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Answers to questions on notice
Received from the Australian Securities and Investments Commission on 18
Question on Notice #1
Mr FLETCHER: Mr Savundra, you said that you had
referred the matter to the AFP. When did that happen?
Mr Savundra: I cannot recall the date precisely but
it certainly occurred after the parliamentary report was delivered. We had had
requests for information via the AFP prior to that time but certainly—
Senator BOYCE: You had made requests or they had
Mr Savundra: We had made international requests for
information through the AFP. Prior to the report we had not sought to formally
refer the matter to the AFP for investigation.
Mr FLETCHER: And the Crime Commission?
Mr Savundra: I will take that on notice, if that is
The Australian Securities and Investments Commission (ASIC)
referred material concerning Trio Capital Limited (in liquidation) and Jack
Flader Jr to the Australian Federal Police (AFP) on 22 June 2012. ASIC
initially approached the Police about this referral on 15 June 2012.
In respect of the Australian Crime Commission after initial
contact a meeting was held between ASIC and the Commission on 20 June 2012.
We have reviewed our records and have confirmed that a
number of Interpol requests have been made through the AFP since October 2009.
These requests were made to assist ASIC with our Trio investigation.
Question on Notice #2
Senator BOYCE: Are you able to give the costs of the
Storm case, including that of the forensic accountant?
Mr Medcraft: I will take that on notice.
Senator BOYCE: If we could have a breakdown of the
costs of the case to ASIC.
Ms Gibson: I think we would probably prefer not to
provide that in a public forum, just because at some stage there will need to
be some discussion about outcomes of the case and costs.
Senator BOYCE: That was going to be my next question:
have costs been awarded or not awarded?
Mr Medcraft: In the case of Storm it is still in
court at the moment, but we can confidentially give you the number.
Ms Gibson: I am not sure.
Mr Medcraft: We will take it on notice.
In view of the pending litigation in which ASIC is involved arising
from the collapse of Storm Financial, ASIC does not consider it appropriate to
comment on the cost of the Storm case at this point in time.
Question on Notice #3
Mr FLETCHER: Is debenture secured over specific
Mr Price: Yes, a floating charge.
Mr FLETCHER: Is it mainly commercial property or
residential property or a mix?
Mr Price: I might take that question on notice. It is
a bit of a mix, but I think it is mainly commercial property, just from memory.
Mr FLETCHER: The other aspect to that question, on
notice, is what is the proportion of established property and property under
Mr Price: Again, I will take that on notice.
The Banksia Securities Limited loans by underlying security
type (based on value):
• 22% was commercial property,
• 46% was residential property,
• 9% was industrial property,
• 18% was rural property and
• 5% was other property.
The Cherry Fund Limited (CFL) loans by underlying security
type (based on value):
• 36% was commercial property,
• 21% was residential property,
• 6% was industrial property,
• 34% was rural property and
• 4% was other property.
(Source 7.3.2 on Pg 19 of Receivers' Report dated 7 December
There are 128 Banksia Securities Limited loans with an aggregate
value of $147 million with internal loan classifications which incorporate a
development element of “construction”, “land bank” and “vacant land”. This
equates to approximately 28% of the Banksia loans by value as possible property
There are no CFL loans classified “construction”, “land
bank” or “vacant land” indicating there are no development loans.
Question on Notice #4
Mr Price: It is an important point generally. One of
the other things that the task force is doing is to consider if there are any
breaches of the law. Obviously if we do find anything we will seek to hold
people to account.
Mr Medcraft: We will look at directors; we will look
at auditors; we will look at trustees. Basically we will look at all the
gatekeepers, as we always do, including financial advisers.
CHAIR: So what are the consequences for—
Mr Medcraft: Sorry; the sad thing was—how much
superannuation money was in—
Mr Price: A little over $100 million, off the top of
my head, in superannuation money was—
Senator BOYCE: How many people?
Mr Price: I will need to take that on notice.
There are 843 different Super Funds (SMSFs) with investments
totalling $112 million as at the date of appointment on 25 October 2012.
(Source Receivers Profiling Sheet dated 27 October 2012)
This equates to 17.26% of the total $652 million investors
funds by value.
Question on Notice #5
CP 189 – FOFA: Conflicted Remuneration
Mr FLETCHER: I want to go to the paper that you have
recently put out, Consultation Paper 189 Future of Financial Advice: Conflicted
remuneration. A concern has been raised with me that this is likely to apply to
investment firms which operate for non-retail clients as well as retail
clients. Is that ASIC's understanding of the scope of the paper and the scope
of these remuneration arrangements?
Mr Kell: No. I will take it on notice to check on
that but, no, that is not our understanding.
Mr FLETCHER: To expand on the concern, it has been
put to me that this firm and other firms in the investment management market
serving non-retail clients typically operate on the basis of a bonus structure
as well as a base remuneration structure for their portfolio managers. A driver
of bonus amongst other things is the amount of additional funds under
management that they are able to secure. They are concerned that that
remuneration structure will no longer be open to them if the arrangements in
paper 189 come into effect.
Mr Kell: It is a little hard to provide a definitive
answer on an example like that off the bat so we are happy to take it on notice
and get back to you quickly. Generally, it is not intended to apply in a purely
Mr FLETCHER: Is that are concern that has been raised
with you on the consultation process?
Mr Kell: Again, I could check on that. It certainly
has not been prominent in the responses to the paper to date to my knowledge.
Under the Corporations Act, a benefit is only conflicted
• it is given to a financial services licensee, or a
representative of a financial services licensee, who provides financial product
advice to persons as retail clients; and
• it could reasonably be expected to influence the choice of
financial product recommended to retail clients or the financial product advice
given to retail clients.
The conflicted remuneration provisions do not apply in
relation to services provided to wholesale clients. This position is reflected
in our proposed regulatory guidance on the conflicted remuneration provisions.
From our consultations with industry, we consider that
industry understand this.
Question on Notice #6
Senator BOYCE: Leading on from what you were just
talking about, the issue has been raised that it may be possible to define a discretionary
trust that operates a family business as a financial product. Has that issue
ever been raised with you? If so, how?
Mr Tanzer: I have to take that on notice, Senator.
As you are aware, ASIC deals with particular matters as they
arise, including considerations of whether something falls within the
definition of a financial product under the Corporations Act 2001. While we are
unable to comment on specific entities, I advise that it does not appear from
our records that this issue has been raised with ASIC in any formal sense.
Question on Notice #7
MF Global – client money
Mr FLETCHER: I want to ask some questions about MF
Global. It is reported that a number of Australians have had their balances in
accounts with that international broker frozen following its collapse in the
US. How actively is ASIC involved in efforts to recover those moneys?
Ms Gibson: There are two positions. Firstly, the MF
Global subsidiary in Australia is being wound up. I thought that there was some
money in the course of being released from the local broker. I do not know
about the position of Australians with funds in the US or UK fund directly.
Some of the moneys that were invested here went through to London. There is
some money frozen there. We are in constant dialogue with the receivers. The
receivers are seeking to negotiate a situation with the US administrators to
extract some money that is held in London.
The issues in these types of external administrations can be
very complex, with a mix of competing interests, and often require court
intercession as was the case with MF Global Australia Limited (MFGA). MFGA was
one of the largest futures brokers and providers of contracts for difference
(CFDs) in Australia. Due to significant financial difficulties faced by its
US-based parent, administrators were appointed to MFGA on 1 November 2011. MFGA
subsequently went into liquidation on 2 March 2012.
Since the collapse of MFGA, ASIC has continued to monitor
and engage with the liquidators of MFGA, as appropriate, including;
• obtaining regular updates on the progress of the
administration and liquidation of MFGA;
• monitoring the various court applications to access the
legal and policy implications; and
• engaging with the liquidators on disclosure to clients and
creditors, including on issues associated the liquidators’ remuneration and
The liquidators of MFGA instituted representative
proceedings to obtain court orders regarding the distribution of client monies
and amounts recovered from clearing houses and counterparties. Representatives
of various categories of claimants appeared in these proceedings. On 29 August 2012
Justice Black of the NSW Supreme Court handed down his decision in these proceedings.
Following the decision, the liquidators of MFGA commenced a first partial
distribution to clients on 31 October 2012. To date approximately $201 million
(or an average of 63 cents in the dollar) has been distributed to clients and a
further distribution is expected after Christmas.
There had been a dispute between MFGA and MF Global UK Limited
(in special administration) (MFGUK) over approximately $36 million held by the
ASX. This had been the subject of separate proceedings in the Federal Court. On
14 December 2012 the liquidators of MFGA announced they had reached an
agreement with the special administrators of MFGUK to settle this dispute.
Relevantly, the dispute has been settled on the basis that:
• MFGUK will receive an amount of GB£400,000 (approximately
• MFGA will receive the balance of the disputed funds, being
approximately AU$35.2 million.
The liquidators of MFGA anticipate receiving the funds from
ASX shortly and will look to make a
further distribution to clients (specifically, futures
clients) as soon as practicable.
Mr FLETCHER: It is reported that, although the
clients were told that their moneys were going into a so-called client
segregated account, they actually went into a pooled account and, when the firm
collapsed, that became part of the pool of assets that creditors tried to
recover against. Is that right?
Ms Gibson: I had thought that when the money was
frozen that this was the subject of much discussion, although I might have to
come back to you on notice about this. It has been to court and tested before Justice
Black. He gave quite a long judgment in working out how the moneys that are available
are to be divided up between the various classes of investor. Whether money is
in a client segregated account is one of the criteria.
At the time of its collapse, MFGA held a substantial amount
of funds in client segregated accounts. As an Australian financial services
licensee and market participant MFGA was required to keep 'client money' in a
client segregated account, separate from its own funds. Under the Corporations
Act, moneys held in client segregated accounts are held in trust. However, the Corporations
Act does not require a licensee to maintain a separate account for each client.
Additional funds were subsequently able to be recovered from clearing houses
and counterparties with which MFGA had open positions. Justice Black found the
client segregated accounts maintained by MFGA should be grouped into four
pools, representing the four product lines of MFGA (namely, futures, CFDs,
online FX and margin FX). In addition, his Honour found that amounts recovered
from clearing houses and counterparties were, on receipt by MFGA, to be held on
trust under Chapter 7.8 of the Corporations Act. Accordingly, the funds
recovered from counterparties are only available for distribution to the
relevant client pool and not for general distribution to other creditors.
Mr FLETCHER: I am interested in understanding whether
clients of MF Global are in a different position to clients of an Australian
broker that they used to transact on the ASX or whether they are in exactly the
Ms Gibson: We would need to take that on notice to
give you a fully correct answer.
Under the ASIC market integrity rules, brokers holding
client funds to trade on Australian futures markets are required to place those
funds into a segregated account. As a market participant, MFGA adhered to this
requirement. The clearing of MFGA futures trades was conducted by MFGUK.
Clearing is a capital intensive business and it is common for one entity in a
group, with a large capital base, to be a clearer in multiple markets for
number of trading participants in the group. There had been a dispute between
MFGA and MFGUK over the funds held by the ASX at the time of MFGA’s collapse,
however this dispute has now been settled.
Mr FLETCHER: There was a suggestion in one of the
press reports that a particular difficulty was that ASIC had granted an
exemption to MF Global to allow it to use its British business as the market
participant in Australia. Is that right or not?
Ms Gibson: I would need to take that on notice. I am
not sure whether we or the ASX would have done that. If the problem was
clearing participants, then probably the ASX would have done that.
MFGUK, an entity regulated by the UK Financial Services
Authority, had been granted an exemption by ASIC from the requirement to hold
an Australian financial services licence for certain financial services it
provided to wholesale clients. The Corporations Act contemplates the granting
of such exemptions.
The decision was made by the ASX to allow MFGUK to be a
Mr FLETCHER: All right. That was all I had.
Question on Notice #8
Financial advice and the super cap
Senator BOYCE: I have had a couple of people complain
to me about not receiving the best advice from their financial service
providers or advisers, which has caused them to go over the cap on
superannuation. Has that issue been raised with you? If so, what is ASIC
thinking about that?
Mr Kell: We are aware of the issue and the fact that
the change in the level of the cap means that advisers should be revisiting the
strategies and arrangements that were put in place prior to July this year.
First and foremost, it is an issue about which the ATO has been providing
educational material and information to investors. That material talks about
the cap and how they can manage that. We have not been receiving a significant
number of complaints about this, but I will take it on notice to check whether
we have had any. I will also check on whether we have referred any of those to
the Financial Ombudsman Service for them to look at the quality of the advice
that has been provided. At this stage, it has not been a big issue in terms of
complaints that have come to us. We are aware of it. We think that it is the
sort of issue that, as a matter of course, should be captured in knowledge d
skills updates for financial advisers. We would like to see it incorporated
into the training that advisers get.
ASIC has not received a significant number of complaints
from consumers who have received advice that has caused them to exceed the
concessional contributions cap. ASIC has, in fact, received 1 complaint and 2
breach notifications regarding excessive contributions to date in the 2012
calendar year. Both breach notifications were in respect of the conduct of one
One of these matters is being considered at the
Superannuation Complaints Tribunal and the other two were managed through the
relevant Australian financial services licensee's dispute resolution framework.
Received from the Australian Securities Exchange on 18 December:
ASX Further Response to Questions
from the PJC
it be possible to get, on notice – I do not necessarily want to know the days –
the meetings and the topic that is discussed at those meetings?”
monthly meetings are held between ASX and ASIC representatives on:
Development, Operations and Technology matters discussion topics cover current
business, technology and operational issues, including:
- ASX Business
initiatives and regulatory issues
relating to the operation of the markets and clearing and settlement facilities
- ASX and ASIC
- Changes to
the operating rules and
related matters discussion of current compliance related issues, including:
- Run off case
- Rule overlap
or other rule issues
with ASIC – has it got a term to it? Does it have to be renegotiated?”
no term. The MOU is ongoing.
memorandum of understanding that you have reached indicates that ASIC has
capacity to advise the Australian Securities Exchange of a potential breach of
the ASX operating rules, but it is limited by the Privacy Act and section 127
of the ASIC Act. Does the ASX receive from ASIC sufficient information to
address breaches of its operating rules? Given the transfer of responsibility
for supervision of the stock market from ASX to ASIC, should section 127 of the
ASIC Act be reviewed to consider the ASX among entities which ASIC may provide
confidential information to?”
regular meetings outlined in Question 1 (above) together with daily discussions
between ASX Compliance and ASIC staff and specific meetings/discussions
relating to particular incidents/events/issues provide forums for ASX to obtain
any relevant information from ASIC that ASX does not otherwise obtain itself
through its operational or compliance activities. Also, ASIC has this
year released information to ASX pursuant to section 127 to enable ASX to pursue
enforcement action against ASX participants.
relation to the question about section 127 of the ASIC Act being reviewed, we
believe this is not necessary for ASX Group licensees. However, it could be
helpful if the Securities Exchanges Guarantee Corporation (the trustee of the
National Guarantee Fund) was included in the list of bodies corporate in Part 1
of Schedule 3. SEGC has statutory powers under section 892D to require
production of documents or statements to assist it in determining a claim for
compensation in respect of a broker, but these powers do not apply to ASIC. The
inclusion of SEGC in the list in Part 1 of Schedule 3 will facilitate
cooperation between SEGC and ASIC in relation to the sharing of information.
This is particularly important now that broker supervision functions have been
transferred to ASIC.
you provide on notice some examples from the US market where the level of high
frequency trading and dark pools activity has had very negative outcomes of the
kind we are seeking to prevent?”
are reports/extracts of high frequency trading and dark pool activity:
US flash crash date and summary of what occurred
May 6, 2010, the prices of many U.S.-based equity products experienced an
extraordinarily rapid decline and recovery. That afternoon, major equity
indices in both the futures and securities markets, each already down over 4%
from their prior-day close, suddenly plummeted a further 5-6% in a matter of
minutes before rebounding almost as quickly.
of the almost 8,000 individual equity securities and exchange traded funds
(“ETFs”) traded that day suffered similar price declines and reversals within a
short period of time, falling 5%, 10% or even 15% before recovering most, if
not all, of their losses. However, some equities experienced even more severe
price moves, both up and down. Over 20,000 trades across more than 300
securities were executed at prices more than 60% away from their values just
moments before. Moreover, many of these trades were executed at prices of a
penny or less, or as high as $100,000, before prices of those securities
returned to their “pre-crash” levels.
the end of the day, major futures and equities indices “recovered” to close at
losses of about 3% from the prior day.
BATs and Facebook IPOs dates and summary of what occurred
experienced a serious technical failure on Friday, March 23, 2012 which caused
it to withdraw its own IPO.
experienced a system problem in our attempt to open the BATS ticker symbol for
the first time on Friday morning. We failed to roll into continuous trading
with our new BATS ticker immediately following the opening auction. In effect,
our newly issued stock did not begin trading as it should and was halted before
it ever started trading.
implementations are prone to failures and unexpected outcomes, even after going
through rigorous testing. Every market center and every trading participant has
experienced technical issues in their history. Our historical reliability has
been very strong, with 99.9% uptime on our primary BATS BZX Exchange over the
last 3+ years. On Friday we were under the brightest spotlight imaginable ...
opening our own stock on our own exchange for the first time ever. It doesn’t
get much more public than that.
listing Exchange has an obligation to operate and maintain fair and orderly
markets. In the ordinary course, when an exchange experiences a technical
problem, normal trading in the affected securities resumes once the technical
problem is resolved. This situation was unique, however, because the affected
security was our own. After fixing the software module that failed, and rolling
it back into production, we were faced with how the market would react to a
re-opening of our stock after the failed first start. Had the delay been only a
few minutes, the restart process would have possibly been manageable. But after
2 ½ hours had transpired, we determined that this was a material event that had
eroded investor confidence in our own stock and made the timely resumption of
fair and orderly trading unlikely. As a result, we pulled the IPO and unwound
all auction executions.
May 18, 2012, Nasdaq experienced system difficulties during the Nasdaq Halt and
Imbalance Cross Process (the “Cross”) for the FB IPO. These difficulties
delayed the completion of the Cross from 11:05 a.m. until 11:30 a.m...
result of the system difficulties, however, certain orders for FB stock that
were entered between 11:11:00 a.m. and 11:30:09 a.m. in the expectation of
participating in the Cross
that were not cancelled prior to 11:30:09 – either did not execute or executed
after 1:50 p.m. at prices other than the $42.00 price established by the Cross.
(Other orders entered between 11:11:00 a.m. and 11:30:09 a.m., including
cancellations, buy orders below $42.00, and sell orders above $42.00, were
handled without incident.) System issues also delayed the dissemination of
Cross transaction reports from 11:30 a.m. until 1:50 p.m. At 1:50 p.m., Nasdaq
system difficulties were completely resolved...
result of these unique circumstances, Nasdaq is proposing to accommodate
members for losses attributable to the system difficulties on May 18, 2012 in
an amount not to exceed $62 million.
Capital malfunction date and summary of what occurred
Capital Group Provides Update Regarding August 1st Disruption To Routing In
previously disclosed, Knight experienced a technology issue at the open of
trading at the NYSE yesterday, August 1st. This issue was related to Knight's
installation of trading software and resulted in Knight sending numerous
erroneous orders in NYSE-listed securities into the market. This software has
been removed from the company's systems.
were not negatively affected by the erroneous orders, and the software issue
was limited to the routing of certain listed stocks to NYSE.
has traded out of its entire erroneous trade position, which has resulted in a
realized pre-tax loss of approximately $440 million. Although the company's
capital base has been severely impacted, the company's broker/dealer
subsidiaries are in full compliance with their net capital requirements. Knight
will continue its trading and market making activities at the commencement of
trading today. The company is actively pursuing its strategic and financing
alternatives to strengthen its capital base.
issues or incidents in the US
order controversy at Direct Edge. Direct Edge withdrew the practice of flashing
customer orders to their liquidity providers before routing unfilled orders to
other venue in 2011.
of dark pools operating in the US
to Mary Schapiro there are 15 public exchanges, more than 30 dark pools, 3
electronic communication networks (ECNs), and more than 200 internalizing
of off market trading in the US
to Fidessa, 32% in FY13.
of retail flow executed on lit exchanges
is also thought to account for almost 100% of all retail marketable order flow.
Retail internalization is driven by the purchase of order flow by wholesale OTC
market makers from retail brokerage firms. This practice enables broker/dealers
to “preference” those orders that are profitable to arbitrage and route
unwanted orders to other market centers
Pools, Internalization, and Equity Market Quality, CFA Institute 2012
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