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Australian Securities and Investment Commission (ASIC) Extends Best Execution Transition Period: Explanatory Statement 2012

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Australian Securities and Investment Commission (ASIC) Extends Best Execution Transition Period: Explanatory Statement 2012 Powered By Docstoc
					               ASIC CLASS RULE WAIVER [CW 11/1103]

                         EXPLANATORY STATEMENT
          Prepared by the Australian Securities and Investments Commission

         ASIC Market Integrity Rules (Competition in Exchange Markets) 2011

The Australian Securities and Investments Commission (ASIC) makes this instrument
under Rule 1.2.1(1) of the ASIC Market Integrity Rules (Competition in Exchange
Markets) 2011 (the Competition Rules).

Under that Rule, ASIC may relieve any person or class of persons from the obligation
to comply with a provision of the Competition Rules.

1.      Background

In April 2011, ASIC made the Competition Rules, which form part of the regulatory
framework for competition between exchange markets.

The Competition Rules apply to a participant (Participant) of a financial market
(Market) on or through which offers to acquire or dispose of certain financial
products (defined in Rule 1.4.3 of the Competition Rules as Equity Market Products)
are made or accepted, the operator of which is licensed under subsection 795B(1) of
the Corporations Act 2001. These Markets currently include the financial markets
operated by ASX Limited (ASX) and Chi-X Australia Pty Ltd (Chi-X).

Rule 4.1.1(1) of the Competition Rules provides that, subject to Rule 4.1.1(2), a
Participant must not enter into a transaction in an Equity Market Product unless the
transaction is entered into by matching of a “Pre-Trade Transparent” order (being an
order for which information such as price and volume is made available before
execution) on an order book of a Market. Rule 4.1.1(1) reflects the importance of pre-
trade transparency to the price formation process and fair and efficient markets. Rule
4.1.1(1) applies to conduct by Participants from 31 October 2011.

Rule 4.1.1(2) of the Competition Rules lists the exceptions to the requirements of
Rule 4.1.1(1). Participants are not required to comply with Rule 4.1.1(1) in relation to:

     (a) Block Trades;
     (b) Large Portfolio Trades;
     (c) Trades At or Within the Spread;
     (d) Permitted Trades during the Post-Trading Hours Period;
     (e) Permitted Trades during the Pre-Trading Hours Period; and
     (f) Out of Hours Trades,

as defined in Rule 1.4.3 of the Competition Rules.
                                           2


The exceptions in Rule 4.1.1(2) of the Competition Rules preserve the substance of a
number of existing exceptions to pre-trade transparency that are available to
Participants of ASX immediately prior to 31 October 2011, and apply them
consistently across Markets.

2.      Purpose of the class rule waiver

Exceptions from Pre-Trade Transparency

ASX’s Operating Rules provide for Block Special Crossings, Facilitated Specified
Size Block Special Crossings, Portfolio Special Crossings, Priority Crossings,
Undisclosed Orders and Iceberg Orders. These order types fall within the pre-trade
transparency exceptions in Rule 4.1.1(2) of the Competition Rules.

However, ASX has a range of other order types that are currently exempt under the
ASX Operating Rules from display on ASX order books, and that fall outside the
Competition Rule pre-trade transparency exceptions, specifically:

     (a) ETF Special Trades;
     (b) orders on the “VolumeMatch” order book;
     (c) Index Replicating Special Crossings;
     (d) Underwriting Disposal Special Crossings;
     (e) Exchange Approved Special Crossings;
     (f) Completion of Order Special Crossings; and
     (g) Crossings of a Derivative/Cash Combination,

(as those terms are used in the ASX Operating Rules Procedures) (collectively the
Further Existing Order Types).

On 29 April 2011, ASIC announced in Regulatory Guide 223 Guidance on ASIC
market integrity rules for competition in exchange markets (RG 223) at RG 223.175-
RG 223.177 that ASIC would extend the pre-trade transparency exceptions in Part 4.1
of the Competition Rules to cover the Further Existing Order Types until further
consultation occurs on the pre-trade transparency regime. This will minimise system
and process changes for ASX and its Participants.

The purpose of paragraph 4 of this Class Rule Waiver is to provide relief to
Participants to extend the exceptions in Part 4.1 of the Competition Rules to the
Further Existing Order Types for a transitional period from 31 October 2011 to 31
December 2012 (inclusive).

ASIC is conducting further consultation on whether the relief conferred under the
Class Rule Waiver for the Further Existing Order Types should remain in place for a
longer period, and whether the removal of any one of these exceptions would impede
legitimate transactions (see Consultation Paper 168: Australian equity market
structure: Further proposals (CP 168), published on 20 October 2011, at paragraphs
363—366).
                                            3



The definition of Special Crossing was amended by the ASIC Market Integrity Rules
(ASX Market) Amendment 2011 (No. 3). The effect of this amendment was that the
Further Existing Order Types referred to at subparagraphs (c) (d) (e) and (f) fall
outside the definition of Special Crossing. The relief conferred by this paragraph is
conferred on condition that transactions resulting from the Further Existing Order
Types referred to at subparagraphs (c), (d), (e) and (f) are treated as Special Crossings
for the purposes of the ASIC Market Integrity Rules (ASX Market) 2010.


"Trade At or Within the Spread" excluding PureMatch

ASX’s existing Operating Rules for Priority Crossings and CentrePoint order types
are such that those order types fall within with the pre-trade transparency exception in
Competition Rules 4.1.1(2)(c) and 4.2.3 for a “Trade At or Within the Spread” entered
into on an order book of a Market.

The “Trade At or Within the Spread” exception in the Competition Rules also
accommodates crossings entered into other than on an order book of a Market, on the
basis of the “Best Available Bid” and “Best Available Offer” at the time the crossing
is entered into.

The “Best Available Bid” and “Best Available Offer” are the highest pre-trade
transparent bid and lowest pre-trade transparent offer available across all pre-trade
transparent order books (also known as the “national best bid and offer” or “NBBO”).
This includes ASX's TradeMatch and will include Chi-X's order book and ASX's
PureMatch order book when they commence operating. Participants have suggested to
ASIC that there are timing and system implications of including PureMatch data into
their compilation of the consolidated “Best Available Bid” and “Best Available
Offer”.

On 11 July 2011, ASIC announced in Competition FAQ A2 Pre-trade transparency
exception – MIR4.2.3 'at or within the spread': What order information must
participants consider in determining whether a trade is able to rely on this exception?
(FAQ A2) that ASIC will not expect Participants to include PureMatch data in their
compilation of the “Best Available Bid” and “Best Available Offer” for the purpose of
this exception until 1 March 2012.
The purpose of paragraph 5 of this Class Rule Waiver is provide relief to Participants
to allow Participants to enter into a crossing on the basis of the “Best Available Bid”
and “Best Available Offer” across all order books not including PureMatch, for a
transitional period from 31 October 2011 to 1 March 2012 (inclusive).

Primary Market Transactions

The pre-trade transparency requirement in Rule 4.1.1(1) of the Competition Rules
applies to transactions in Equity Market Products. These requirements are intended to
apply to the activities or conduct of Participants in relation to the relevant Market.

Primary market transactions in Equity Market Products (for example, an application,
subscription, issue, allotment or redemption) and securities lending and borrowing
                                            4


arrangements are not specifically excluded from the pre-trade transparency
requirements.

ASIC has previously advised in CP 168 at paragraphs 363—366 that it is not ASIC’s
intention that primary market transactions be caught by the pre-trade transparency
requirements of the Competition Rules. ASIC has proposed in CP 168 a new Rule to
clarify that primary market transactions and securities lending and borrowing
arrangements are not caught by these requirements.
The purpose of paragraph 6 of this Class Rule Waiver is to provide relief to
Participants to clarify that the pre-trade transparency requirements do not apply in
relation to primary market transactions and securities lending and borrowing
arrangements.

3.      Operation of the class rule waiver

Waivers

Paragraph 4

Paragraph 4 of this Class Rule Waiver provides relief to Participants from the
obligation to comply with Rule 4.1.1(1) of the Competition Rules during the period
from 31 October 2011 to 31 December 2012 (inclusive) for:

     (a) ETF Special Trades
     (b) orders on the “VolumeMatch” book;
     (c) Index Replicating Special Crossings;
     (d) Underwriting Disposal Special Crossings;
     (e) Exchange Approved Special Crossings;
     (f) Completion of Order Special Crossings; and
     (g) Crossings of a Derivative/Cash Combination.

The relief only applies to a transaction entered into in accordance with the ASX
Operating Rules.

The relief in Paragraph 4 is subject to the condition that the Participant treat
Transactions referred to in subparagraphs 4 (c), (d), (e) and (f) as if they are Special
Crossings under the ASIC Market Integrity Rules (ASX Market) 2010.
Paragraph 5
Paragraph 5 of this Class Rule Waiver provides relief to Participants from the
obligation to comply with Rule 4.1.1(1) of the Competition Rules during the period
from 31 October 2011 to 1 March 2012 (inclusive) in relation to a crossing done other
than on an order book of a Market at or within the spread of the “Best Available Bid”
and “Best Available Offer”, where the “Best Available Bid” and “Best Available
Offer” are the highest “Pre-Trade Transparent” bid and offer (respectively) available
across all order books, other than PureMatch, at the time of the transaction.
                                            5


Paragraph 6

Paragraph 6 of this Class Rule Waiver provides relief to Participants from the
obligation to comply with Rule 4.1.1(1) of the Rules in relation to a transaction
entered into under:

     (a) the terms of an Equity Market Product, including a redemption;
     (b) a primary market action, including an issue or allotment of, application or
         subscription for, an Equity Market Product, or acceptance of an offer under an
         “Off-Market Bid” (as defined in Rule 1.4.3 of the Competition Rules); or
     (c) the delivery of an Equity Market Product under a “Securities Lending
         Arrangement” (as defined under Rule 1.4.3 of the Competition Rules).
The relief in paragraph 6 of this Class Rule Waiver applies until revoked.

4.      Consultation

ASIC consulted generally with relevant industry stakeholders before making this
Class Rule Waiver.

The Class Rule Waiver implements ASIC’s existing policy in relation to pre-trade
transparency in a multi-market environment, which underwent regulatory impact
assessment through the Regulation Impact Statement Competition in exchange
markets (April 2011).

The consultation process for the Competition Rules included the publication of
Consultation Paper 145 Australian equity market structure: Proposals in November
2010, which proposed market integrity rules to address some of the regulatory issues
arising from market developments and the additional regulatory issues resulting from
the introduction of competition. Further, RG 223 provided background to the Rules
and outlined ASIC's expectations about how market operators and participants should
comply with the Competition Rules. As noted above:

     (a) ASIC’s proposal to provide relief to allow Participants to continue to rely on a
         number of existing ASX pre-trade transparency exceptions on commencement
         of the Competition Rules was outlined in RG 223, published in April 2011;
     (b) ASIC’s proposal to provide relief to allow Participants to exclude PureMatch
         data from their compilation of the “Best Available Bid” and “Best Available
         Offer” for the purposes of the “Trade At or Within the Spread” exception was
         outlined in FAQ A2, published in July 2011; and
     (c) ASIC’s proposal to clarify that the pre-trade transparency requirements do not
         apply to primary market transactions and securities lending and borrowing
         arrangements was outlined in CP 168, published in October 2011.

				
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