ASX Market Rules Guidance Note No. 14 KEY TOPICS TRADE ERRORS, ERROR DISPUTES AND 1. Trade Errors CANCELLATIONS 2. Error Disputes 3. Cancellations Purpose ASX Market The purpose of this Guidance Note is to provide guidance to Rules Trading Participants as to the intent and general operation of ASX Market Rule 15 that deals with trade errors and the 1. Section 15 available rectification steps for all Products made available for 2. Rule 14.1.1 trading by ASX. 3. Rule 28.15 to 28.17 This Guidance Note provides guidance to Trading Participants on those Rules in Section 15 that address Error Disputes. It does not provide guidance to Trading Participants on those Rules in Guidance Note Section 15 that address Dealing Disputes. History This Guidance Note supersedes Guidance Note 04/02. Re-Issued – 1 July 2004 Background Amended – Section 15 empowers ASX: 31 March 2008 28 November 2005 (a) to authorise and permit the cancellation or amendment of a trade entered into on the basis of an Error where such Previously: ASX action is agreed to by the Trading Participants who Guidance Note 03/02 effected the trade; and and 04/02 (b) to cancel or amend a trade entered into on the basis of an Error where: (i) the Trading Participants who effected the trade are in dispute as to whether it should be cancelled or amended; and (ii) ASX considers that the trade may give rise to circumstances contrary to the interests of a fair and orderly Market. GN 14 – Trade Errors, Error Disputes and Cancellations 31 March 2008 Page 1 of 9 The following principles underpin these Rules: • Trading Participants are responsible for all their transactions and should not rely on the dispute resolution process as a substitute for ensuring adequately trained and diligent personnel or the implementation of appropriate automated filters. • ASX believes it is in the interests of all Market Participants that traded prices properly reflect prevailing market prices and that Market Participants should not seek windfall profits from trading which is not fair and orderly. • A trade that would appear to any competent Designated Trading Representative (DTR) to be significantly outside prevailing market prices or volumes may be eligible for recognition as an obvious error. • A Trading Participant must ensure the conduct of an orderly market. This includes not intentionally taking advantage of a situation where a breakdown or malfunction in ASX procedures or systems management results in an erroneous trade. These trades will constitute an Error for the purposes of these Rules. • ASX believes it is in the best interests of all Market Participants that Trading Participants take immediate steps to minimise any flow-on effects of trades made in Error. • The financial significance of the trading loss may be taken into account when deciding to refer an Error Dispute to a Dispute Governors Committee. Obligations A Trading Participant is obliged under Market Rule 15.2.1 to notify ASX of an Error if it wishes to have, or retain the right to request to have, the trade cancelled or amended by ASX (even if it is also conducting negotiations aimed at mutual agreement to resolve the erroneous trade in the meantime). Additionally, should an Error Dispute arise, the Trading Participant is obliged to comply with the direction given by ASX under Market Rule 15.4.7. For the purposes of meeting these obligations, ASX Market Control will be the primary contact point within ASX for Trading Participants. Notification should be delivered through a recorded telephone call or email. GN 14 – Trade Errors, Error Disputes and Cancellations 31 March 2008 Page 2 of 9 Timings A Trading Participant that proposes to notify ASX Market Control of an Error under Rule 15.2.1 must do so within 15 minutes of the execution of the Market Transaction if it wishes to have, or retain the right to request to have, the trade cancelled or amended by ASX. Where ASX is the initiator of a notification under Rule 15.2.2 that an Error has occurred and has requested a submission from a Trading Participant as to the facts surrounding the cause and subsequent trading implications of the transaction, this information must be delivered within 3 hours of the ASX request. If Trading Participants cannot agree to resolve an Error a Trading Participant that chooses to refer the alleged Error to ASX under Rule 15.2.6 must refer the Error to ASX Market Control immediately and within 15 minutes of making the referral, provide a statement presenting details of the disputed transactions and the efforts used to try and achieve agreement (see ASX Market Rule Procedure 15.2.6 for further procedural requirements). All communications relating to Errors and disputes involving erroneous trades must be carried out on the day of the event. Trading Participants are well aware of the practical constraints surrounding amendment or cancellation of trades and the need for timely action. In the case of trades in Derivative Market Contracts amendments or cancellations must occur before the close of trading on the Trading Day (T). Trades in Cash Market Products may be amended or cancelled up to the end of T+1, however this does not alter the timing for initial notification nor does it alter the principle of immediacy of action in order to minimise flow-on effects. A Trading Participant that fails to adhere to these short time limits may not be able to refer a dispute to ASX under Section 15 Rules. Errors resolved by Mutual Agreement Transactions arising from erroneous orders may, with the consent of the counterparty, be resolved in accordance with ASX Market Rule 15.2.4. Where a Trading Participant is unable to identify a counterparty the Trading Participant may request ASX to facilitate agreement with a counterparty by following the procedure set out in Rule 15.2.8 and Procedure 15.2.8. ASX will notify the Trading Participant of the counterparty’s response to a request that a trade be amended or cancelled as soon as reasonably practicable. If the counterparty acknowledges to ASX its agreement to the Trading Participant’s request that a trade be amended or cancelled the parties will be taken to have agreed to the cancellation or amendment. If agreement cannot be reached, because the counterparty does not agree or ASX cannot contact the counterparty, the Trading Participant may refer the Error to ASX under Rule 15.2.6 (within 15 minutes of being notified) and ASX will decide whether to refer the Error Dispute to a Dispute Governors Committee. GN 14 – Trade Errors, Error Disputes and Cancellations 31 March 2008 Page 3 of 9 ASX expects Trading Participants to agree to rectify obviously erroneous trades in appropriate circumstances, particularly where there may be unfair or disorderly market concerns. The scope of a rectification event may encompass all trades that specifically resulted from the identified error transaction within a single Product made available for trading by ASX but may not extend to positions created in other Products as part of a broader trading strategy. Some examples are: • An erroneous trade in a Warrant, which has had an associated equity transaction to create a hedge position, is identified. After discussion between the Trading Participants involved in the Warrant trade, an agreed amendment to the price of the Warrant trade is struck in order to rectify the abnormality of the trade itself and permit the equity hedge to remain in place. This rectification methodology recognises the separation of Products and avoids fair and orderly market impacts on the related Trading Participant(s) involved in the other side of the equity hedge transaction. • An Equity Combination order that matches against another Equity Combination order with an error in its pricing or volume will be treated as a single transaction. However, another Combination order that transacts against multiple individual Option orders may be treated as separate trades for each leg with only one leg being cancelled or amended. Again this methodology avoids fair and orderly market impact upon the Trading Participant(s) involved in the other side of a reasonable individual Option transaction. • An obviously erroneous buy order entered for an equity that immediately transacts and generates 20 trades and pushes the sell side price up to 30 price steps away from the pre-existing spread. This event triggers a release of a buy order in another Product. The Trading Participant responsible for the erroneous order may propose to let trades within prevailing intra-day price volatility levels stand and seek cancellation for the remainder. The released buy order would be unknown and may not figure in this proposed solution. Initiating the Dispute Process As noted above, Trading Participants are obliged to correctly execute trades and so, as a general rule, ASX will not intervene in the first instance to rectify errors that can be resolved by mutual agreement. However, in some situations, a dispute arising from an erroneous trade may be dealt with under the dispute handling process in Market Rule 15.4. The aim of the dispute resolution action is to resolve the dispute and restore the Market as rapidly as possible to a fair and orderly position. It is possible that this will be a different position from that which the market was in just prior to the occurrence of the erroneous GN 14 – Trade Errors, Error Disputes and Cancellations 31 March 2008 Page 4 of 9 transaction. Trading Participants should not expect the re-establishment of trading priority as a common solution for resolving erroneous trade disputes. Market Rule 15.4 describes the powers of ASX and the role of a Dispute Governors Committee to resolve disputes. Market Rule 15.4.7 provides ASX with discretion to take any action necessary to restore a fair and orderly market. The sorts of actions that are contemplated include: a) ASX may cancel and amend a trade; b) ASX may restore an Order; c) ASX may direct Trading Participants to cancel, amend and enter into a new position in order to achieve a substantially similar result; and d) ASX may request a clearing facility to give effect to ASX’s actions by cancelling or amending the registration of an Open Contract. The Dispute Governors Committee considers and recommends action to resolve disputes between Trading Participants in relation to Error Disputes and Dealing Disputes. For the purposes of invoking the dispute process pursuant to Rule 15.4, a recognised dispute must be based on either an Error Dispute where the relevant Trading Participants do not mutually agree to cancel or amend the transaction, or a Dealing Disputes between Market Participants arising in relation to any Dealing Rules. Disputes relating to errors with trades must be of sufficient market impact or financial consideration to warrant the convening of a Dispute Governors Committee. In order to assess whether relevant dispute criteria have been met, the main characteristics and rules of each Product will be used and ASX will involve the appropriately skilled internal staff to provide opinion. It is not appropriate for ASX to be prescriptive on assessment criteria given the diversity of Products and causes involved although guidance may be provided to Trading Participants from time to time. For example, in the case of an obviously erroneous transaction in an equity outside the S&P/ASX100 index in which multiple impacted Trading Participants have not been able to come to mutual agreement, criteria for considering an erroneous trade of sufficient substance to warrant convening a Dispute Governors Committee may be made as follows: • The Trading Participant responsible for entering the erroneous order is carrying a trading loss; • A reference price will be defined as the last traded price immediately before the erroneous transaction or another more appropriate price as the Product might dictate; GN 14 – Trade Errors, Error Disputes and Cancellations 31 March 2008 Page 5 of 9 • A “reasonable pricing” range will be set using prevailing market prices as, say, 7 price steps above and below this reference price; and • A minimum trading loss before a dispute may be recognised will be set at $5,000 between the value of a trade if the disputed volume is priced at the reference price against the value of the trades under dispute. Where the erroneous trades do not stretch outside the criteria relevant to the market for the Product involved, the trades will be considered as falling within the normal course of business and will not be entitled to any dispute action. The fact that an erroneous trade is outside the relevant criteria does not oblige ASX to refer the matter to a Dispute Governors Committee. However, issues of maintaining a fair and orderly market would take precedence over the relevant criteria when appropriate. Where it is decided that a Dispute Governors Committee shall be formed ASX will seek to include Governors with strong experience in the Product involved. Errors that will not be referred as Error Disputes to the Dispute Governors Simple errors in order entry by Trading Participants as a result of carelessness which result in trades at prevailing market prices may not trigger the dispute process. These types of errors should be resolved by agreement between all parties involved. Some examples include: For all Products • Trading the incorrect Product at prevailing market prices; • Buying a single Product at prevailing market prices when selling was the intention and vice versa; • Trading at prevailing market prices more than once by entering the same order multiple times; or • Trading reliant upon erroneous announcements by Listed Companies. For Derivatives Market Contracts • Trading a combination the wrong way around at prevailing market prices; • Trading at prevailing market prices when price / quantity figures have been transposed; or • Incorrectly pricing a spread that trades at prevailing market prices. In examples such as these, failure to reach agreement means the transaction stands. GN 14 – Trade Errors, Error Disputes and Cancellations 31 March 2008 Page 6 of 9 ASX is more concerned with whether a competent DTR would regard the price or quantity of the resulting trades to be unreflective of the prevailing market conditions in normal trading circumstances than the underlying reason for the error in its assessment as to whether an Error should be referred as an Error Dispute. Steps in considering an Error Dispute When an Error Dispute occurs timeliness is critical and ASX will endeavour to finalise action and, if necessary, restore a fair and orderly market as rapidly as possible. Subsequent to contact through ASX Market Control and application of the appropriate assessment criteria, the following major dispute resolution steps result: • ASX assesses whether the extent of the error is of sufficient market impact to warrant any immediate action, and in the extreme case to halt continuous trading in the relevant Product, on a fair and orderly market basis and takes action accordingly. • ASX assesses whether the transaction in question should or should not be referred to a Dispute Governors Committee by application of the appropriate internal resources, rules and suitable assessment criteria given the circumstances. • ASX convenes a Dispute Governors Committee comprising one ASX Dispute Governor and two non-conflicted non-ASX Dispute Governors. • The Dispute Governors Committee examines the details and makes a recommendation to ASX for appropriate resolution of the dispute as soon as practical and on the same day as the dispute arose. • ASX decides, under Market Rules 15.4.7 or 15.4.8, upon a course of action to resolve the dispute and informs all impacted parties of the decision. The impacted Participants and ASX perform all necessary actions. • All relevant details of actions and decisions are recorded as they occur. Appeals A Trading Participant may appeal against a decision of ASX taken pursuant to Market Rules 15.4.7 or a decision not to refer a matter for dispute to a Dispute Governors Committee. The appeals process and the powers of the Appeals Tribunal are set out in the Australian Securities Exchange Disciplinary Procedures and Appeals Rulebook. GN 14 – Trade Errors, Error Disputes and Cancellations 31 March 2008 Page 7 of 9 Dispute Governors ASX invites, and will continue to invite, individuals to perform this role for a period and on terms and conditions ASX considers appropriate. The role of the Dispute Governor is to bring their significant expertise as a market practitioner to provide a pragmatic and impartial resolution recommendation to ASX on a case-by-case basis in a timely manner. The diversity of Product now tradeable and potential complexities involved in valid disputes requires Dispute Governors to be drawn from many and varied backgrounds in order for this important industry function to operate effectively. Fees Where a trade Error Dispute is referred to a Dispute Governors Committee, a fee will be charged to the Trading Participant (if any) who referred the dispute to ASX under Rule 15.2.6. The fee prescribed is set out in the Procedures supporting these Rules. Both the dispute assessment criteria for each Product and the fee applied can be modified by ASX from time to time and applied as the circumstances of a particular transaction dictates. Changes to standard dispute fee levels will be notified to the market. Confirmations and Client Relations It is the responsibility of Trading Participants to manage the relationship with their clients where a transaction has been cancelled. Clients may be confused by the cancellation of trades after they have been issued a confirmation and may object to having a trade resulting from the error of another Trading Participant cancelled or amended. It is a requirement, pursuant to Market Rule 15.8, that Trading Participants provide written notice to all clients, prior to submitting messages, that ASX has the power to cancel and amend Market Transactions. Whilst ASX does not require Participants to modify existing client agreements to reflect these Rules, this is a highly recommended step to take, particularly for all new clients. It is also highly recommended that Trading Participants reinforce expectations that cancellations should occur by agreement in the first instance. GN 14 – Trade Errors, Error Disputes and Cancellations 31 March 2008 Page 8 of 9 Role of DTRs DTRs are reminded of their obligation to accurately enter orders. ASX may take disciplinary action, particularly in cases of repeat errors. DTRs who repeatedly enter orders in error may be required to be retested in order to retain their access rights or may be suspended from access for a period of time. Potential Disciplinary Actions ASX may take a range of disciplinary actions against a Trading Participant responsible for entering erroneous orders into the Market. These include, but may not be limited to, actions for: • Doing anything which results in a Market for a Product not being both fair and orderly, or failing to do anything where that failure has that effect (Rule 14.1.1); or • Unprofessional Conduct (Rule 28.3.7), Disciplinary action will generally be directed towards the Trading Participant responsible for causing the dispute. However, it is possible that the circumstances of the transaction may require disciplinary action to be taken against other Trading Participants seeking to take advantage of the situation. Qualification ASX has published this note to promote commercial certainty and to assist Participants. Nothing in this note necessarily binds ASX in the application of the Rules in a particular case. In issuing this note ASX is not providing legal advice and Participants should obtain their own advice from a qualified professional person in respect of their obligations. ASX may replace this Guidance Note at any time without further express notice to any particular person. Readers should contact ASX to ensure they have the latest version. Enquiries Enquiries about this Guidance Note can be made to ASX Market Control Phone: 1800 024 000 Email: email@example.com GN 14 – Trade Errors, Error Disputes and Cancellations 31 March 2008 Page 9 of 9
"ASX Market Rules Guidance Note 14 - Trade Errors, Error Disputes"