Commsec options trading fees
Compliance: Theory and Practice in the Financial Services Industry IMPORTANT NOTE: These slides have been provided primarily for the use and benefit of students taking the "Compliance: Theory and Practice in the Financial Services Industry" course at Sydney University Law School. They are a summary only of the subject matter covered and are not intended to be, nor should they be relied upon as, a substitute for legal or other professional advice. In particular, it should be noted that the slides are not always verbatim quotes from the underlying source material and that material may have been abridged or paraphrased for presentational purposes. There also may have been legislative, regulatory or other developments since these slides were last updated that are not incorporated. These slides are made available without the assumption of a duty of care by Inhouse Legal Solutions Pty Limited "ILS" or the officers, employees or agents of ILS who were involved in their preparation and without any representation or warranty as to accuracy or completeness. Your use of these slides is subject to the terms and conditions set out on our Legal Notices page. These slides were created with Microsoft FrontPage and are best viewed with Internet Explorer Daily closing prices are the ones usually reported in the financial press and that makes them particularly susceptible to manipulation. Anyone who has an interest in making a price appear higher or lower will often target the closing price for that purpose. This includes the closing prices on the expiry dates for share price index SPI futures, where someone who has a significant SPI position may have an incentive to manipulate the closing price of shares on that date to favour their SPI position as occurred in ASC v Nomura International PLCbelow. For example, a company might simply want to see its flagging share price supported. A bidder in a scrip takeover might want its shares to appear to have a higher value to increase the likelihood of the bid succeeding as occurred in North v Marra Developments Ltdbelow. A target in a contested takeover bid might want its shares to appear to have a higher value to help it fight off the bid. An investment manager might want the value of securities in their investment portfolio to appear higher to improve their performance figures. This resulted in an increase in the SPI index and, consequently, the SFE SPI contract, the settlement price of which was determined by reference to the closing price of the index. This induced other market participants to enter orders that executed against the limit orders previously entered by the Trillium traders. Once their limit orders were filled, the Trillium traders would then immediately cancel the non-bona fide orders. At that price, a number of prominent brokers would have been bankrupted if they had to buy stock to cover their short positions. The Sydney Stock Exchange committee, which included several of the brokers who were short, creatively solved the problem by permanently suspending Antimony Nickel shares from trading. He was found to have engaged in market manipulation in contravention of both CA ss1041A and B. He considered that the reasoning of Mason J in North v Marra Developments Ltd see below was equally applicable to the creation of an artificial price for trading in securities under s1041A as it was to the creation of false or misleading appearance with respect to the market for, or the price of, securities under s1041B In DPP Cth v J Mthe accused, the CEO of a company who had a margin loan to finance the purchase of shares in the company, provided funds to his daughter and son-in-law to enable them to purchase shares in the company. They used the funds to purchase shares at market close allegedly so as to maintain the closing price of the shares above the level at which the accused would have a margin called on his loan The trial judge stated a case for the Victorian Court of Appeal seeking a ruling on whether this involved the creation of an "artificial price" for the shares within the meaning of s1041A. After looking at the legislative history of s1041A, they concluded that the term "artificial price" in s1041A was meant to capture US jurisprudential notions of cornering and squeezing and connotes a price which in truth reflects market forces of supply and demand in a free and informed market but which is the result of a monopolist or party otherwise in a position of market dominance taking unfair advantage of market power in order to extract a price different to that which would apply in times of adequate supply. The references in s A to a transaction which has, or is likely to have, the effect of creating an "artificial price", or maintaining the price at a level fees is "artificial", should be construed as including a transaction where the on-market buyer or seller of listed shares undertook it for the sole or dominant purpose of setting or maintaining the price at a particular level. It is, however, important to emphasise that whether there are other kinds of transaction which have the effect of creating or maintaining an artificial price in a market for listed shares is fees, and, given the terms of the case stated, should not be, decided The price that results from a transaction in which one party has the sole or dominant purpose of setting or maintaining the price at a particular level is not a price which reflects the forces of genuine supply and demand in an open, informed and efficient market. It is, within the meaning of s A, an "artificial price". It is sufficient to show that the buyer or seller set the price with the sole or dominant purpose described Further, if a transaction is made for the sole or dominant purpose of setting or maintaining a price for listed shares, it is not necessary to proffer some additional proof that the impugned transactions "went on to affect the behaviour of genuine buyers and sellers in the market" in order to demonstrate that the transactions had, or were likely to have, the effect of creating or maintaining an artificial price. On-market transactions on the ASX like the impugned transactions in this case are made openly Participants in the market can be and are informed of the transactions which occur. Participants in the market are entitled to assume that the transactions which are made are made between genuine buyers and sellers and are not made for the purpose of setting or maintaining a particular price. They have, or at least are likely to have, the effect of setting or maintaining an artificial price for the shares in question. This section was introduced to clarify the fault elements for an offence to be committed under s1041B 1having regard to the deeming provision in s1041B see below. It really does nothing more than confirm the position that would trading under ss and of the Commonwealth Criminal Code in any event In North v Marra Developments LtdMarra considered itself vulnerable to takeover because its net asset value per share was considerably higher than its prevailing market price. On the advice of a stockbroker, it proposed a bonus issue and then a merger with another company effected through a share for share takeover. The shares in the other company were trading at much better prices and it was therefore felt necessary to boost the price of Marra shares to ensure that the takeover succeeded. The takeover was successful Subsequently, the stockbrokers sued for their fees for the advice they had given on the transactions. The company resisted the claim. It was held that the claim failed for illegality. The agreement contemplated a breach of the precursor to s1041B and the parties had conspired to engage in that illegal conduct. Mason J, with whom the rest of the court agreed, said at pp "… the statutory prohibition is directed against activity which is designed to give the market for securities or the price for securities a false or misleading appearance. Purchases or sales are often made for indirect or collateral motives, in circumstances where the transactions will, to the knowledge of the participants, have an effect on the market for, or the price of, shares. Plainly enough, it is not the object of the section to outlaw all such transactions It seems to me that the object of the section is to protect the market for securities against activities which will result in artificial or managed manipulation. The section seeks to ensure that the market reflects the forces of genuine supply and demand. By "genuine supply and demand" I exclude buyers and sellers whose transactions are undertaken for the sole or primary purpose of setting or maintaining the market price. The market was moved from 35 cents to cents. Markets, in reflecting the interaction of forces of supply and demand, may suffer from a variety of imperfections, including mismatches of information, without such imperfections destroying their integrity. The central object of such conduct was options influence the market price. Nomura gave instructions to separate brokers to sell its basket of securities very aggressively near to the close of trading on 29 March Many of the securities in question were illiquid and so there was a very limited opportunity for "latent demand" for these securities to emerge during the brief period of aggressive selling contemplated by Nomura. For a variety of reasons, most commsec the brokers entrusted with the sell orders did not fully comply with their instructions. In particular, the court found that it was intended to create a false and misleading appearance of active trading or price on the ASX in illiquid securities in breach of s998 of the Corps Law, the precursor to CA s1041B in respect of securities. Finally, the court found the conduct was misleading and deceptive in breach of s995 of the Corps Law, the predecessor to s1041H The facts in Braysich v R are difficult to discern from the judgment. HoweverBuss JA gave an interesting exposition of the history and meaning of the market rigging provisions in the Corporations Act. This was because special crossings are conducted off-market and are known to be capable of being done at a price that bears no relation to the market price. Therefore, they could not create a false or misleading appearance with respect to the market for, or the price for trading in, financial products on a financial market CA s1041B 2 a captures so-called "wash trades", while s1041B 2 b captures "matched orders". The interference will arise from the creation of the false or misleading appearance of trading between unassociated sellers and buyers who do not intend, by their dealings, to create an artificial market or price. Prior to each trade, RBC allegedly identified stocks in US and Canadian companies that RBC believed would generate a tax benefit. RBC and a subsidiary allegedly bought and sold these stocks, and also bought and sold narrow based stock index futures and single stock futures contracts written on the stocks opposite each other. For further details, see CFTC Release pr CA s1041B theoretically could also present some issues in relation to the correction of trading errors. The usual course of conduct when an error occurs is immediately to enter into an equal and opposite trade to flatten your exposure on the error. So, for example, if a client instructed you to buy ,000 XYZ shares and the trader accidentally keyed in a sale of 1,000 XYZ shares, the accidental sale would be credited to an error account. Again, the second buy transaction potentially falls within s1041B 2 b It used to be a defence to a prosecution under the predecessors to ss1041B 1 and ss and if you could prove that the purpose or purposes for which the accused did the act was not, or did not include, the purpose of creating a false or misleading appearance of active trading in securities on a stock market s Hence one could reasonably argue that the purpose of these types of transactions was to crystallise a tax loss or correct an error and not to create a false or misleading appearance of active trading and seek to rely commsec this defence. This was especially so if in the case of a tax loss crystallisation transaction each of the sale and purchase trades, or in the case of an error correction the correcting trade, was done in a single line at prevailing market prices Buss JA explained in Braysich v R how the offence in sthe deeming provision in s and the defence in s interacted "In my opinion, s a facilitates proof. Section a may be relied on by the prosecution to prove that the accused, by engaging in the activity described in the provision, created a false or misleading appearance of active trading in the securities in question on a stock market, within the first limb of s Proof of the activity described in s a is sufficient to produce the consequence that the accused, for the purposes of s read with s of the Corporations Lawis to be judged to have created a false or misleading appearance of active trading. These observations also apply, with trading modifications, to s b and c The prosecution is not, of course, confined to s in proving that an accused created a false or misleading appearance of active trading. However, where the prosecution relied on the deeming provision in sit was sufficient for the prosecution to prove beyond reasonable doubt that the accused knew of the relevant activity the subject of the deeming provisions. Under the Criminal Code, offences have a physical element and a fault element. The deeming provision in s1042B only addresses the physical element of creating a false or misleading appearance of active trading in particular financial products on a financial market. Hence, while s1041B 2 deems a person to have done that physical element if they engage in a wash trade or matched orders, the effect of ss1041B 1Awhen read in conjunction with the Criminal Code, would seem to be that the prosecution must still prove that the accused intentionally engaged in the wash trade or matched orders and was reckles s as to whether it had, or was likely to have, the effect of creating, or causing the creation of, a false or misleading appearance of active trading in particular financial products on a financial market. In order to put the transaction through the market at cents, CTC had to buy approximately 2. E asserted that the transaction was a 3 month loan to CTC secured against the 4m shares. The trial magistrate did not accept this and found that the true purpose was to rig the market. There was a totally artificial transaction involving 4 million shares and it resulted in no change in the ownership of the shares, just an apparent surge in activity to the extent of million shares on the day, forgetting altogether about the necessity to clear the market the day before. Whether or not the magistrate erred in his finding of fact and it was he who heard the whole of the evidenceit could not be possible, having regard to the expense to be incurred by the transaction such as payment of duties and commission, to conclude other than that the purpose was to create a false and misleading impression of the market. On appeal, the NSW Court of Criminal Appeal rejected an argument by the defendants that the convictions should be set aside because they were not dealing as principal and that the persons who should have been charged were the trust companies concerned who owned the shares. The court held that the predecessor to s1041B 1 applied to a person who engaged in the proscribed conduct even though that person so engaged by dealing in the securities of another with or without the authority of that other. The court, however, quashed the convictions because the Crown had failed to identify the persons who were the beneficial owners of the shares before and after the transactions for the purposes of the predecessor to s1041B 2 a and to identify the persons or their associates commsec held interests in the shares before and after the transactions for the purposes of the predecessor to s1041B This provision is intended to prohibit a person from causing a run on a financial product by spreading information about illegal transactions the person has done to manipulate the market, or about illegal transactions someone else has done to manipulate the market where the person stands to receive some consideration or benefit for spreading that information In Endresz v Whitehouseaboveafter the transaction in question, the ASX wrote to Emu Hill and queried it about the fluctuations in its share price. E, who you will recall was the chairman of Emu Hill and a director of its major shareholder CTC, responded on behalf of Emu Hill without referring the matter to his fellow directors He said that the board of Emu Hill was not aware of any information not known to the market that would explain the movement in its share price. The letter also stated that CTC had purchased the 2. It did not mention the fixing of the price on the 4m transaction. E was charged and convicted at first instance of breaching the precursor to s1041E. On appeal, E tried to argue that he had answered the ASX query as chairman of Emu Hill and not as director of CTC and was precluded from disclosing in the letter information that was confidential to CTC. The court rejected this argument and dismissed the appeal, saying that some of his answers included information that could only have been known to CTC. As a consequence, the market price of Wattle Gully traded up from 8 cents to 12 cents. Further, the geologist had said in the report that he did not consider the deposits to be economically recoverable. A few days later a correcting letter was sent to the ASX and the price fell back to 8 cents and subsequently even lower. An appeal by W against his conviction and jail sentence, however, was rejected In ASC v MacLeodM, an independent consulting geologist, issued a report to Cambridge Gulf Exploration NL on the results of exploration it had undertaken off the coast of north-west WA with a view to mining diamonds off the sea bed. The company issued the report to the ASX and its share price climbed dramatically. The size of the sample that had been taken was not adequate to draw the conclusions that the geologist had and, as it transpired, the company did not make anywhere near the level of recoveries or profits that the geologist had predicted. He was convicted as first instance by a magistrate of breaching the precursor to s1041E. That decision was set aside and the charges dismissed on appeal by a Commissioner of the Supreme Court of Western Australia. ASC then appealed the dismissal to the Full Court of the Supreme Court of Western Australia. Further it was clearly material and, on the evidence, one that was likely to induce people to buy shares in the company. The test to be applied when considering whether a person knew or should have known something was materially misleading was an objective one and, on that standard, the geologist should have known that his statements would have induced people to buy shares Accordingly, the Full Court found that he was properly convicted of breaching the precursor to s1041E and reinstated his conviction. The co urt found that the central thrust of the statements was to quell market concern about the ability of James Hardie to meet trading asbestos liabilities and that these statements were likely to induce persons to acquire James Hardie shares and to have the effect of maintaining or stabilising the price for those shares. Fortis shares fell sharply, prompting the company to issue a press release denying it. Fortis eventually collapsed during the GFC under the weight of having bought part of ABN Amro. The company was later nationalised and broken up. He was charged with, and pleaded guilty to, one count of disseminating information that was false in a material particular and was likely to induce persons to dispose of financial products, in contravention of CA s1041E. CA s1041F 3 gives this section an extended operation in relation to certain dealings in superannuation and RSA products. The NCSC applied to have sales on the exchange declared void. The amount of the bonus was linked to the market price of Select Vaccines shares on that day. The CEO did not appeal the decision at first instance. As the ASX noted in ASX Business Rules Guidance Note Trading Practices "A cornerstone of fair and orderly markets is that they reflect the forces of genuine supply and demand. This concept is fundamental. ASX seeks to ensure that its markets are fair and orderly and free of manipulative trading. ASX closely monitors trading activity. This is essentially the same as ASX MIR above. Again, this is essentially the same as ASX MIR above. Often, the first thing a regulator will ask for if it comes to do an audit or investigation of a financial services licensee is its order records. Deficiencies in order records often are symptomatic of, or contribute to, other compliance deficiencies. CR r seems to duplicate many of the requirements of r It is unclear why both regulations have been included. That is seen to have the advantage of ensuring that all clients get the same price. MIR requires a broker to be able to link each trading message back to an order at all times. They are intended to ensure that licensees fees their clients fairly in these circumstances. This slide has been paraphrased to combine ss991B 1 and The word "associate" in ce and f takes its meaning from ss11, 13 and 15 of the Corporations Act. It includes directors and secretaries of a company, partners of a partnership, related bodies corporate, and certain trusts. CA s991B 2 is complemented by CR rbelow, which basically says that if a licensee wants to deal in financial products on its own account and the person who is going to effect that dealing is aware of instructions of a client to deal in the same products at or near the market price, then they cannot transmit the instructions for the principal order until the client order has been transmitted. To the extent that paragraph above requires "at market" orders to be transmitted in the sequence they are received, it basically codifies the common law position: see Constable v Meyer DCR NSW In that case, a client M telephoned his broker and asked the market price trading T. M asked the broker to buy him 2,000 shares in T at market ASAP. The order was handed to a floor operator along with an order from another client to buy shares. The floor operator came back with a number of purchases at the end of the day for M and other clients. In accordance with firm practice, the operator allocated the original 4,000 purchase to M and the other client at an average price for the total purchase. The options of purchases for the rest trading the day were allocated to M and the remaining clients also at an average price for the total balance. M rejected the purchases as not being in accordance with his instructions and the broker then sued M for payment. The District Court of NSW held that where a stockbroker is instructed by a number of clients to buy shares at market price in a rapidly rising market, its duty to those clients is to execute their commissions as expeditiously as possible and strictly in the order in which they are received. The broker had failed to do that in this instance and so judgment was entered for the client. Note the words in italics in r above. Its meaning is altogether vague. How far away from the current market price must an order price be to not be "near the market price"? On that scenario, the regulation would seem to have achieved little. For what it is worth, my view is that the phrase "at or near the market price" needs to be interpreted having regard to the manner in which markets normally operate and reflect the fact that, at any point in time, there is usually a bid-ask spread in the market ie there is no single "market price" as such. In my view, a buy order should be considered to be "near the market price" if it is equal to or more than the current bid price but less than or equal to the current ask price and a sell order should fees considered to be "near the market price" if it is less than or equal to the current ask price but equal to or more than the current bid price. That said, the clearly safer course for any licensee to follow who receives an order to buy or sell a financial product at a particular trading as distinct from a "careful discretion" or "best price" style order is to transmit the order to the market as soon as it is received, regardless of how close it is to the current market price. There is also a provision in CR r requiring a licensee to keep client instructions confidential. We look at that provision in lecture As mentioned above, this MIR effectively displaces the operation of s991B 2 and CR r on the ASX market by reason of the operation of s991B 3 b and rr andmentioned previously. Many brokers are part of a larger corporate group and the persons who work in their business are often employed by another entity in the group. Technically, therefore, these persons are not employees of the participant in the normal legal sense. However, they are probably caught by the expanded definition of "employee" on the basis that they are agents or representatives of the participant. Note that the expressions "responsible executive", "controller", "immediate family", "family company" and "family trust" also have defined meanings under the ASX Market Integrity Rules see MIR Given its obligations under MIRa participant needs to be able to identify orders that come from a prescribed person especially employees and their immediate family and family companies and family trusts and label them as such in its order management system. That could be a real problem if the broker were trying to cover a balance sheet exposure. It is therefore critical that brokers who trade on their own account have an allocation policy which acknowledges that they can execute principal orders at the same time as client orders and that they get client consent to that policy. Clearly, the best way to do that is for brokers to build the required consent into their client agreements. However, some institutional clients are reluctant to sign formal client agreements and so it would be wise to have a separate short-form consent for them to sign in lieu MIR provides that for the purposes of MIRa limit order which cannot be executed owing to price differences is not on the same terms. Under MIR options, a market participant must keep a record of any consent given by a client for the purposes of c above. One point to note. The effect of c and d therefore is that a broker may have to postpone an employee trade to a client trade. Brokers should include a proviso to that effect in their employee trading policy MIR is the flip side of MIR above. MIR deals with how you execute orders. The best way to do that is to build the required consent into your broker client agreement. It also does not apply to sales or purchases of securities or interests in registered managed investment schemes by issuers under the fund raising provisions in Chapter 6D or Part CR r Note also that this section only applies if the other party to the trade is a non-licensee. Trades that occur on market technically take place between the two brokers executing the trade as principals, even where those brokers are acting for a client. Most brokers will hold a financial service licence unless they are proprietary traders who deal solely on their own account and do not make a market and therefore have no requirement to hold an AFSL and so this section will not generally apply to trades done on-market in the ordinary course. Most institutional clients will also be financial services licensees. So this rule will fees only apply in practice to a broker who crosses on-market as principal on one side for a non-institutional client on the other side, or who trades off-market as principal with a non-institutional client. The breadth of the expression "able to be traded" in a above has been narrowed by CR rr A and 1B Prior to the introduction of those regulations, there was a concern that a licensee might not know whether a particular financial product is able to be traded on a financial market on which the licensee was not a participant or did not have access through a third party. The assumption underlying this restriction is that if you are selling a market-traded financial product to a client, or buying a market-traded financial product from a client, as principal you are likely to be making a margin on the transaction and it is unfair for you to charge commission as well. Note that the restriction only relates to a transaction of "sale or purchase" of market-traded financial products. The better view would seem to be that it does not capture entering into the other side of a derivatives transaction on-market as principal with a client. While it is common to refer to this as having entered into a "sold position" or a "bought commsec, they are not really transactions of "sale or purchase" in the normal sense In relation to c above, the ASX MIRs have provisions regulating how and when a market participant can charge a brokerage, commission or fee when it deals as principal with a client see below. CR r see next slide specifies the form of authorisation that is required to meet d above and the disclosure that must be given to meet e above. That raises an issue as to how this can be reconciled with s991E 3 and r above. It does not apply to the acquisition of partly paid shares or interests in managed investment schemes. CR r A options provides that s991F does not have effect in relation to a financial services licensee that gives credit in good faith to a person employed by the financial services licensee or a person related to the financial services licensee to enable the person to acquire an insurance product in relation to a credit facility provided by the financial services licensee to the person eg mortgage insurance or consumer credit insurance provided in relation to a credit facility This regulation acts as an exception to the general rule in s991F 3 that an employee of a licensed market participant must only acquire products traded on that market through their employer. It allows an employee to trade through a related body corporate of the licensee provided the conditions in a and b are met. Fees brokers form part of a larger corporate group and the persons who work in their business are often employed by another entity in the group, such as the parent company or a service company. Technically those employees would not be caught by s991F 3 as they are not employees of the broker. Hence, it is not really clear what r is directed to, unless it relates to those groups that have more than one broker within the group eg one that acts for institutional clients and another that acts for retail clients This regulation also acts as an exception to the general rule in s991F 3 that an employee of a licensed market participant must only acquire products traded on that market through their employer. The requirements of subsection F 3 will continue to apply to such employees. A person who is employed in this way technically will only fall within this rule if they act as an options or "representative" of the broker. Notwithstanding this, some Australian financial services groups that include an ASX broker apply these requirements across the entire group and oblige all group employees, even those not involved in the broking business, to comply with their employee trading policy. Typically this will require employees, their immediate family and fees companies and family trusts to commsec their broking accounts with the house broker and to seek prior approval from Compliance to transactions in those accounts. In addition to ensuring compliance with MIR for broking staff, this also facilitates the monitoring of compliance with Chinese walls requirements across the entire organisation. The requirements of this MIR operate in addition to the requirements of CA s991F. On trading face, s1020B 2 applies to brokers selling securities on behalf of their clients. It would therefore be wise for a broker to include a warranty in its client agreements that unless the client instructs otherwise, whenever they place a sell order with the broker, they will be taken to have represented that they have a presently exercisable and unconditional right to vest the securities in fees buyer. As an example of something that happens from time to time — a client places an order to buy 100,000 shares over the course of a day. The broker, because of market conditions or through carelessness or whatever, only manages to buy 95,000 by the close of trading. The former s1020B 4 d provided and the operator of the market is informed as soon as practicable that the sale has been made short in accordance with this subparagraph. This will depend on the terms of the borrowing arrangement. That, in turn, led to some fairly dubious securities lending arrangements being put in place to circumvent the prohibition on short sales and, in particular, the requirement in s1020B 4 d iii for a short sale relying on the securities borrowing exception to take place on the uptick. That is evidently so when you have regard to the exception that used to appear in s1020B 4 c and that now appears in s1020B see below. The fact that an express exception was thought necessary for short trading covered by purchases that are conditional only on payment of the purchase price and delivery of title and transfer documentation would suggest that it does not take much conditionality at all around the delivery of borrowed securities to prevent the borrower having a presently exercisable and unconditional right to vest them in a buyer In this regard, the market standard Australian M aster Securities Lending Agreement "AMSLA" requires that the terms of each securities loan should be agreed prior to the commencement of the relevant loan, either orally or in writing including any agreed form of electronic communication and confirmed in such form and on such basis as is agreed between the parties cl Normally this is done by the borrower delivering a written request to borrow securities which is accepted by the lender before a contract to lend the securities comes into being Commsec the requirement for collateral is waived, on the settlement date specified in the borrowing request, the borrower must deliver agreed collateral to the lender simultaneously against delivery of the borrowed securities by the lender to the borrower cl While the AMSLA does not expressly deal with the point, it seems strongly arguable that the obligation of the borrower to deliver agreed collateral, and the obligation of the lender to deliver the borrowed securities, are cross-conditional. This new disclosure regime appears to operate on the assumption that an arrangement options borrow securities under an AMSLA style securities lending agreement will give the borrower a presently exercisable and unconditional right to commsec the securities to be borrowed in a buyer. The logical extension of that view is that unless the obligation to deliver agreed collateral has been satisfied or waived, the borrower of securities under an AMSLA would not have a presently exercisable and unconditional right to vest those securities in a buyer and therefore could not purport to sell them without breaching the law against naked short selling. Whether the arrangements are sufficient to reflect a presently exercisable and unconditional right to vest will depend on the particular circumstances of these arrangements" RG There may, however, be another way to get trading the same end point as was assumed in ASX Business Rules Guidance Note and appears to be assumed in ss1020AA AF and now by ASIC in the latest iteration of RG At law, a securities "lending" agreement is, in fact, an agreement by the lender to transfer securities to the borrower for consideration with a promise by the borrower to re-transfer equivalent securities back to the lender at the conclusion of the "loan". Accordingly, there is a perhaps contrived but not entirely disrespectable argument, as yet untested in the courts, that if a lender has agreed to a written borrowing request under clause of an AMSLA, that gives rise to a contract on the part of the borrower to "purchase" the securities ie accept a transfer of the securities for consideration which is conditional only on the payment of the "purchase price" ie delivery of the collateral and the delivery of title and transfer documentation for the securities. If that argument is correct, then the securities lending agreement would fall within the exception in s1020B see below and any sale of the securities intended to be borrowed would not infringe s1020B but would still fall within the disclosure regime in ss1020AA AF! ASIC itself hints that it might be amenable to this argument in its comment in the note to RG that: "While securities lending is a sale with an undertaking to return the transferred securities or their equivalentthis guide uses the common market terminology to describe the transaction and parties. The broadest approach is to focus on whether borrowing takes place to meet delivery obligations. In relation to the last bullet point, ASX Business Rules Guidance Note correctly said that a short sale covered by shares that will be issued in the future commsec company issued options constitutes an unlawful short sale because at the time of sale all that the seller has is a contractual right against the listed company for the allotment of securities in the future through the exercise of the options. That is not a "presently exercisable and unconditional right to vest the shares in the buyer". In addition, the short sale will also amount to a contravention of ASX MIR because, at the time of the sale, the securities dealt with will not have been admitted to official quotation. Official quotation can only be applied for after the options have been exercised and shares have been allotted. These breaches will arise even if the seller is able to fulfil its settlement obligation by having the options converted and the shares admitted to official quotation by the time settlement is required. Fees extension, the same reasoning will apply to other convertible or converting securities So to sum up "naked" short selling of s1020B products is generally prohibited by s1020B 2subject to the technical exceptions in the slide above. The errors meant they were unable to determine their net long or short position in a security. After the genuine order trades, the multiple orders on the other side are rapidly withdrawn. The manipulation occurred at the time of various corporate activities by Healthzone, including capital raisings and acquisitions see also ASIC Media Release CA s1041B 1 — False Trading and Market Rigging A person must not do, or omit to do, an act whether in this jurisdiction or elsewhere if that act or omission has or is likely to have the effect of creating, or causing the creation of, a options or misleading appearance: of active trading in financial products on a financial market operated in this jurisdiction; or with respect to the market for, or the price for trading in, financial products on a financial market operated in this jurisdiction. See North v Marra Developments Ltd CLR esp. In determining whether a transaction is fictitious or artificial for the purposes of s1041C 1the fact that the transaction is, or was at any time, intended by the parties who entered into it to have effect according to its terms is not conclusive. CA s1041D - Dissemination of Information About Illegal Transactions A person must not whether in this jurisdiction or elsewhere circulate or disseminate, or be involved in the circulation or dissemination of, any statement or information to the effect that the price for trading in financial products on a financial market operated in this jurisdiction will, or is likely to, rise or fall, or be maintained, because of a transaction, or other act or thing done, in relation to those financial products, if: the transaction, or thing done, constitutes or would constitute a contravention of s1041A, B, C, E or F; and has received, or may receive, directly or indirectly, a consideration or benefit for circulating or disseminating, or authorising the circulation or dissemination of, the statement or information. CA s1041E False or Misleading Statements A person must not whether in this jurisdiction or elsewhere make a statement, or disseminate information, if: the statement or information is false in a material particular or is materially misleading; to have the effect of increasing, reducing, maintaining or stabilising the price for trading in financial products on a financial market operated in this jurisdiction; and the person knows, or ought reasonably to have known, that the statement or information is false in a material particular or is materially misleading. In the case of ss1041E and F, liable to pay damages to anyone who suffers loss or damage as a result of a contravention, along with any other person "involved in the contravention" s1041I. The factors they are required to take into account in this regard are set out in ASX MIR — Relevant Factors In considering options circumstances of the order, the market participant must have regard to whether the order or execution of the order would be inconsistent with the history of, or recent trading in, that product; whether the order or execution of the order would materially alter the market for, or the price of, the product; whether the person on whose behalf the order is placed, or another person who the market participant knows to be a related party of that person, may have an interest in creating a false or misleading appearance of active trading in any product or with respect to the market for, or the price of, any product; whether commsec order is accompanied by settlement, delivery or security arrangements which are unusual; where the order appears to be part of a series of orders, whether when put together with the other orders which appear to make up the series, the order or the series is unusual having regard to the matters referred to in this rule; whether there appears to be a legitimate commercial reason for that person placing the order, unrelated to an intention to create a false or misleading appearance of active trading in or with respect to the market for, or price of, any product; whether the transaction, bid or offer the execution of which is proposed will involve no change of beneficial ownership; the extent to which a person amends or cancels an instruction to purchase or sell a product relative to the number of transactions executed for that person. Commsec market participant must also comply with this Part in respect of orders the subject of automated order processing. It is important that a trading participant which receives an unusual order is able to establish that it has made due inquiries and satisfied itself as to the reason for the trading. As a minimum, appropriate notations should be made on the order record or some other record as to the reason for the trading. ASX 24 MIR — Relevant Factors In considering the circumstances of the order, the market participant must have regard to whether the order or execution of the order would be inconsistent with the history of, or recent trading in, trading contract; whether the order or execution of the order would materially alter the market for, or the price fees, the contract; whether the person on whose behalf the order is placed, or another person who the market participant knows to be a related party of that person, may have an interest in creating a false or misleading appearance of active trading in any contract or with respect to the market for, or the price of, any contract; whether the order is accompanied by settlement, delivery or security arrangements which are unusual; where the order appears to be part of a series of orders, whether when put together with the other orders which appear to make up the series, the order or the series is unusual having regard to the matters referred to in this rule; whether there appears to be a legitimate commercial reason for that person placing the order, unrelated to an intention to create a false or misleading appearance of active trading in or with respect to the market for, or price of, any contract; the extent to which a person amends or cancels an instruction to purchase or sell a contract relative to the number of transactions executed for that person. ASX MIR — Entering Orders Without an Intent to Trade A market participant must not enter orders where there does not exist an intent to trade. For these purposes, circumstances which indicate that there does not exist an intent to trade include: orders which are entered at price limits substantially higher or lower than the previous settlement price of the specific contract, or alternatively, entered with unusually large volume levels; or placement, modification and cancellation of orders during the pre-opening phase, which are entered with intent to affect the opening price of any futures or options contract. Subject to rthe financial services licensee must transmit, in the options in which they are received, all instructions to deal in a class of financial products at or near the market trading for financial products of that class prevailing immediately before execution of the instructions. AS X MIR Allocations ASX MIR Relevant Factors In considering whether MIR has been complied with, the following factors are relevant: allocation of market transactions is immediate and automatic, unless circumstances or instructions justify later or manual allocation; market transactions executed pursuant to instructions whether an order of a client or an order on its own account are allocated in the sequence in which the market participant received those instructions, entered those instructions or the market transactions were effected; allocation of a market transaction occurs in accordance with the disclosed allocation policy of the market participant; and except as provided in these Rules, a market participant does not allocate market transactions to fulfil all or part of an order for its own account when it has an unfulfilled order on the same terms for those market transactions from a client. ASX MIR — Disclosure of Allocation Policy A market participant must when requested to do so by a client, disclose to the client … the policy it adopts in the allocation of market transactions to fill orders placed with it … The market participant must keep a record of disclosure made under this Rule. In particular the Trading Participant must not give unfair preference to itself, to any Prescribed Person or to any client, over another client. If the non-licensee gives an oral s991E 1 d consent to the financial services licensee, or revokes a s991E 1 d consent orally, the financial services licensee must: provide a copy of the written record to the non-licensee within business days after the day on which the consent is given or revoked. CA s991E 3 — Restriction on Right to Charge Brokerage, Commission or Other Fees If a financial options licensee, either personally or through an authorised representative, enters into a transaction of sale or purchase of financial products on their own behalf: that is with a person the non-licensee who is not a financial services licensee or commsec authorised representative; the licensee must only charge the non-licensee a brokerage, commission or other fee in respect of the transaction if the charge is permitted by the regulations. CR r — Form of Authorisation and Disclosure Required to Charge Brokerage, Commission or Other Fees A r d authorisation given to the financial services licensee by the non-licensee: If the non-licensee gives an oral r d authorisation to the financial services licensee, or revokes a r d authorisation orally, the financial services licensee must: provide a copy of the written record to the non-licensee within business days after the day on which the authorisation is given or revoked. The market participant must keep a record of disclosure made under this Rule. This matter is regulated by CA s991E 1 and therefore requires disclosure or consent Corporations Act CA s991F — Dealings Involving Employees A financial services licensee and an employee of the licensee must not, on their own behalves, jointly acquire a financial product. A financial services licensee must not give credit to an employee of the licensee, or to a person who they know is an associate of an employee of the licensee, if: the credit is given for the purpose of enabling the person to whom the credit is given to acquire a financial product; or the licensee knows or has reason to believe that the credit will be used for the purpose of acquiring a financial product. A market participant must take reasonable steps to ensure that a person who approves a market transaction under above takes into account the circumstances of the proposed transaction and anything which might materially affect the price of the relevant cash market product or, in the case of a derivatives market transaction, the price or value of the relevant contract series the subject of the market transaction. ASX MIR d i - DTRs Not to Trade on Own Account Without Approval A trading participant must ensure that a DTR does not execute any order in a trading platform for or on behalf of, or which will benefit, directly or indirectly, the DTR or any associate or relative of the DTR, without the prior approval of the trading participant. The matter is regulated by CA s991F. CA s1020B 2 — Prohibition Against Short Selling A person must only, in this jurisdiction, sell s1020B products to a buyer if, at the time of the sale: the person has or, if the person is selling on behalf of another person, that other person has; or the person believes on reasonable grounds that the person has, or if the person is selling on behalf of another person, that other person has; a presently exercisable and unconditional right to vest the products in the buyer. If person infringing is a licensed dealer or its representative — cancellation or suspension of licence ss915C 1 a and 912A 1 c or banning order s920A 1 e for breach of a financial services law. The former s1020B 4 d provided "Section B 2 does not apply in relation to a sale of s1020B products in the following circumstances: the person who sold the products is not an associate of the body corporate that issued options products; arrangements are made before the time of the sale that will enable delivery of products of the class sold to be made to the buyer within business days after the date of the transaction effecting the sale; and the price per unit in respect of the sale is not below the price at which the immediately preceding ordinary sale was effected; and the price per unit is above the price at which the immediately preceding ordinary sale was made, unless the price at which the immediately preceding ordinary sale was made was higher than the next preceding different price at which an ordinary sale had been made; and the operator of the market is informed as soon as practicable that the sale has been made short in accordance with this subparagraph. These provisions appear to proceed on an assumption that a person who has entered into or gained the benefit of a securities fees arrangement and who has arranged to borrow securities under it has a presently exercisable right to vest those securities in a buyer and therefore does not infringe s1020B 2 by agreeing to sell those securities.
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