NZX has a gold star from the Financial Markets Authority, which reviews the stock exchange operator at least once a year.
It found the NZX is carrying out its regulatory role effectively, its markets are well regulated and it is not required to take any specific actions.
The FMA says it is satisfied market participants’ compliance is effective, with the NZX demonstrating good processes and responding appropriately to breaches.
“We believe the market may still interpret low levels of visible action to mean NZX does not respond appropriately to potential or actual non-compliance,” FMA capital markets director Garth Stanish says.
“This is particularly evident in commentaries made when the market experiences an event such as a large price movement.”
But he says much of NZX’s regulatory work is not obvious to the public, with monitoring for market misconduct and inquiries into issuers’ material disclosures generally remaining behind the scenes.
When breaches occur, enforcement action taken by NZX is usually only reported if the case is referred to the NZ Markets Disciplinary Tribunal.
Thirteen cases were referred to the tribunal last year, with four relating to participants and brokers. Two were for breaches of good broking practice, one was for breach of employee trading permissions requirements, and the fourth was for short-selling when an issuer was under a takeover. There was one referral in 2014 for breaches of rules regarding employee trading.
The FMA is encouraging NZX to improve public visibility of its regulatory action, suggesting it publish participant updates and report when it uses its new infringement notice power for minor breaches.
It also reviewed NZX’s approach to dealing with recurring non-compliance and looked at three files concerning different breaches by the same firm. Two of the breaches were relatively minor and the third was due to timeliness and priority of placing client orders into the market.
The firm was required to modify its processes, undertake training and report back to NZX, and the FMA says this was appropriate.
There were two key changes to NZX’s business during the year – it acquired funds management business SuperLife and launched the NXT market, for small and medium sized companies.
The FMA says while the purchase of SuperLife could lead to potential conflicts of interest between its commercial interests and its regulatory role, it is satisfied NZX has appropriate measures in place to address this.
There are three companies listed on the NXT, but the FMA says this has let the procedures and technology be tested and it is satisfied the NZX is monitoring the new market appropriately for the level of activity on it.
NZX’s equity markets have doubled in value since the FMA’s first review in 2011. During 2015, the total value increased 14.2% to $110.2 billion.
The FMA notes international trading in NZX’s markets appears to be increasing, mostly through direct market access (DMA) accounts, which let participant firms’ clients enter orders directly into NZX’s trading system.
“As trading grows, it is increasingly important NZX participants’ controls for DMA access by their clients are adequate to maintain orderly markets and prevent market misconduct," Mr Stanish says. "Participants should also be able to identify the source of orders, as the participant is responsible for all trading executed through its accounts.”
The NZX is reviewing participant rules and if proposed changes go ahead, participant firms will be required to enter more information into the trading system, to help NZX identify clients.
The FMA has taken enforcement action against suspected market manipulation three times in the past two years, following referrals from NZX.
FMA is satisfied that NZX:
ensured, to the extent reasonably practicable, that each of its licensed markets was fair, orderly and transparent
had adequate arrangements for notifying disclosures from participants in its markets, and for continuing to make them available
had adequate arrangements for handling conflicts between its commercial interests, and the obligation to ensure its markets operate in a fair, orderly and transparent manner
had adequate arrangements for monitoring the conduct of participants in its markets
had adequate arrangements for enforcing compliance with market rules
had sufficient resources (including financial, technological and human resources) to operate its licensed markets properly.