Post on 17-Jun-2020
NZX Regulatory Agenda2017
NZX Regulatory Agenda
This is the second annual NZX Regulatory Agenda.
NZX plays a critical role in supporting and driving the
development of New Zealand’s listed capital
markets, which it does with the cooperation of
issuers, market participants and other market
advocates. The markets NZX operates provide
businesses with access to capital that supports their
growth, and provide investors with access to listed
financial products to create wealth and to manage risk.
NZX continues to focus on policy initiatives that
support New Zealand's markets ecosystem. This
includes pursuing stronger and deeper listed capital
markets, and transparent market trading activity.
As a licensed market operator, NZX is required to
regulate the conduct of issuers and participants on
its markets. It does this through NZX Regulation,
which is independent of NZX’s commercial business.
It is fundamental to NZX’s commercial success that
it operates, and is seen to operate, markets with a
strong reputation for market integrity. The work of
NZX Regulation and NZX Policy contributes to New
Zealand's markets ecosystem and to maintaining
confidence in the integrity of those markets.
NZX's 2017 Regulatory Agendafocuses on five key areas:
Market Infrastructure
Orderly Markets
Market Engagement
Risk-Based Approach to Regulation
Market Development
In order to be an effective regulator, NZX Regulation
proactively addresses market trends, changes in
technology and law, and developments in
international best practice. This agenda forms part
of that work – to provide clarity on NZX’s regulatory
priorities and resourcing, and the outcomes we seek
to achieve.
We have appreciated the engagement with issuers
and participants over the course of the last year, and
look forward to continuing to collaborate in 2017.
Joost van Amelsfort
Head of MarketSupervision
Hamish Macdonald
General Counsel
NZX Regulatory Agenda
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Contents
NZX Regulatory Agenda 04
Market Infrastructure 05
Orderly Markets 10
Market Engagement 12
Risk-Based Approach to Regulation 13
Market Development 14
NZX's Regulatory Functions 17
Risk and Trends Context 19
Legislative Context 21
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NZX Regulatory Agenda
NZX’s Regulatory Agenda for 2017 focuses on fivekey areas:
Marketinfrastructure
Orderly markets
Marketengagement
Risk-basedapproach toRegulation
Marketdevelopment
These areas, and the objectives for each, reflect NZX’s statutory obligations, the current economic environment, and NZX’s observation of the risks andtrends that are impacting or will impact operation of NZX’s markets. The agenda expands on the scope of focusin 2016.
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Market Infrastructure
NZX’s objectives:
NZX’s market rules and guidance:
Balance the need for informed, confident participation in NZX’s markets, and the efficient
operation of those markets
Appropriately reflect international best practice and principles, as well as technological and
legal trends
Encourage on-market trading of securities
NZX’s regulatory infrastructure comprises the rules, technology andprocesses – effectively the architecture – that NZX uses to operate itsmarkets. Key to this architecture is NZX’s market rules.
NZX’s regulatory infrastructure supports NZX to
operate fair, orderly and transparent markets.
Informed, confident participation by investors in
NZX’s markets is facilitated by effective regulatory
oversight of conduct rules. Those rules should
reflect international best practice for the regulation
of securities exchanges, listed financial products,
issuers and market participants – to the extent
appropriate for the New Zealand capital markets.
They should also seek to address the key risks and
trends that influence conduct and behaviour on
NZX’s markets.
AREAS OF FOCUS FOR 2017
Embedding revised corporate governance bestpractice code
During 2016, NZX consulted extensively with the
market on a review of NZX’s corporate governance
best practice code for issuers (Code). The revised
Code proposed by NZX sought to strike a balance
between effective disclosure and the cost to issuers,
with corporate governance arrangements
appropriately reflecting New Zealand’s market size,
and the diversity of listed issuers on NZX’s markets.
The key objectives of the updated NZX Code were
to:
Improve corporate governance practices to
provide long term value for shareholders
Promote efficient delivery of quality information
by listed issuers to help investors make informed
decisions in respect of corporate governance
practices
Balance the costs and challenges of disclosure
requirements with requiring disclosure which
provides value for investors
Create a code for New Zealand listed issuers which
has greater alignment with other relevant reporting
frameworks
Provide listed issuers with clear recommendations
that are fit for purpose, flexible and easy to
implement
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The level of market engagement in the consultation
process exceeded NZX’s expectations. Although
this ensured a collaborative approach to the
development of the final proposed Code
amendments, the level of feedback and requests
from market participants for additional time to
engage in the process meant NZX was not in a
position to implement the amended reporting
requirements in 2016 as originally intended.
NZX will shortly apply to the Financial Markets
Authority (FMA) for approval of the specific rule
amendments required to give effect to the revised
corporate governance Code and anticipates that the
Code will be published in Q2 2017.
Based on feedback received on the timeframe for implementation, NZX anticipatesthat issuers will be required to commencereporting against the updated Code forperiods ending 31 December 2017 andonwards in order to allow for anappropriate transition timeframe forissuers.
As part of implementation plans, NZX will also:
Consider the guidance that supports the updated
Code, including for example, guidance in relation
to environmental, social and governance
reporting, and considering existing guidance in
relation to diversity reporting
Consider its approach to oversight of the updated
Code
Embedding revised Administrative Trading Haltsregime
In 2015, NZX initiated consultation on its current
practice for identifying price sensitive information,
flagging this information to the market and applying
short administrative trading halts following the
release of such announcements. Feedback received
on NZX’s initial proposal to cease that practice
resulted in NZX engaging further with the market
in 2016.
NZX concluded its second round of market
consultation on administrative trading halts practice
in Q3 2016, which resulted in NZX reconsidering its
initial proposal.
Under the revised regime, operational changes will
be made to NZX’s market announcement platform
(MAP) so that issuers, rather than NZX, will be
required to flag if information being released (i) fits
into one of a series of prescribed categories, (ii) is
an interim update for the purposes of the NXT
Market Rules, or (iii) is material information for the
purposes of the NZX Main Board or NZAX Listing
Rules. Administrative trading halts will then be
applied and removed automatically if applicable.
Implementation of the revised process involved NZX
undertaking a significant amount of design and
build work in late 2016 to the technology that
underpins NZX’s announcement and trading
infrastructure.
NZX will seek to implement the revised
administrative trading halt regime in mid-2017. This
will include:
Minor rule amendments being made to some of
NZX’s market rules to allow issuers to only release
announcements via MAP
Training for issuers on how to use the updated
MAP, and publication of user guides to support
issuers with these operational changes
Development of processes to monitor the extent
to which issuers are correctly implementing the
process
Review of NZX Participant Rules and guidance
During 2016, NZX conducted a substantive review
of the NZX Participant Rules.
The review reflected recent market developments
and trends, the activities of participants, and
matters consequential to recent legislative changes.
Proposed amendments were made to several areas
governing the regulation of accredited participants
who provide brokerage and advisory services for
NZX’s markets. The themes of that review included:
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Reducing overlap with other applicable legislation,
for example, in relation to the regulation of
financial advice, operation of discretionary
accounts, custody of client assets and the
requirements of know your client obligations for
client advising participants
Addressing known issues with the rules, including
in relation to control of broking offices and
modernising methods for delivery of contract notes
Introducing additional surveillance tools and
heightened requirements in relation to order
records, to further enhance NZX’s capabilities to
monitor trading activity
Updates to capital adequacy requirements,
including a more risk based approach to
notification requirements
Feedback on an exposure draft of proposed
amendments to the Participant Rules was received
in February 2017.
Implementation of those amended rules will follow
conclusion of the formal FMA approval process. In
addition to the changes to the Participant Rules, NZX
also intends to make corresponding amendments
to the Clearing and Settlement Rules and Derivatives
Market Rules, as appropriate.
In tandem with these rules changes, NZX will
conduct a review of its current guidance notes,
practice notes and forms. That review will support
the amendments being made to the rules, and
clarify NZX’s current expectations on best practice
and conduct by participants operating in NZX’s
markets.
NZX is targeting a staged implementation of the
rules changes, as well as release of revised guidance
and forms, and will communicate firm time frames
for amendments to take effect in due course.
Commence review of NZX Main Board/DebtMarket Rules
NZX has commenced internal scoping of a proposed
review of the NZX Main Board/Debt Market Rules.
NZX considers it an opportune time to conduct a
review of the listing rules, and consult on a range
of issues relating to the scope and application of
those rules, including:
Simplifying the rules to better enable them to be
used as a tool to support issuers’ compliance
programmes
Further tailoring the rules to reflect, and facilitate,
the diverse range of financial products and issuer
types listed and quoted on the NZX Main Board
and Debt Market
Responding to domestic and international
legislative, capital markets and financing
Considering changes to the mandatory corporate
governance requirements, to support the changes
to the NZX corporate governance best practice
Code
Considering changes to address situations where
NZX frequently grants routine waivers in order to
reduce unnecessary compliance costs
As noted in the 2016 NZX RegulatoryAgenda, NZX is conscious that a reviewwill need to ensure that an appropriatebalance is maintained between theinterests of investors, issuers and marketparticipants.
Any review of the listing rules will be a significant
project. NZX will implement a multi-stage
consultation process for the review, given the
potential scale of the changes that may be
proposed, and the extent of stakeholder interest
NZX anticipates will occur.
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Participant Portal
NZX Participants are subject to various ongoing and
periodic reporting and notification obligations.
There is currently no centralised platform used by
participants to submit such information.
In 2017, NZX intends to launch acentralised participant portal. This portalwill be used by authorised brokerpersonnel to access information on theirbusiness and compliance obligations.
In addition, it is intended that the portal will:
Allow uploading of capital and prudential
information and periodic reporting
Provide access to online forms for completing
applications and compliance certificates
Allow participants to perform a range of
regulatory tasks, including processing waiver/
exemption applications, and submitting
notifications required under the Rules
Automate due date reminders for participants
Provide access to NZX guidance and template
documents
Automate aspects of NZX’s internal reporting and
enhance analysis of quantitative data
NZX envisages that the portal will incorporate data
generated by NZX Surveillance and the Clearing
House, which is used as part of NZX’s risk profiling.
This initiative will:
Significantly improve the efficiency of the
interaction between NZX and accredited participants
Remove a significant number of manual processes
currently in place that relate to the maintenance
of governance and administrative information
Further enhance data integrity
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NZX Regulatory Agenda
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Orderly Markets
NZX’s objectives:
Deliver comprehensive and effective frontline monitoring and enforcement of trading
misconduct on NZX’s markets
Ensure market participants understand the scope of permissible trading conduct on NZX’s
markets, and proactively demonstrate NZX recommendations and expectations on best practice
Ensure market participants effectively monitor and mitigate risks associated with potential
market misconduct at an operational level
As a licenced market operator NZX undertakes comprehensive frontlinemonitoring of trading on NZX’s markets, and takes appropriate action inrespect of suspected trading misconduct.
NZX’s broader engagement strategy includes
targeted education of participants on the
parameters of permissible trading conduct, and
principles and best practice on matters relevant to
trading on NZX’s markets. In addition, NZX’s annual
inspection programme and ongoing risk assessment
processes provide NZX with oversight of
participants’ operational and compliance
frameworks. Together, these support the detection
and prevention of potential market misconduct, and
maintaining the orderliness of NZX’s markets.
AREAS OF FOCUS FOR 2017
Trading conduct guidance
During 2016, NZX and the FMA engaged further
with participants in the broker and funds
management industries on current trading
practices. This engagement was part of a joint
regulatory initiative between NZX and the FMA to
provide greater clarity on the parameters of
permissible trading conduct.
NZX considers that good trading conduct practices
underpin fair, orderly and transparent markets and
promote market integrity. This increases public
confidence in the operation of NZX’s markets, which
in turn enhances market liquidity.
In February 2017, NZX issued a consultation
document seeking feedback on a draft trading
conduct guidance note, which:
Sets out the key principles that NZX considers
underpin the role of participants who trade on NZX
markets
Describes acceptable market practices, best
practice and recommendations on procedures
relevant to order execution
Describes regulatory expectations for participants
conducting principal trading, as either proprietary
trading or to facilitate client transactions
Highlights the types of conduct or behaviour that
may be viewed as potentially manipulative,
potentially breach NZX market rules or otherwise
result in regulatory scrutiny
NZX will seek to implement this guidance at the same
time as implementation of the NZX Participant Rule
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amendments referred to in the Market Infrastructure
section of this agenda. As part of this, NZX will
continue to actively engage with participants in
2017, and facilitate training for participants’
compliance and trading personnel, on practical
implications of that guidance.
Inspection programme and risk profile procedures
As part of NZX’s ongoing monitoring programme,
accredited market participants are subject to annual
risk assessments, and on-site or desk-based
inspections.
NZX made a number of enhancements to its risk
assessment methodology in 2016, including
integration of additional trade activity, client asset
and capital position reporting, together with
additional monthly risk data from NZX Surveillance
and NZX Clearing. This has enhanced the quality and
relevance of data available to NZX to monitor
participants.
NZX’s 2017 inspection programme willfocus on Participants’ understanding of,and planning for implementation of, theParticipant Rule changes and tradingconduct guidance.
NZX will also follow up on recommendations made
in the 2016 programme, particularly in relation to
Direct Market Access (DMA) arrangements, and
compliance monitoring plans. NZX will continue its
approach of proactively working with participants
to identify and implement best practice improvements.
NZX will continue to collaborate with the FMA on
the inspection programme in 2017, given the FMA’s
role in oversight of brokers under the Financial
Advisers Act 2008.
Embedding enhanced surveillance tools
The amendments to be implemented to the
Participant Rules and Derivatives Market Rules in
2017 include a number of enhancements to NZX’s
surveillance capabilities.
In 2017, NZX will review its surveillance processes
to leverage the additional information that will
become available. This will further support real-time
and post-trade monitoring of trading conduct,
including by reference to:
New rules for flagging of trades (for example,
short sales and prescribed person trading), which
enables NZX to more readily identify different
trading types and assists with centralised recording
Client reference numbers that will allow NZX to
directly identify wholesale client trading
New rules requiring clear identification of all
individual NZX dealers accessing the trading
system, whether directly or via third party systems
MABRA membership and access to information
NZX is a member of the Intermarket Surveillance
Group (ISG) and the World Federation of Exchanges
(WFE). In 2016, NZX continued to leverage those
memberships as forums for sharing information and
coordinating regulatory efforts, including in respect
of initiatives to address potential intermarket
manipulations and trading abuses.
In 2017, NZX will look to further build on its
regulatory relationship with the Australian Securities
and Investment Commission (ASIC). This will include
NZX seeking certification of its status as a foreign
regulator in relation to the administration or
enforcement of foreign business law for the
purposes of the Mutual Assistance in Business
Regulation Act 1992 (Australia) (MABRA).
Certification under MABRA will enable NZX to
directly request ASIC to gather information,
documents or evidence on NZX’s behalf and to
disclose that information to NZX. This will enhance
the efficiency and effectiveness of NZX’s surveillance
and investigation capabilities, and further contribute
to the maintenance of fair, orderly and transparent
markets. NZX considers this an important initiative,
given the continued growth of DMA trading and
participation of Australian-based participants and
investors in NZX’s markets.
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Market Engagement
NZX objectives:
Support and facilitate the development of issuer and participant compliance frameworks
Set expectations for how issuers and participants approach organisational culture and
conduct, with proactive ownership by boards and management of compliance obligations
under NZX’s market rules
NZX commits significant resource to engaging with
issuers, participants, and their external advisers, on
obligations under NZX’s market rules, guidance and
best practice expectations. NZX collaborates with
regulatory agencies and external stakeholders on
capital market issues and policy initiatives.
AREAS OF FOCUS FOR 2017
Enhanced visibility of NZX’s investigations andenforcement function
NZX conducts a significant number of enquiries and
investigations each year. This forms part of its
ongoing monitoring of compliance by issuers and
participants with NZX’s market rules.
In Q1 2017, NZX will publish the first of an annual
series of reports to increase public awareness of this
work, and to further improve visibility of NZX’s
enforcement function. That report will provide an
overview of NZX’s investigations and enforcement
work over the preceding year. It will also detail:
Other work performed by NZX Regulation over the
year in support of broader market regulation
NZX’s current approach to market monitoring and
oversight/compliance
How NZX utilised the various enforcement tools
available to it and the key regulatory outcomes
that it sought to achieve
Increased issuer engagement
NZX will continue to develop its issuer engagement
strategy in 2017, leveraging recent work undertaken
to better understand the dynamics of issuers’
operating environments and their different
compliance approaches.
Engagement will continue to be tailored toreflect the particular needs, size andexperience of issuers listed on NZX’smarkets, and will include direct one-on-one engagement with management andworkshops on key regulatory themes andissues.
In Q1 2017, NZX commenced publication of a
regular series of practice notes, aimed at assisting
issuers and their advisers with questions and
providing practical guidance on the Listing Rules.
These will be an additional compliance tool, and sit
alongside NZX’s existing guidance notes.
Increased broker engagement
As part of the implementation strategy for changes
to NZX’s Participant Rules, NZX will engage with
brokers on the implications of those rules
amendments. NZX also intends to support its
current work on developing trading conduct
guidance, by hosting workshops for brokers’
compliance and trading teams as part of the
implementation of that guidance.
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Risk-Based Approach to Regulation
NZX objectives:
Enhance NZX’s risk-based regulatory approach
Prioritise and target resourcing to issuers, participants and financial products which present
the more significant risks to the operation of fair, orderly and transparent markets
NZX takes a risk-based approach to its regulatory functions. This includesutilising an issuer and participant risk framework to assist NZX prioritise itsoversight and monitoring activities. NZX also directly interacts with issuersand participants through a combination of its formal inspection programmeand ad hoc engagement, to develop a better understanding of the riskprofile of individual organisations and their industry. This enables NZX tobe more proactive and targeted in its regulatory oversight.
AREAS OF FOCUS FOR 2017
NZX thematic reviews
In 2017, NZX will undertake the first of a series of
thematic reviews of issuers to support its ongoing
monitoring of market and compliance trends. NZX
proposes that the first thematic review will be on
issues, practices and conduct in respect of market
disclosure by issuers. NZX will publish its findings
and any recommendations.
The subject matter of the initial thematic review
reflects a continued focus by NZX on disclosure
practices. NZX considers this a particularly important
area, as investors need access to full, timely and
accurate information in order to make informed
investment decisions. The ability to access material
information on an issuer and its securities are also
key to transparent operation of NZX’s markets and
the price discovery process for on-market trading.
Risk-based offer document reviews
NZX Regulation has a role in reviewing offer
documents for primary and secondary capital
raisings on NZX’s markets. NZX has continued its
practice of collaborating with the FMA on offer
document reviews, given the FMA’s role in relation
to securities offers under the Financial Markets
Conduct Act 2013 (FMCA).
In 2017, NZX will undertake a review of its approach
to the review of offer documents. This will seek to
ensure that NZX’s approach appropriately balances
the need for effective and adequate disclosure of
material offer information to potential investors, with
issuers’ primary responsibility for ensuring
compliance with other prescribed content
requirements.
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Market Development
NZX objectives:
Market development is supported through the application and enforcement of clear,
appropriate standards of conduct, disclosure and reporting
NZX’s policy framework creates a market environment that is conducive to the listing and
quotation of new issuers and financial products, and access to comprehensive trading and
advisory services for products listed on NZX’s markets
NZX’s regulatory function is separate from its commercial function as amarket operator. NZX has in place robust processes, conflicts managementarrangements and review procedures to ensure this functional separation.It is fundamental to NZX’s commercial success that it operates, and is seento operate, markets with a strong reputation for market integrity.
The combination of that reputation, and NZX’s
ongoing policy programme and initiatives, supports:
Deeper and more liquid capital markets activity
NZX’s markets being an effective mechanism for
raising capital
A diverse range of accredited participants
providing comprehensive trading, advisory and
clearing services to support operation of NZX’s
markets
The listing and quotation of a diverse range of
investment products
AREAS OF FOCUS FOR 2017
Issuer support
In connection with NZX’s continued focus on
engagement, NZX Regulation intends to develop
additional materials and training in 2017 to support:
Issuers new to operating in a listed company
environment, or which are migrating between NZX
markets that are subject to different listing rules
Small to medium-sized issuers
New board members and senior managers
This initiative will seek to provide pragmatic
guidance on key matters relevant to those issuers,
directors and senior managers under the Listing
Rules, and support effective compliance strategies.
Product and market design
Recent trends in financing, and changes in New
Zealand’s securities legislation, has seen an
increasing variety of financial products available for
investment, options available to issuers to offer
financial products, and distribution channels for
financial products in the New Zealand capital markets.
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As part of NZX’s proposed review of the NZX Main
Board/Debt Market Listing Rules in 2017, NZX will
be reviewing the policy settings and rules
framework in relation to:
Equity, debt and managed investment scheme
products (ie unit trusts, funds)
Different types of corporate structure for issuers
listed on NZX’s markets
Issuers and products that are also listed and/or
quoted on securities exchanges in other jurisdictions
From a policy perspective, NZX wishes to ensure
that investors have access to a diverse range of listed
financial products available for investment. More
generally, NZX seeks to ensure that its policy
settings and regulatory approach for different
product and issuer types reflects international trends
and best practice and continues to support NZX’s
ability to operate fair, orderly and transparent markets.
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NZX's Regulatory FunctionsA summary of NZX’s regulatory functions is set out
below.
REGULATORY FUNCTIONS
NZX has two key regulatory functions in respect of
the operation of NZX’s markets:
Regulating market conduct – NZX is responsible
for monitoring and enforcing the rules under
which NZX’s markets operate. This applies
directly to issuers, market participants and
indirectly (through market participants) to
investors. This function is undertaken by the NZX
Regulation team.
Market rules and policies – NZX is responsible for
developing and enhancing the market rules,
practices and policies under which NZX’s markets
operate. This function is undertaken by the NZX
Policy team.
These functions are supported by the NZX Market
Services team, which provides operational support
to NZX’s markets and conducts frontline trade
monitoring.
NZX Regulation
NZX Regulation is led by the Head of Market
Supervision, who reports directly to the NZX Board.
It covers two broad areas of regulatory focus:
Issuer Compliance
Participant Compliance
The Issuer Compliance team administers the NZX
Listing Rules, and supervises compliance by listed
issuers with those rules. The team:
Advises and guides issuers on best practice
Engages with issuers on continuous disclosure
issues and market releases
Provides ad hoc guidance on the application of the
Listing Rules
Considers applications for new listings
Considers applications for waivers and rulings in
relation to the NZX Listing Rules
Reviews documents for compliance with the NZX
Listing Rules
Manages trading halt applications
Responds to queries and complaints from
members of the public
Investigates suspected rule breaches and takes
enforcement action, as appropriate
The Participant Compliance team administers the
Participant Rules, Derivatives Market Rules and
Clearing and Settlement Rules, and supervises
compliance with those rules by market participants.
The team:
Undertakes capital and prudential monitoring
Undertakes risk profiling and monitoring of
participants
Considers applications for accreditation as a
market participant
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Considers applications for waivers and rulings in
relation to the NZX Participant Rules, Derivatives
Market Rules and Clearing and Settlement Rules
Investigates suspected rules breaches, and refers
suspected rule breaches to the Enforcement team
for enforcement, if appropriate
NZX Regulation also investigates suspected
breaches of NZX’s market rules and takes action in
accordance with NZX’s enforcement policies.
NZX Policy
NZX sets the rules for its markets. Those rules are
enforceable as a contract between NZX and each
participant or issuer, and the continuous disclosure
provisions are also enforceable under the FMCA.
NZX publishes guidance to assist with compliance.
The NZX CEO is responsible for NZX’s regulatory
policy, and the work is led by the General Counsel
whose responsibilities include leading the NZX
Policy team.
Market Services
In addition to the core regulatory functions
undertaken by NZX Regulation and NZX Policy,
market operations are monitored by NZX’s Market
Services team, namely:
Surveillance
Client and Data Services (CDS).
The Surveillance team performs real time and post-
trade monitoring. This includes analysis of abnormal
market conduct or trading, and allegations of
market misconduct on NZX’s markets.
The Surveillance team uses market-monitoring
software (SMARTS), market information from the
NZX’s trading system (X-stream), databases that
update in real time with securities movements and
volume statistics from information providers such as
Iress and Bloomberg, as well as NZX's historical
database of market activity.
The CDS team monitors and processes market
announcements, and monitors for compliance with
issuers’ periodic reporting requirements.
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RISK AND TRENDS CONTEXT
Capital markets inherently involve risk and are
impacted by market trends. These include
macroeconomic risks, market activity and capital
inflows and outflows, as well as other risks which
directly or indirectly impact on NZX's markets.
These risks are a factor for NZX in setting its
regulatory agenda, as they are often drivers of conduct.
Some of the key drivers of risk and recent trends
affecting NZX’s regulatory environment are set out
below.
Participation in NZX’s markets
Issuers and brokers are key drivers of conduct on
NZX’s markets. Their resources, experience and
governance shape their compliance culture and
their approach to compliance with NZX’s rules.
Although the NZX Main Board includes a number
of large, sophisticated companies, a key feature of
NZX’s markets is the prevalence of smaller and
medium-sized issuers. NZX has observed that this
can impact the level of resource committed to issuer
compliance. There are also differing levels of
expertise and experience within management and
boards of operating in a listed company
environment. This can occasionally present
challenges to those issuers, their compliance
frameworks, and their ability respond to market
events that have implications under NZX’s market
rules.
A number of Issuers on NZX’s Main Board also have
a primary or secondary listing on another overseas
exchange. Such issuers are often subject to multiple
market rule sets and compliance obligations. This
can increase the risk of information asymmetry,
different regulatory and operational approaches
being taken by the relevant exchanges, and
opportunities for trading arbitrage between listing
venues.
NZX accredits brokers and advisors to undertake
certain services on NZX’s markets. The composition
of this group of market participants is evolving.
New Zealand's capital markets are subject to
significant concentration - this includes concentration
in the key brokers that service the market, the
wholesale investors that participate, and pools of
domestic capital. This concentration can impact
trading strategies employed by wholesale investors
and brokers, including a preference for off market
trading.
There has been a continued increase in participation
by overseas entities in the NZX Derivatives Market,
with three US-based entities now accredited as
trading and clearing participants for that market.
NZX has also observed an increase in market
participants outsourcing internal functions offshore,
such as those relating to finance and technology.
This trend reflects participants seeking to leverage
international arrangements that are often available
through related company and parent company
relationships.
NZX notes that where participants’ operational
functions are based overseas or they rely on group
compliance functions based overseas, this can give
rise to logistical constraints and/or more limited
knowledge of the New Zealand regulatory
environment.
These trends influence NZX’s approach as the
regulator of participant conduct on its markets. In
particular, NZX dedicates significant resource to
inducting newly accredited participants to ensure
working knowledge of relevant market rules and
legislation, guidance and NZX best practice
expectations.
Technological innovation
The regulation of exchanges is increasingly being
impacted by technology. As noted in last year’s
agenda, developments in electronic trading and the
integration of global markets are particularly
relevant to NZX.
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The following trends have continued in New Zealand
and on NZX’s markets:
Algorithmic and high frequency trading, which use
computer trading programmes to execute trades
Dark pool arrangements, which involve direct off-
market trading, usually between market
participants and institutional investors
DMA, which allows clients to directly access and
place orders in NZX’s trading system
Each has benefits for efficiency and cost
effectiveness in order execution.
The use of these technologies continues tobe an area of interest for NZX, consistentwith a broader international focus on thepotential impact of technology on marketorderliness. In particular, regulatoryconcern focuses on the potential impactsof trading technology not operating asdesigned, or operating with inadequateoversight.
Those scenarios could potentially result in abnormal
trading, and consequently pose a risk to market
efficiency and integrity, as well as the transparency
of market liquidity and the price discovery process.
Trading conduct
Good trading conduct practices underpin fair,
orderly and transparent markets and promote
market integrity. NZX actively supervises trading
conduct on its markets to support this objective.
This increases public confidence in the operation of
NZX’s markets. Public confidence in turn enhances
the market liquidity and efficiency.
Some fundamental components of this for trading
participants include:
Ensuring price transparency which reflects genuine
supply and demand
Managing potential conflicts of interest between
client and principal trading
Ensuring the priority of client order execution
Having procedures and processes, and governance
and oversight arrangements, that prevent
manipulative trading occurring
Manipulative behaviour poses risks for NZX. It can
damage the integrity of the markets and undermine
investor confidence, by creating a false or misleading
appearance as to the extent of trading, supply or
demand, or the price of securities.
NZX’s Surveillance function, together with the
NZX’s market rules and guidance, are integral to the
monitoring for potential market manipulation on
NZX’s markets and for enforcing the rules.
Information quality
Investors in NZX’s markets must have access to full,
timely and accurate disclosure to make informed
investment decisions.
The quality of disclosures and disclosure practices
varies significantly between issuers on NZX’s
markets. Inadequate disclosure practices can
adversely impact confident participation on NZX’s
markets, particularly if it means that trading occurs
where there is an asymmetry of information in the
market.
NZX will focus on disclosure practices in
2017, particularly in the context of recent
trends and conduct observed in relation to:
Developing business trends
Adverse operational and financial results
Deviation from analyst and issuer
financial forecasts
Working capital constraints
NZX Regulatory Agenda
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Regulatory coordination
NZX and the FMA have joint regulatory
responsibility for a number of regulatory issues,
including:
Continuous disclosure
Surveillance and investigation of insider trading
and market manipulation
Investigations and complaints concerning brokers
Approval of market rules
Review of offer documents for regulated offers of
securities under the FMCA
These require coordination and collaboration
between NZX and the FMA to ensure that oversight
is efficiently managed.
In addition, other government agencies have roles
that directly impact NZX’s markets. These include
the Ministry for Business, Innovation and
Employment, the Reserve Bank of New Zealand, the
Commerce Commission, and the Takeovers Panel.
Measures introduced by these agencies can impact
participants in NZX’s markets, and affect NZX’s
regulatory functions. This requires NZX to be
proactively involved in relevant policy debates, and
to coordinate with those agencies on relevant matters.
LEGISLATIVE CONTEXT
The legal framework that underpins New Zealand’s
capital markets activity is subject to ongoing change.
Recent changes and developments have included
the end of the transitional period for implementation
of the FMCA, review of the financial advisers and
financial service providers’ regime and continued
changes in international financial services, AML and
audit requirements.
These changes, and the policy drivers that influence
them, will continue to affect the way in which NZX
performs its oversight function, delivers on its
regulatory policy strategy, and is assessed on the
discharge of those functions.
The FMCA is key to the operation of New Zealand’s
public financial markets. It imposes obligations on
NZX as a licensed market operator. This includes
requiring NZX to do all things, to the extent that it
is reasonably practicable, necessary to ensure that
its markets are fair, orderly, and transparent. NZX
is assessed annually by the FMA on its compliance
with those requirements.
NZX Regulatory Agenda
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