ASIC RG 265 — ASIC Regulatory Guide – RG 265 Guidance on ASIC market integrity rules for participants of securities markets

Page 1 REGULATORY GUIDE 265 Guidance on ASIC market integrity rules for participants of securities markets August 2022 About this guide This guide is for market participants subject to the ASIC Market Integrity Rules (Securities Markets) 2017 and ASIC Market Integrity Rules (Capital) 2021. It gives guidance on how market participants can comply with their obligations under these rules. Page 2 REGULATORY GUIDE 265: Guidance on ASIC market integrity rules for participants of securities markets © Australian Securities and Investments Commission August 2022 Page 2 About ASIC regulatory documents In administering legislation ASIC issues the following types of regulatory documents. Consultation papers: seek feedback from stakeholders on matters ASIC is considering, such as proposed relief or proposed regulatory guidance. Regulatory guides: give guidance to regulated entities by:  explaining when and how ASIC will exercise specific powers under legislation (primarily the Corporations Act)  explaining how ASIC interprets the law  describing the principles underlying ASIC’s approach  giving practical guidance (e.g. describing the steps of a process such as applying for a licence or giving practical examples of how regulated entities may decide to meet their obligations). Information sheets: provide concise guidance on a specific process or compliance issue or an overview of detailed guidance. Reports: describe ASIC compliance or relief activity or the results of a research project. Document history This guide was issued in August 2022 and is based on legislation, regulations and market integrity rules as at the date of issue. In May 2024, we updated RG 265.659 to define ‘immediately’ for a major event notification. In December 2025, we updated Section O: Technological and operational resilience to include details of a class waiver (relating to partially exempt outsourcing arrangements). Expectations relating to critical business services and business continuity plans were clarified, and updates were made to outdated references. Previous version  Superseded Regulatory Guide 265, issued May 2018 Disclaimer This guide does not constitute legal advice. We encourage you to seek your own professional advice to find out how the Corporations Act and other applicable laws apply to you, as it is your responsibility to determine your obligations. Examples in this guide are purely for illustration; they are not exhaustive and are not intended to impose or imply particular rules or requirements. Page 3 REGULATORY GUIDE 265: Guidance on ASIC market integrity rules for participants of securities markets © Australian Securities and Investments Commission August 2022 Page 3 Contents A Overview ........................................................................................... 5 Supervision of trading on domestic licensed financial markets ......... 5 ASIC market integrity rules ................................................................ 5 Communicating with ASIC ................................................................. 5 Scope of this regulatory guide ........................................................... 6 Related guidance ............................................................................... 7 B Supervision of trading on domestic licensed financial markets 8 ASIC’s supervisory responsibilities .................................................... 8 How ASIC works together with market licensees .............................. 9 Status of notifications, consents, waivers, etc., given before 1 August 2010 .................................................................................. 10 C ASIC market integrity rules........................................................... 11 ASIC market integrity rules .............................................................. 11 Waivers ............................................................................................ 12 D Communicating with ASIC ............................................................ 14 Forms ............................................................................................... 14 Contacting ASIC .............................................................................. 15 When to contact ASIC ..................................................................... 16 Notifying ASIC of reportable situations ............................................ 17 E Operational requirements ............................................................. 18 Management requirements .............................................................. 18 Good fame and character requirement ............................................ 28 Professional indemnity insurance .................................................... 29 Designated trading representatives ................................................. 29 F Client relationships ....................................................................... 31 Client agreements ............................................................................ 31 Client detail record keeping ............................................................. 31 G Best execution ............................................................................... 32 Scope and application ..................................................................... 32 Best execution obligation ................................................................. 33 Policies and procedures .................................................................. 43 Disclosure to clients of best execution arrangements ..................... 47 Monitoring and reviewing best execution arrangements ................. 51 Evidencing how client orders are executed ..................................... 54 Access to markets ........................................................................... 55 H Suspicious activity reporting ....................................................... 58 What suspicious activity must be reported? .................................... 58 Compliance with Part 5.11 ............................................................... 69 I Crossing systems .......................................................................... 73 Scope and application ..................................................................... 73 Notifying ASIC of intention to operate a crossing system ............... 74 Monthly reporting to ASIC on trading activity and system changes 75 Public disclosure about crossing system operations ....................... 76 Disclosure to crossing system clients .............................................. 78 Fair treatment of users ..................................................................... 82 Monitoring and suspicious activity reporting .................................... 83 Tick sizes ......................................................................................... 87 Systems and controls ...................................................................... 88 Page 4 REGULATORY GUIDE 265: Guidance on ASIC market integrity rules for participants of securities markets © Australian Securities and Investments Commission August 2022 Page 4 J Pre-trade transparency ................................................................. 90 Scope and application ..................................................................... 90 Orders and quotes to be pre-trade transparent ............................... 91 Exceptions ....................................................................................... 91 Content of pre-trade disclosures ..................................................... 98 K Post-trade transparency ............................................................... 99 Scope and application ..................................................................... 99 Market participants’ obligations to report data ................................. 99 Which activities do not need to be reported? ................................ 104 L Regulatory data ............................................................................ 105 Scope and application ................................................................... 105 Confidentiality ................................................................................ 106 Data to be provided and recorded ................................................. 106 What are ‘reasonable steps’ to determine data? ........................... 121 M Trades under rules of a market operator, trade confirmations, client agreements, confidential order information and order incentives ..................................................................................... 122 Scope and application ................................................................... 122 Trading under the operating rules of a market operator ................ 122 Trading suspensions and off-order book trading ........................... 123 Non-retail client confirmations ....................................................... 123 Accumulation of trade confirmations ............................................. 126 Managing confidential order information ....................................... 127 Order incentives ............................................................................. 130 N Capital requirements ................................................................... 137 Scope, application and waivers ..................................................... 137 Lodging forms and returns ............................................................. 137 ASX guidance materials on capital ................................................ 138 O Technological and operational resilience ................................. 139 Scope and application ................................................................... 139 Critical business services .............................................................. 140 Information security ....................................................................... 151 Business continuity plans .............................................................. 154 Governance ................................................................................... 159 Appendix 1: Guidance notes .............................................................. 161 Appendix 2: Superseded guidance ................................................... 162 Key terms ............................................................................................. 163 Related information ............................................................................. 174 Page 5 REGULATORY GUIDE 265: Guidance on ASIC market integrity rules for participants of securities markets © Australian Securities and Investments Commission August 2022 Page 5 A Overview Key points We are responsible for supervising domestic licensed financial markets in Australia. As part of our supervisory responsibilities, we make market integrity rules and monitor compliance by market participants with those rules. Supervision of trading on domestic licensed financial markets RG 265.1 We are responsible for supervising the activities and the conduct of market participants in relation to domestic licensed markets (i.e. financial markets operated by persons licensed under s795B(1) of the Corporations Act 2001 (Corporations Act)). RG 265.2 We are also responsible for supervising compliance with the Corporations Act and for making and supervising compliance with market integrity rules. RG 265.3 Australian market licensees are responsible for the operation of their markets and for monitoring and enforcing compliance with their markets’ operating rules, which include their listing rules. ASIC market integrity rules RG 265.4 Under Pt 7.2A of the Corporations Act, we are able to make market integrity rules dealing with activities and conduct in relation to domestic licensed financial markets, including the activities and conduct of market participants. We are also responsible for granting waivers from the obligation to comply with a provision of the market integrity rules. Communicating with ASIC RG 265.5 Market participants can contact ASIC directly to ensure that market integrity matters are known and addressed in an efficient and timely manner. RG 265.6 You may contact ASIC by direct email or by telephone to the relevant ASIC teams to communicate issues and queries about markets, trading and participant conduct. For contact details see RG 265.43–RG 265.47. See Table 3 for a list of email addresses you can use to contact ASIC about different market- and participant-related matters. RG 265.7 In Table 2 we have listed some of the information which must be provided to ASIC under the market integrity rules. Page 6 REGULATORY GUIDE 265: Guidance on ASIC market integrity rules for participants of securities markets © Australian Securities and Investments Commission August 2022 Page 6 Scope of this regulatory guide RG 265.8 This regulatory guide provides guidance for market participants on the ASIC Market Integrity Rules (Securities Markets) 2017 and ASIC Market Integrity Rules (Capital) 2021. Note 1: In this guide, ‘Securities Markets Rules’ refers to the ASIC Market Integrity Rules (Securities Markets) 2017. The Securities Markets Rules replaced the ASIC Market Integrity Rules (APX Market) 2013, ASIC Market Integrity Rules (ASX Market) 2010, ASIC Market Integrity Rules (Chi-X Australia Market) 2011, ASIC Market Integrity Rules (Competition in Exchange Markets) 2011 and the ASIC Market Integrity Rules (SIM VSE Market) 2010. The Securities Markets Rules can be downloaded from the Federal Register of Legislation. Note 2: In this guide, ‘Capital Rules’ refers to the ASIC Market Integrity Rules (Capital) 2021. The Capital Rules replaced the ASIC Market Integrity Rules (Securities Markets—Capital) 2017 and ASIC Market Integrity Rules (Futures Markets—Capital) 2017. The Capital Rules can be downloaded from the Federal Register of Legislation. Note 3: Guidance on the ASIC Market Integrity Rules (Futures Markets) 2017 for market participants can be found in Regulatory Guide 266 Guidance on ASIC market integrity rules for participants of futures markets (RG 266). RG 265.9 This guide also explains how we expect market participants to comply with requirements about: (a) the operation of market participants and representatives, specifically: (i) management structures; (ii) professional indemnity (PI) insurance; and (iii) designated trading representatives (DTRs); (b) client relationships, specifically: (i) client agreements; (ii) client detail record keeping; and (iii) best execution; (c) trading, specifically: (i) suspicious activity reporting; (ii) crossing systems; (iii) pre- and post-trade transparency; (iv) regulatory data; and (v) trades under rules of a market operator; (d) capital requirements; and (e) technological and operational resilience, specifically: (i) adequate arrangements for critical business services; (ii) change management; (iii) outsourcing; Page 7 REGULATORY GUIDE 265: Guidance on ASIC market integrity rules for participants of securities markets © Australian Securities and Investments Commission August 2022 Page 7 (iv) information security; (v) business continuity plans; and (vi) governance RG 265.10 This guide does not cover the operating rules of market operators or clearing and settlement (CS) facility operators. Related guidance RG 265.11 Table 1 identifies other regulatory guides that may be relevant to market participants. This is not an exhaustive list. Note 1: Guidance on various obligations under the Securities Markets Rules that apply to market operators can be found in Regulatory Guide 172 Financial markets: Domestic and overseas operators (RG 172). Note 2: Guidance on the professional standards for financial advisers who provide personal advice on relevant financial products to retail clients under the Corporations Act (as introduced by the Corporations Amendment (Professional Standards of Financial Advisers) Act 2017) can be found on our website—see Professional standards for financial advisers. Table 1: Related guidance Topic ASIC regulatory guide The disciplinary process for breaches of all market integrity rules, the function of the Markets Disciplinary Panel (MDP) and the policies that the MDP will take into account when making decisions about alleged contraventions of the market integrity rules Regulatory Guide 216 Markets Disciplinary Panel (RG 216) Notifying ASIC of a range of conduct by Australian financial services (AFS) licensees known as ‘reportable situations’: see s912DAA Regulatory Guide 78 Breach reporting by AFS licensees and credit licensees (RG 78) Our approach to supervising compliance with the AFS licensing obligations Regulatory Guide 104 AFS licensing: Meeting the general obligations (RG 104) and Regulatory Guide 105 AFS licensing: Organisational competence (RG 105) Our minimum training standards that apply to persons who provide financial product advice to retail clients Regulatory Guide 146 Licensing: Training of financial product advisers (RG 146) Information on electronic forms of disclosure Regulatory Guide 221 Facilitating digital financial services disclosures (RG 221) Guidance on electronic trading and automated order processing (AOP) Regulatory Guide 241 Electronic trading (RG 241) Guidance on an AFS licensee’s statutory obligation to manage conflicts of interest (s912A(1)(aa)) Regulatory Guide 181 Licensing: Managing conflicts of interest (RG 181) Page 8 REGULATORY GUIDE 265: Guidance on ASIC market integrity rules for participants of securities markets © Australian Securities and Investments Commission August 2022 Page 8 B Supervision of trading on domestic licensed financial markets Key points We are responsible for supervising trading on Australian domestic licensed financial markets. We take a risk-based approach to surveillance of compliance with the market integrity rules and market participants’ obligations under the Corporations Act. ASIC’s supervisory responsibilities RG 265.12 We are responsible for supervising market participants, market operators and other prescribed entities for compliance with the market integrity rules. This is in addition to our role in supervising compliance by market participants with the market misconduct provisions of the Corporations Act (e.g. the prohibitions against insider trading, market manipulation and making false and misleading statements) and with the general obligations of AFS licensees. Note 1: For our approach to supervising compliance with the general obligations of AFS licensees under s912A of the Corporations Act, see RG 104 and RG 105. Note 2: Guidance on market operators’ obligations under the Securities Markets Rules can be found in RG 172. Note 3: Our supervisory responsibilities do not extend to foreign-based markets that are licensed to operate in Australia under s795B(2) or to financial markets that are exempt from being licensed. Supervision of compliance with market integrity rules RG 265.13 We take a risk-based approach to surveillance of compliance with the market integrity rules and market participants’ obligations under the Corporations Act. In doing so, we consider the Objectives and principles of securities regulation set out by the International Organization of Securities Commissions (IOSCO). Note: IOSCO, Objectives and principles of securities regulation (PDF 187 KB), report, 10 June 2010. RG 265.14 We perform risk assessments of participants and, where necessary, conduct targeted surveillance of suspected misconduct. RG 265.15 We are responsible for any investigation and action in relation to an alleged breach of the market integrity rules. Page 9 REGULATORY GUIDE 265: Guidance on ASIC market integrity rules for participants of securities markets © Australian Securities and Investments Commission August 2022 Page 9 Guidance notes RG 265.16 In assessing a market participant’s compliance with the market integrity rules, we will seek to follow existing relevant published interpretation contained in old ASX guidance notes. The old ASX guidance notes that remain relevant are listed in the appendix. Market surveillance RG 265.17 To promote market integrity, we monitor on-market trading activity, including activity in relation to cash market products, options market contracts and futures market contracts, through a variety of computerised systems. RG 265.18 Our Market Surveillance team makes inquiries of market operators, participants, listed entities, clients and others, using compulsory powers where necessary. Disciplinary process RG 265.19 The disciplinary process for breaches of the market integrity rules is contained in RG 216. The MDP exercises ASIC’s power to issue infringement notices and accept court enforceable undertakings relating to breaches of the market integrity rules. RG 216 provides guidance on the processes by which matters will be referred to, and dealt with by, the MDP. How ASIC works together with market licensees RG 265.20 Australian market licensees are responsible for the operation of their markets and are required to set operating rules for their markets. These operating rules govern how trading can take place on the market and may, where relevant, deal with entities trading on the market’s official list. Market licensees are responsible for monitoring and enforcing compliance with their operating rules. Note: Guidance on market licensee obligations under the Corporations Act and, for domestic licensees, under the Securities Markets Rules and Futures Markets Rules, can be found in RG 172. RG 265.21 ASIC and market licensees conduct site visits of market participants and, where appropriate, share information on supervisory practices. Page 10 REGULATORY GUIDE 265: Guidance on ASIC market integrity rules for participants of securities markets © Australian Securities and Investments Commission August 2022 Page 10 Status of notifications, consents, waivers, etc., given before 1 August 2010 RG 265.22 Unless ASIC determines that it should be amended or revoked, any written: (a) waiver, exemption, consent, recognition, accreditation, approval, determination or notification given by a market operator to a participant under the operating rules of a market, where those rules are incorporated into the market integrity rules; and (b) notification or certification given by market participants to market operators under the operating rules of a market, where those rules are incorporated into the market integrity rules, is grandfathered and taken to be given by ASIC so as to continue in its existing form, and continue to have the same effect as given under the operating rules: reg 10.15.04 of the Corporations Regulations 2001 (Corporations Regulations). Note: Rule 1.6.1 of the Securities Markets Rules provides additional transitional arrangements to ensure the continuity of the status of notifications and certifications given by a market participant to ASIC in accordance with the market integrity rules in force immediately prior to 7 May 2018. Page 11 REGULATORY GUIDE 265: Guidance on ASIC market integrity rules for participants of securities markets © Australian Securities and Investments Commission August 2022 Page 11 C ASIC market integrity rules Key points The market integrity rules are made by ASIC and apply to market operators, market participants, other prescribed entities and financial products traded on a licensed market. We will consult on future amendments to the market integrity rules as required. We are responsible for supervising compliance with the market integrity rules. We are also responsible for granting waivers from the obligation to comply with a provision of the market integrity rules. ASIC market integrity rules RG 265.23 We are able to make market integrity rules under Pt 7.2A of the Corporations Act dealing with the activities or conduct of: (a) licensed markets; (b) persons in relation to licensed markets; and (c) persons in relation to financial products traded on licensed markets. RG 265.24 The market integrity rules are legislative instruments and are subject to parliamentary scrutiny and possible disallowance by Parliament. Ministerial consent to market integrity rules RG 265.25 We may not make a market integrity rule unless we have the written consent of the Minister. An exception applies for making emergency rules that are necessary, or are in the public interest, to protect people dealing in a financial product. Future review and amendment to the market integrity rules RG 265.26 We will review the market integrity rules from time to time to make any adjustments required as a result of our experience in administering the rules; developments in the market and the international regulatory environment; and feedback from market operators, participants and clients. RG 265.27 We expect to consult on any future amendment of these rules. Page 12 REGULATORY GUIDE 265: Guidance on ASIC market integrity rules for participants of securities markets © Australian Securities and Investments Commission August 2022 Page 12 Waivers Power to grant a waiver of a market integrity rule RG 265.28 We are able to grant waivers from the obligation to comply with a provision of the market integrity rules. RG 265.29 Any such waiver may be general, or limited to a particular case or category, and may be limited by such conditions as we think fit. If conditions are imposed on a waiver, all of the conditions must be complied with for the waiver to be effective. Failure to comply with a condition imposed on a waiver is a contravention of Rule 1.2.2. Further, failure to comply with a condition on a waiver may amount to a possible breach of the relevant market integrity rule waived. Note: In this guide, ‘Chapter 4’, ‘Part 4.2’ and ‘Rule 4.2.1’ (for example) refer to a chapter, part or rule (respectively) of the Securities Markets Rules, unless otherwise specified. RG 265.30 We will make a waiver by way of legislative instrument. All legislative instruments, including waivers, are registered on the Federal Register of Legislation and are publicly available. RG 265.31 We may withdraw, by legislative instrument, a waiver at any time. We will not grant a waiver retrospectively. Approach to considering a market integrity rule waiver RG 265.32 We will consider and determine all requests for a waiver of a market integrity rule on the basis of the facts, circumstances and merits of each request. In determining whether such a request should be granted, we will take into account commercial considerations against the need to maintain the integrity of the market. RG 265.33 Where appropriate, we may grant a waiver to a class of persons. The process of requesting a waiver RG 265.34 Any request for a waiver must be in writing. It should also include details of the market integrity rule to be waived, the person or class of persons seeking the waiver, the requested start date and duration of the waiver, the rationale for the waiver, all relevant facts and circumstances in support of the request, and any other relevant information. RG 265.35 Market participants may be refused a request if they fail to address all of the relevant issues. Similarly, failure to supply relevant information may cause a delay in finalising the request. RG 265.36 Should a commercially time-sensitive situation arise, we can consider such requests on an urgent basis, providing the participant has clearly Page 13 REGULATORY GUIDE 265: Guidance on ASIC market integrity rules for participants of securities markets © Australian Securities and Investments Commission August 2022 Page 13 demonstrated that the urgency results from factors beyond their reasonable control and that those factors could not reasonably have been foreseen. Self- imposed deadlines will not be a sufficient basis for urgent consideration. RG 265.37 Applications for waivers should be submitted through the ASIC Regulatory Portal. Market participants will need to pay fees for their application. We have provided details about payment options in the portal. For more information, see how to apply for relief. Publication of waivers RG 265.38 All waivers will be publicly available on the Federal Register of Legislation. RG 265.39 We may also publish notice of a waiver on our website. We maintain a public register of waivers on our website that contains details of: (a) the date a waiver takes effect; (b) the person or class of persons relieved from the obligation in the market integrity rule; (c) the provision of the market integrity rule to which the waiver applies; (d) brief reasons for the waiver; and (e) any conditions that apply to the waiver. Page 14 REGULATORY GUIDE 265: Guidance on ASIC market integrity rules for participants of securities markets © Australian Securities and Investments Commission August 2022 Page 14 D Communicating with ASIC Key points Market participants can contact ASIC directly to ensure that market integrity matters are known and addressed in an efficient and timely manner. Market participants should use the forms available on the ASIC Regulatory Portal to submit certain information to us, as required under the market integrity rules. Other contact points include direct email and telephone access to the relevant ASIC teams to communicate issues and queries about markets, trading and participant conduct. Breaches of the market integrity rules and/or provisions of the Corporations Act should be reported in accordance with the reportable situations procedures set out in RG 78. Forms RG 265.40 Details about the type of information that is required to be submitted to ASIC in writing are contained in the market integrity rules. RG 265.41 Market participants should use the forms available on the ASIC Regulatory Portal to submit certain information to us, as required under the market integrity rules. If you encounter issues while using the portal, contact market.intermediaries@asic.gov.au. RG 265.42 Table 2 lists some of the matters market participants will need to notify ASIC about. Note that this list is not exhaustive. Table 2: What market participants must notify ASIC about All market participants Reportable situations (s912DAA) Securities markets participants Trust account reconciliation breaches (Rule 3.5.10) Management structure (Rule 2.1.2) PI insurance: With related body corporate (Rule 2.2.2) PI insurance: Claims (Rule 2.2.4) Legal proceedings (Rule 2.2.5) Suspicious activity reports (Rule 5.11.1) Crossing systems (Chapter 5A) Capital requirements (Capital Rules) Becoming aware of a major event (Rule 8B.4.1(6)) Page 15 REGULATORY GUIDE 265: Guidance on ASIC market integrity rules for participants of securities markets © Australian Securities and Investments Commission August 2022 Page 15 Contacting ASIC RG 265.43 The market integrity rules require market participants to provide ASIC with information and other notifications in certain circumstances. Information should be provided in the manner detailed in the relevant market integrity rule. Written applications and requests RG 265.44 Requests and applications should be made to ASIC using the relevant form on the ASIC Regulatory Portal. If you encounter issues while using the portal, contact market.intermediaries@asic.gov.au. ASIC Regulatory Portal RG 265.45 Market participants can submit a range of applications and notifications using the forms available on the ASIC Regulatory Portal. Where a form is available on the portal, participants should use the portal to make the application or notification. Telephone hotline RG 265.46 Market participants can directly contact the relevant ASIC teams by calling our markets-related hotline on 1300 029 454 between 9 am and 5 pm Eastern Standard Time on market trading days. The hotline is for communicating with ASIC about live markets trading issues, non-live markets queries, general participant queries, notifications and exemptions. Participants can also call ASIC’s Client Contact Centre on 1300 300 630. Email RG 265.47 There are three email addresses set up for use by market participants for market- and participant-related matters: see Table 3 for details. Table 3: ASIC email addresses for use by market participants Email address To be used for: Examples of information, applications and notifications feedback.breach@asic.gov.au Reportable situations under s912D of the Corporations Act Queries regarding reportable situations Market participants must lodge notifications of reportable situations under s912DAA via the ASIC Regulatory Portal. Further guidance is given in RG 78 Page 16 REGULATORY GUIDE 265: Guidance on ASIC market integrity rules for participants of securities markets © Australian Securities and Investments Commission August 2022 Page 16 Email address To be used for: Examples of information, applications and notifications markets@asic.gov.au Matters relating to markets and trading Concerns or queries about trading anomalies Queries about unexplained market events Concerns about misconduct in the market market.intermediaries@asic.gov .au Participant-related matters General participant queries When to contact ASIC RG 265.48 As stated above, we are responsible for supervising trading activities by market participants to ensure market integrity. As such, we can be contacted about conduct and activities that occur on domestic licensed financial markets. RG 265.49 Australian market licensees retain responsibility for the operation of their markets. Queries about the operations and processes of markets should be directed to the relevant market operator. RG 265.50 In general terms, if your issue relates to an obligation or conduct covered by the market integrity rules or provisions of the Corporations Act, you should contact ASIC. The following examples indicate the sorts of matters that might arise and who to contact. Example 1: Crossings Participant A has a trading-related query about conducting crossings. • Participant A should contact the relevant market operator as this is an operational issue. Example 2: Market manipulation Participant A has a trading-related query about possible market manipulation by one of their clients. • Participant A should contact ASIC. Example 3: Trade cancellations Participant A has a trading-related query about trade cancellations. • Participant A should contact the relevant market operator. Page 17 REGULATORY GUIDE 265: Guidance on ASIC market integrity rules for participants of securities markets © Australian Securities and Investments Commission August 2022 Page 17 Notifying ASIC of reportable situations RG 265.51 Breaches (or likely breaches) of market integrity rules may constitute reportable situations for AFS licensees under s912D. If certain breaches of the market integrity rules are required to be reported under s912DAA, market participants need to report them to ASIC. The process for notifying ASIC of reportable situations under s912DAA and reporting significant breaches of market integrity rules to ASIC is the same. RG 265.52 Guidance on how to notify ASIC of a reportable situation by AFS licensees under s912DAA is set out in RG 78. You must report to ASIC using the prescribed form on the ASIC Regulatory Portal. Note: See RG 78 for further guidance on the process for notifying ASIC of reportable situations, and how we deal with these notifications. Page 18 REGULATORY GUIDE 265: Guidance on ASIC market integrity rules for participants of securities markets © Australian Securities and Investments Commission August 2022 Page 18 E Operational requirements Key points This section provides guidance for market participants and representatives on complying with operational requirements contained in the market integrity rules. These requirements relate to: • management structures; • good fame and character requirements; • professional indemnity (PI) insurance; • designated trading representatives (DTRs). RG 265.53 This section of the regulatory guide provides guidance on complying with a range of operational requirements contained in the Securities Markets Rules. Management requirements Management structure RG 265.54 Market participants must have appropriate management structures and supervisory policies and procedures to comply with the Corporations Act, relevant market integrity rules and market operating rules. Part 2.1 sets out minimum management requirements for market participants. RG 265.55 Rule 2.1.1 requires a market participant to have appropriate management structures in place covering all of its businesses and conduct relating to securities markets. Although ‘management structure’ is not defined, Rule 2.1.1 provides that a market participant’s management structure is to ensure that: (a) it has operations and processes in place that are reasonably designed, implemented and function to achieve compliance with the Securities Markets Rules and market operating rules; (b) those operations and processes are supervised by supervisory staff with appropriate supervisory skills, knowledge and experience; and (c) its supervisory staff have sufficient seniority and authority to exercise control, leadership, influence and supervision over the market participant’s operations and processes. Page 19 REGULATORY GUIDE 265: Guidance on ASIC market integrity rules for participants of securities markets © Australian Securities and Investments Commission August 2022 Page 19 Documenting the management structure and allocation of responsibilities RG 265.56 A market participant must also keep accurate records of its management structure and allocation of responsibilities among these supervisory staff: Rule 2.1.1(2). Such records should include: (a) an overview of the market participant’s business model and business objectives, including the types of services and products offered by the organisation and physical office addresses; (b) if the market participant is part of a conglomerate group, a group structure chart which shows the relationship between the market participant, its parent company and other related bodies corporate; (c) the internal structure of the market participant’s business, including a chart showing the individuals responsible for managing the business, their titles, responsibilities, roles and reporting lines (including alternative arrangements for when these individuals are on leave or out of the office); (d) a description of internal committees; (e) trading arrangements, including order management and trade execution, such as identifying supervisory staff managing these key functions or interactions with other participants; (f) clearing and settlement arrangements, such as identifying supervisory staff managing these key functions or interactions with other participants where alternative clearing and settlement operations are used; (g) details of any outsourcing arrangements; (h) frameworks for supervision, risk management, corporate governance and complying with regulatory obligations; (i) monitoring, review and control processes and responsibilities; and (j) escalation and reporting processes. RG 265.57 A market participant’s management structure records may incorporate by reference other frameworks, policies or procedures it has adopted and implemented. We expect that any such cross-reference in the management structure records would be accompanied by a brief summary of the relevant aspects of the framework, policy or procedure to preserve the usefulness and effectiveness of the management structure records. New market participants must give management structure documents to ASIC RG 265.58 Under Rule 2.1.2, an entity that becomes a market participant on or after commencement of the Securities Markets Rules must, within 10 business Page 20 REGULATORY GUIDE 265: Guidance on ASIC market integrity rules for participants of securities markets © Australian Securities and Investments Commission August 2022 Page 20 days of becoming a market participant of the relevant market, give ASIC a document that sets out its management structure and the allocation of responsibilities among its supervisory staff. RG 265.59 Notification to ASIC should be submitted using the relevant form on the ASIC Regulatory Portal. Significant changes in management structure RG 265.60 A market participant must have accurate, up-to-date records of its management structure and the allocation of responsibilities among its supervisory staff: Rule 2.1.1(2). RG 265.61 As such we expect a market participant to review and update its documented management structure in the event of a significant change. A significant change in a market participant’s management structure may include, but is not limited to: (a) a change in directors, senior managers, supervisory staff or other key staff including senior staff responsible for overseeing the compliance function; (b) a new business or change in business model, including a decision to conduct activities overseas; (c) providing services for new products; (d) rapid growth and expansion of the business; (e) a change to risk management systems, risk oversight or the risk profile of business; and (f) takeovers and mergers. RG 265.62 A market participant should consider the significance of a change to its management structure, taking into account the nature, scale and complexity of its business. RG 265.63 We may review management structures from time to time as part of our regular risk assessments of market participants’ businesses. We take a risk- based approach to prioritising our surveillance activities and may use our compulsory information-gathering powers to obtain information about management structures and other matters as necessary. Compliance and supervisory procedures RG 265.64 We expect market participants to adopt and implement management structures and supervisory procedures that are specifically tailored to the nature, scale and complexity of their business. RG 265.65 Unless carefully adapted to the business, ‘off-the-shelf’ compliance and supervisory procedures are unlikely to reflect the actual practices of the Page 21 REGULATORY GUIDE 265: Guidance on ASIC market integrity rules for participants of securities markets © Australian Securities and Investments Commission August 2022 Page 21 market participant or the responsibilities allocated to its representatives, and so may not be appropriate to ensure compliance with their obligations. RG 265.66 Compliance and supervisory procedures are ‘living’ documents. Market participants should periodically review their compliance and supervisory procedures to assess whether they are still appropriate to ensure compliance with their obligations. Compliance procedures RG 265.67 A market participant must have appropriate compliance policies and procedures to ensure it and each person involved in its business comply with the Securities Markets Rules, the operating rules of each relevant market and the Corporations Act: Rule 2.1.3. RG 265.68 Appropriate compliance procedures should help a market participant’s representatives to understand how its obligations apply to its particular business and the behaviours expected (and not permitted) by the participant to ensure it complies with those obligations. This approach fosters a strong focus on the causes of poor conduct and promotes responsible behaviour and high standards of integrity. RG 265.69 In our view, compliance procedures which merely restate the law provide insufficient guidance to a market participant’s representatives about how it will comply with its obligations. Supervisory procedures RG 265.70 Distinct from compliance procedures, written supervisory procedures document the supervisory system that has been established to ensure that the compliance procedures are being followed, and to prevent and detect prohibited practices. For example, supervisory procedures may specify the actions and reviews that must be undertaken by supervisory staff and the frequency of the supervisory reviews. RG 265.71 Written supervisory procedures should be maintained by market participants and made easily accessible to all staff irrespective of their location. RG 265.72 We expect that, at a minimum, a market participant’s written supervisory procedures should specify: (a) the supervisory staff responsible for supervision of the market participant’s business operations and processes, identified by name or title and position; (b) the supervisory activities each supervisor is responsible for carrying out; Page 22 REGULATORY GUIDE 265: Guidance on ASIC market integrity rules for participants of securities markets © Australian Securities and Investments Commission August 2022 Page 22 (c) the frequency with which the market participant requires those supervisory activities to be carried out; (d) any supervisory activities which the supervisory staff may delegate to other persons, taking into account any need for specific qualifications; and (e) the documentation that the market participant requires a supervisor to retain to demonstrate that their supervisory activities were carried out and the results of those activities. Allocation of supervisory staff RG 265.73 As noted above, a market participant must have in place a management structure which ensures that its operations and processes are supervised by one or more persons who have appropriate supervisory skills, knowledge and experience and sufficient seniority and authority to exert control, leadership, influence and supervision over those operations and processes: Rule 2.1.1(1)(b)–(c). RG 265.74 A market participant’s written supervisory procedures should clearly identify each person who has supervisory responsibilities within the market participant’s business and the nature of those responsibilities. Where supervisory staff leave the organisation or take extended leave, a market participant should have a plan in place to ensure their supervisory responsibilities are carried out. RG 265.75 The supervisory staff who are responsible for the market participant’s operations and processes should be identified by name and position title. We expect a market participant to maintain records relating to its allocation of, and any changes to, supervisory responsibilities given to its supervisory staff. RG 265.76 If joint supervisory responsibility for a function or task is given to two or more supervisors, a market participant should consider how the joint supervisory responsibility should be shared so that risks are appropriately managed. RG 265.77 A market participant is responsible for appointing appropriately qualified supervisory staff to its management structure. We expect that supervisory staff, in carrying out their managerial responsibilities, will lead and shape the compliance culture of the market participant. Therefore it is important that all its supervisory staff have an appropriate level of financial services industry knowledge relevant to the market in which they operate. This includes, among other things, understanding the type of business the market participant operates, the types of products in which it deals and the relevant compliance and regulatory obligations. Page 23 REGULATORY GUIDE 265: Guidance on ASIC market integrity rules for participants of securities markets © Australian Securities and Investments Commission August 2022 Page 23 RG 265.78 We expect a market participant’s written supervisory procedures to set out: (a) any qualifications, skills and experience the market participant considers important in determining whether supervisory staff can fulfil their assigned responsibilities; (b) its procedures for determining and reviewing on an ongoing basis whether supervisory staff possess such qualifications, skills and experience; and (c) its methods for monitoring the performance of supervisory staff. RG 265.79 We acknowledge that one market participant’s requirements may differ from that of another—for example, because of its AFS licence authorisations and obligations, its business activities, its internal policy requirements and its membership of an industry association and adoption of standards set by that association. RG 265.80 We expect that a market participant will periodically review (at least on an annual basis) whether each individual involved in the supervision of its business has the appropriate skills, knowledge and experience for the supervisory role they are performing. While we expect that completion of examinations and continuing education or training requirements will be key considerations, market participants are best placed to make an overall assessment of the supervisory skills, knowledge, experience, seniority and authority of their supervisory staff. Note: The Securities Markets Rules do not adopt requirements in the ASIC Market Integrity Rules (APX), (ASX) or (Chi-X) relating to use of the title ‘responsible executive’ by market participants, notifications to ASIC about responsible executives and approval by ASIC of examinations written by industry providers that assess the knowledge and competency of supervisory staff. Activities should be independently assessed RG 265.81 Supervisory responsibilities should be performed independently and with high standards of integrity. RG 265.82 A market participant should not make a representative responsible for supervising their own activities. For instance, the head of trading should not be responsible for setting his or her own trading limits. Such an arrangement would demonstrate weakness in the participant’s risk management systems and arrangements for managing conflicts of interest arising in its financial services business. Note: ‘Representative’ has the meaning given by s910A—see the ‘Key terms’. Supervision of representatives RG 265.83 We expect a market participant to assign responsibility for supervising the conduct of each of its representatives to one or more of its supervisory staff who are competent to do so. In our view, it is not necessary for the Page 24 REGULATORY GUIDE 265: Guidance on ASIC market integrity rules for participants of securities markets © Australian Securities and Investments Commission August 2022 Page 24 representative to be a direct report of the responsible supervisory staff. However, there should be a clear and documented connection between the activities of the representative and the responsibilities of the supervisor. RG 265.84 We expect these responsibilities to be documented in the market participant’s management structure and allocation of supervisory responsibilities. Documenting supervisory activities RG 265.85 A market participant’s supervisory procedures should clearly describe the supervisory activities it will conduct, and who will conduct those activities. RG 265.86 We expect a market participant to maintain records of its supervisory activities, any incidents or breaches of its obligations encountered and how these incidents or breaches were addressed. When a market participant’s supervisory actions in a particular matter are called into question, it is almost always to the market participant’s advantage to have a written record of the supervisory actions that were taken. A written record will serve as helpful evidence that the supervisors considered an issue or problem and made good faith judgements about the proper course of action. It is in the interests of the market participant, its directors and supervisory staff to ensure these records are made and kept. RG 265.87 For this reason, a market participant’s written supervisory procedures should specify that when incidents or breaches arise, supervisory staff should prepare a written record of the steps taken, possibly in consultation with the market participant’s compliance executive or legal advisers. Note: See RG 78 for guidance on the breach reporting obligation under s912DAA for AFS licensees. Examples of supervisory procedures RG 265.88 Where possible, a market participant’s supervisory procedures should be designed to prevent breaches of market integrity rules and laws, as well as monitor for breaches after they occur. RG 265.89 The following are examples of preventative supervisory procedures that a market participant may implement in its business. Supervising business or branch offices RG 265.90 Designing and implementing appropriate and effective procedures for supervising a market participant’s business or branch offices (especially those outside Australia) is vital for ensuring compliance with its obligations under Rule 2.1.1. The market integrity rules anticipate that this will be achieved through assigning management responsibilities to supervisory staff. Page 25 REGULATORY GUIDE 265: Guidance on ASIC market integrity rules for participants of securities markets © Australian Securities and Investments Commission August 2022 Page 25 RG 265.91 We do not expect supervisory staff to be located in every part of the business or at all branch offices. We do, however, expect that market participants will hold supervisory staff accountable for the activities of those business or branch offices, including those business or branch offices located offshore. We expect these management responsibilities, and how they are assigned among the market participant’s supervisory staff, to be documented in the market participant’s management structure maintained under Rule 2.1.2. RG 265.92 In addition to desk reviews, we consider that onsite reviews are essential in order to exercise strict supervisory control over a market participant’s business or branch offices and test compliance with its obligations. Onsite reviews may also help a market participant to identify emerging issues in its business. To achieve these goals, onsite reviews of business and branch offices should be carried out regularly and comprehensively, taking into account the nature, scale and complexity of the financial services provided. RG 265.93 If supervisory staff delegate certain supervisory responsibilities for a business or a branch office’s operations to another person, we expect the supervisory staff to follow up on a regular basis to assess whether the assigned duties are being carried out effectively. For example, a delegate of the supervisor may visit each business or branch office on a quarterly basis to verify the performance of any delegated responsibilities. RG 265.94 A market participant should consider a centralised approach to compliance supervision as its geographical footprint and complexity grows. Centralised compliance supervision supplements the valuable oversight contributed by supervisory staff in business and branch offices and is a means by which the participant may control fragmentation of its supervisory procedures. RG 265.95 Regardless of how a market participant supervises its business and branch offices, it is important that all supervisory staff clearly understand their specific duties and that controls are in place to ensure that those duties are carried out effectively and in a timely manner. Procedures for confirmations, statements and mail RG 265.96 We expect that confirmations and client account statements for dispatch to clients will not be produced by advisers or other front office staff. RG 265.97 If advisers or other front office staff do need to add information such as individual notes to confirmations or client account statements, the market participant should ensure that the additional material is reviewed and, if appropriate, incorporated by a member of its operations department. RG 265.98 Similarly, the booking of an executed transaction should not be actioned by the dealer that executed the transaction. Instead, bookings may be properly performed by the bookings team within the operations department or by Page 26 REGULATORY GUIDE 265: Guidance on ASIC market integrity rules for participants of securities markets © Australian Securities and Investments Commission August 2022 Page 26 individuals within ‘middle office’, both of which are separate from the dealing staff in the market participant’s front office. RG 265.99 Where possible, client cheques, unopened incoming mail, confirmations and statements should not be received or personally delivered by advisers or other front office staff. Monitoring and controls for AOP and ACOP RG 265.100 A market participant that uses its system for AOP must have and review policies and procedures for compliance with Part 5.6 and have appropriate design documentation. RG 265.101 Where a market participant provides automated client order processing (ACOP) access to clients, the market participant should have an adequate understanding of a client’s business. The filters and controls for client access should reflect the nature of the business. RG 265.102 See RG 241 for detailed guidance on monitoring, supervising and using AOP systems. Automated systems to assist in achieving compliance RG 265.103 Where a market participant uses an automated system to assist it in supervising compliance with its obligations, the participant’s supervisory procedures should set out how it plans to monitor and test the operation of the automated system and respond to any weaknesses, vulnerabilities, failures or errors which may arise. Complex products procedures RG 265.104 A market participant should consider what, if any, additional supervisory procedures are necessary to appropriately monitor dealing in new or complex financial products. At a minimum, supervisory staff given responsibility for supervising representatives who deal in a new or complex financial product should understand the terms, pay-off profile and risks of the product and the nature of the services the market participant’s representatives provide in relation to the product. Managed discretionary accounts RG 265.105 We consider it good practice for market participants to document the measures they have in place to manage conflicts of interest that may arise from managed discretionary account (MDA) arrangements. This may include management of a material conflict of interest through a combination of internal controls, disclosure and, in some cases, avoidance of the conflict of interest. Page 27 REGULATORY GUIDE 265: Guidance on ASIC market integrity rules for participants of securities markets © Australian Securities and Investments Commission August 2022 Page 27 RG 265.106 Further guidance on how we regulate MDA services provided to retail clients under the Corporations Act is available in Regulatory Guide 179 Managed discretionary accounts (RG 179). Outsourcing RG 265.107 We expect a market participant to have written supervisory procedures to select and monitor the ongoing performance of outsourced service providers. If a market participant engages a service provider to provide, operate or support one or more of its critical business services, additional safeguards are required to ensure the operational resilience of those services: see RG 265.598–RG 265.622. Regular review of supervisory procedures RG 265.108 We expect the board of a market participant to regularly assess its supervisory arrangements. RG 265.109 From time to time, market participants will need to revise their compliance and supervisory procedures if they have been affected by a change to: (a) the financial services legislation; (b) the market integrity rules; or (c) the operating rules or procedures of a market or CS facility. RG 265.110 Where such a change occurs, we consider it good practice for a market participant to: (a) communicate details of the change to its representatives; (b) prepare a plan for updating the participant’s compliance and supervisory procedures before the change takes effect, or otherwise in a timely manner; (c) implement the updated procedures and provide training to relevant staff; and (d) review the effectiveness of the updated procedures within a reasonable time. Additiona