nzx regulatory and policy agenda€¦ · nzx regulatory and policy agenda this is the third annual...

NZX Regulatory and Policy Agenda2018

NZX Regulatory and Policy Agenda

This is the third annual NZX Regulatory and Policy

Agenda.

As a licensed market operator, the New Zealand

exchange plays a key part in the capital markets

ecosystem. It has a critical role in delivering strong

and liquid capital markets that operate with integrity

and rigour.

NZX is committed to ensuring that:

its markets remain fair, orderly and transparent

it continues to respond to industry trends and

developments

Issuers and Participants are provided with tools

and guidance that supports them to operate on

the exchange.

In delivering on this commitment in 2017, NZX

completed a number of significant policy initiatives

such as implementation of the revised NZX

Corporate Governance Code and the review of

NZX’s Participant Rules. It also saw NZX

Regulation’s inaugural thematic review on

continuous disclosure, update of the Continuous

Disclosure Guidance Note, and the publication of

more than 20 issuer practice notes.

NZX’s key regulatory focusareas are:

Market Engagement

Market Development

Orderly Markets

Market Infrastructure

Risk-Based Approach to Regulation

This NZX Regulatory and Policy Agenda sets out

detail on the work NZX will do in these areas.

Delivering on initiatives and ongoing activity that

support these focus areas is part of NZX

Regulation’s aim to regulate the markets, and the

participants in those markets, in a pragmatic,

effective and collaborative way that drives

compliance-focussed outcomes.

NZX Policy will also continue to pursue policy

initiatives that will contribute to deeper and more

liquid market activity, and modern rules that are

relevant to New Zealand’s evolving capital markets.

In 2018, this will include a substantive review of the

Main Board/Debt Market Listing Rules and the rule-

settings relevant to secondary market trading.

We look forward to continuing to collaborate with

you in 2018.

Joost van Amelsfort

Head of MarketSupervision

Hamish Macdonald

General Counsel andHead of Policy


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Contents

NZX Regulatory and Policy Agenda 04

NZX Policy Initiatives 06

NZX Regulation Initiatives 09


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2018 Areas of focus

M

arke

t

Infras

truc

ture

Orderly

Markets

Marke

t

Eng

agem

ent

Risk-based approach to Regulation

Mar

ket

Dev

elopm

ent

NZX’s market rules and guidance:

• Balance the need for informed, confidentparticipation in NZX’s markets, and theefficient operation of those markets

• Appropriately reflect international best practiceand principles, as well as technologicaland legal trends

• Encourage on-markettrading of securities

• Deliver comprehensive and effectivefrontline monitoring and enforcementof trading misconduct on NZX’s markets

• Ensure market participants effectivelymonitor and mitigate risks associated withpotential market misconduct at anoperational level

• Ensure market participants understandthe scope of permissible trading conduct onNZX’s markets, and proactively demonstrateNZX recommendations and expectations onbest practice

• Support and facilitate thedevelopment of issuer and participantcompliance frameworks

• Set expectations for how issuersand participants approach organisationalculture and conduct, with proactiveownership by boards and management

of compliance obligations under NZX’s market rules

• Enhance NZX’s risk-basedregulatory approach

• Prioritise and target resourcing to issuers,participants and financial products which presentthe more significant risks to the operation of fair,orderly, and transparent markets

• Market development is supportedthrough the application of clear,appropriate standards of conduct,disclosure and reporting

• NZX’s policy framework createsa market environment that is conduciveto the listing and quotation of newissuers and financial products, andaccess to comprehensive tradingand advisory services for productslisted on NZX’s markets

These areas, and the objectives for each, reflect NZX’s statutoryobligations, the current economic environment, and NZX’sobservation of the risks and trends that are impacting or willimpact operation of NZX’s markets.


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As a market operator licensed under the Financial Markets Conduct Act 2013, NZX is responsible for:

monitoring and enforcing NZX’s market rules; and

developing and enhancing the market rules, practices and policies under which the market operates.

Further information on NZX Regulation and NZX Policy can be found at: https://www.nzx.com/regulation.

Each year, NZX Regulation undertakes a programme of work in support of its regulation of the markets. This includes a number of strategic initiatives that contribute to achieving the objectives outlined above, in the key areas of regulatory focus. Details on the initiatives for 2018 are set out below at pages 9 to 12.

NZX Regulation’s work also includes significant ongoing activity and resource dedicated to:

engaging with issuers, participants, and their external advisers, and providing guidance, tools and

advice on regulated activity under the rules

prudential and conduct monitoring of issuers’ and participants’ compliance

real time monitoring of trading

reviewing and providing support of regulated transactions

undertaking investigation and enforcement, including publication of case studies and market education

This ongoing work includes continued delivery of the outcome of initiatives undertaken in previous years.

In 2018, for example, this will include publication of NZX Regulation’s second Oversight and Engagement

Report and the publication of additional Practice Notes.


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https://www.nzx.com/regulation

NZX Policy Initiatives

NZX MAIN BOARD / DEBT MARKET LISTING RULES REVIEW

As noted in last year’s agenda, in 2017 NZX commenced a review of the NZX Main Board/Debt Market

Rules. The review marks the first holistic review of those rules since 2003 and includes consideration of

NZX's broader equity market structure. In September 2017, NZX published a discussion document seeking

feedback on the proposed objectives of the review, and subject areas for proposed updated rule settings.

The objectives of the review are to:

Reduce complexity with the current three equity market structure and build scale in the Main Board

Enhance investor protections to increase confidence and participation in our markets and reduce the

cost of capital for issuers

Accommodate the listing of a broader range of financial products and issuers with fit for purpose rules

for smaller issuers, funds and debt issuers

Improve access for foreign listings to expand the range of investable products for New Zealand investors

Remove unnecessary compliance costs, introduce tools to reduce the cost of compliance and ensure

the rules are easy to navigate and use

NZX received strong feedback to the first stage of the review with close to 70 submissions and survey

responses. In H1 2018, NZX will publish an exposure draft of the proposed revised rules for further feedback.

NZX anticipates that it will be in a position to submit formal application to the Financial Markets Authority

in Q3 2018 for approval of revised rules. NZX will then focus on assisting issuers, as well as their boards

and management, through the rules transition period. This will include commencing work to review the

guidance notes and practice notes that support the Listing Rules, prior to implementation at the end of

that transition period.

SECONDARY MARKETS ACTIVITY

NZX released its revised strategy in November 2017, including details of activity in support of secondary

market development. Consistent with that strategy, NZX announced in December 2017 that it would seek

to implement changes to its trading and clearing pricing structure in the second half of 2018.

In parallel with this change, NZX intends to commence a formal consultation process by the end of Q1

2018 on potential changes to the NZX Participant Rules to promote market integrity and advance towards

global standards.

Consultation will seek feedback on rule settings that impact order execution, price transparency and

decisions whether to trade on or off-market. These proposals would seek to align NZX’s rules more

closely with secondary activity rule settings in other jurisdictions, on:

“Best execution” requirements, in order to ensure that order execution best meets client outcomes


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Eligibility criteria for trades to be executed as “Crossings”, possibly through application of minimum

value thresholds

The requirements for bringing orders to market, including the current ability of Participants to utilise

standing written client authorities to accumulate and bundle orders, and delay order execution at the

Participants’ discretion

NZX considers that there are opportunities to better support secondary market activity, in a manner that

will further improve market integrity through enhanced price transparency and clear expectations of order

execution methodology.

DERIVATIVE MARKET RULES

In conjunction with changes made to the Participant Rules in 2017, NZX also amended the Derivatives

Market Rules and Clearing and Settlement Rules and Procedures to ensure that the changes to the capital

adequacy sections are consistent across the rule sets. Those changes came into effect on 1 December 2017.

NZX intends to make further amendments to the Derivatives Market Rules to reflect other changes made

to the Participant Rules in 2017, for implementation in 2018.

That review will seek to replicate, as appropriate, the changes already made in the Participant Rules in the

following main areas:

Financial advice

Discretionary Investment Management Services (DIMS)

“Know your Client” obligations

Contract notes

Order records

Disclosure of interests

Employee and Prescribed Person trading

Direct Market Access (DMA) and surveillance tools

NZX will consider a broader review of the Derivatives Market Rules beyond 2018.

VOICE RECORDING

In 2018, NZX will implement amendments to the Participant Rules requiring mandatory voice recording

of all pre-order and order placement discussions for personnel on the wholesale sales & trading and

principal (both facilitation and proprietary) desks of NZX Trading Participants. The proposed changes will

apply to NZX’s cash markets. Voice recording requirements already apply to NZX’s derivatives market.

Voice recording will further enhance NZX’s and the FMA’s surveillance capabilities, by providing another

form of evidence of client order conversations and instructions. These recordings will supplement physical

and electronic order records, and align with the expectations set in NZX’s revised trading conduct and

conflicts management guidance notes.


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NZX Policy published a consultation paper in late 2017, seeking feedback on the scope of the proposed

obligations, recording retention period and implementation timetable.

NZX will seek to publish an exposure draft of revised Participant Rules in H1 2018 to give effect to

mandatory voice recording. It is anticipated that those revised rules will come into effect in H2 2018,

following second round consultation and formal approval of amended rules by the FMA. Given the extent

of technological changes that some Participants will need to implement, NZX envisages a longer term

transition period will apply.

NZX Regulation will engage with Participants through this period to review and provide assurance on the

extent to which Participants’ proposed technology solutions and procedures will satisfy the mandatory

recording requirements.


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NZX Regulation Initiatives

PARTICIPANT INSPECTION SCHEDULE

As part of NZX Regulation’s ongoing monitoring programme, accredited Participants are subject to

annual risk assessments, and on-site or desk-based inspections.

NZX Regulation implemented a targeted inspection programme for the period 2015 – 2017, focusing on

specific areas that arose from trends analysis work and which had otherwise been determined to be of

strategic importance. In 2017, this included particular emphasis on Direct Market Access (DMA)

arrangements and compliance monitoring plans.

NZX Regulation’s inspection programme for 2018 will be a comprehensive review with a particular focus

applied to areas affected by the Participant Rules changes. The programme will focus on reviewing key

policies and procedures, as well as testing controls in a number of areas, including (but not limited to):

Capital Adequacy

Client Assets

Compliance Monitoring

Conflicts Management

Governance and Supervision

Prescribed Persons Trading

C&S Credit Events, Settlements and Margins

Trading Conduct

Direct Market Access

NZX’s Participant Compliance team will also assess how Participants are transitioning to the revised

Participant Rules and applying areas of the updated guidance.

NZX Regulation will collaborate with the FMA on the 2018 inspection programme, given the FMA’s role

in the oversight of brokers and financial advice under the Financial Advisers Act 2008, and explore

opportunities for joint engagement.

Following the recent publication of NZX’s Trading Conduct guidance note, NZX Regulation will also work

with the FMA on potential industry engagement on matters arising out of that guidance. In 2018, that is

likely to include joint market engagement on regulatory expectations relevant to facilitation practices.

This reflects some differences of understanding by Participants recently observed by NZX Regulation in

relation to the difference between active facilitation and pure proprietary trading.

ALGORITHMIC TRADING

NZX Regulation proposes to enhance its focus on algorithmic trading in 2018, to better support oversight

of electronic order flow to the exchange. This follows a number of changes being made to the Participant


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Rules in 2017 to enhance operational requirements and surveillance capabilities that support oversight

of electronic trading flows.

NZX Regulation anticipates that its focus in 2018 will include further:

analysis of the scope of algorithmic trading on NZX’s markets

assessing the impact of algorithmic trading on market behavior and order execution

considering whether additional quantitative tools would enhance NZX’s real time monitoring of

potential misconduct arising from algorithmic trading

NZX Regulation will seek to collaborate with the FMA on this work. NZX Regulation will undertake

aspects of this work together with its thematic review (discussed on page 11 in this agenda).

SMARTS AND X-STREAM TRADING SYSTEM FUNCTIONALITY

NZX Surveillance performs real time and post-trade monitoring of trading on NZX’s markets. This includes

analysis of abnormal trading, and referral of possible market misconduct to other internal NZX Regulation

teams or to the FMA.

NZX Surveillance uses SMARTS market-monitoring software and market information from the NZX’s

trading system (X-stream) in performing its functions.

In the period to early-2018, NZX Surveillance will implement a number of enhancements to SMARTS

surveillance functionality. This will include:

The upgrade and roll-out of SMARTS version 6.6, which provides an improved interface and other

system features

Calibration of various “alert” settings. This will significantly decrease the number of false positive

alerts generated, provide access to more statistically relevant data and enable NZX Surveillance to be

more targeted in its investigation activities.

Introducing new alerts, focusing on (i) “double printing” (i.e. monitoring of the principal trading book

for instances of crossings occurring at the same price, with the broker trading on different sides of the

crossing), (ii) trading at the client level in the NZX dairy derivatives market, and (iii) “layering” (i.e. the

practice of high level order placement and cancellation, usually as part of a high-frequency trading algorithm).

Introducing an upgrade to support the scheduled launch of calendar spreads1 trading in the dairy

derivatives market in March 2018, by enabling oversight of implied orders that arise out of calendar

spread orders in the market and for real time analysis of volatility that may be caused by such trades.

In 2018, NZX Regulation also intends to introduce infrastructure enhancements that align with recent

changes made to the Participant Rules requiring all orders and trades submitted by accredited Dealers to

be identifiable in the NZX trading system. This will involve utilisation of a trader’s identification details to

automatically attach to all orders and trades entered into the trading system.

These changes will allow NZX Surveillance to identify the specific accredited dealer that entered each

order or trade into the trading system. This will result in more focused surveillance activities, improved

alert functioning, and reduce the number of routine Participant enquiries that focus on identifying the

1. A calendar spread is a spread order that involves simultaneously entering buy and sell orders on the same derivative product butwith different delivery months, for execution of both order legs at the same time.


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dealer. More generally, it will improve the transparency of trading on the markets, including where

dealers use a third party service provider to connect to the trading system rather than connecting directly

to the X-stream trading system.

THEMATIC REVIEW – NZX SURVEILLANCE

In 2018, NZX Regulation will undertake its second thematic review in support of the ongoing monitoring

of market and compliance trends. This follows the release of NZX Regulation’s inaugural thematic review

in 2017, which addressed continuous disclosure practices adopted by listed issuers. NZX Regulation

proposes that the subject of the 2018 thematic review will be on issues, practices and conduct in relation

to algorithmic trading activity on the markets.

This topic has been selected in recognition of broader market perceptions of the influence that

algorithmic trading may be having on the markets. It also reflects the anticipated future importance of

algorithmic trading as an order execution model, including an expected increase in the prevalence of

electronic order flow as a result of NZX’s recent targeted trade pricing review.

It is anticipated that the review will include analysis of the:

Type, extent and origination of algorithmic trading

Trends and risks of observed algorithmic trading

Pre-trade and post-trade monitoring and control mechanisms implemented by Participants and the

technology providers that facilitate access to the trading system

International trends on the regulation of electronic trading

A preliminary assessment of the impact of the enhanced surveillance capabilities implemented through

the 2017 Participant Rule changes

NZX Regulation will publish its findings and any recommendations.

MARKET ANNOUNCEMENT PLATFORM - ENHANCEMENT PROJECT

In 2017, changes were implemented to the administrative processes and to the Listing Rules for the

receipt and release of market announcements. Those changes mean issuer announcements are now

released directly to market using the Market Announcement Platform (MAP). Issuers are now required to

confirm whether the announcement falls within a prescribed announcement category or otherwise

contains “material information” (for the purposes of Listing Rule 10.1.1), to automate the application of

administrative trading halts.

In 2018, NZX will further enhance the capabilities of MAP by enabling issuers to enter their own reporting

data into MAP directly. This task is currently undertaken by the exchange’s Product Operations team. The

changes will result in information being directly captured by databases, with automated generation and

release of a corresponding market announcement. It is anticpated that this will improve operational

efficiency and data accuracy, and will provide issuers with greater control and management of corporate

information.

There will be a staged approach to these MAP enhancements. It is intended that the initial stage will

facilitate self-management by issuers of a number of standard administrative notifications.


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A number of Rules changes are likely to be required, to ensure that the Rules requirements for the

lodgement of these notifications align with revised MAP operational processes. This initiative is part of an

ongoing focus on providing issuer tools. In 2017, that included the publication of more than 20 practice

notes and templates for issuers. The first stage of these MAP enhancements is intended to align with one

of the stated objectives of the Listing Rules review, namely the removal of unnecessary compliance costs

and the introduction of tools that make the Listing Rules easier to navigate and use.

The exchange intends to explore the viability of additional future enhancements to enable further self-

management of information by issuers. This will likely include the ability for issuers to process corporate

actions, such as rights issues, share consolidations, name changes and dividend/interest payments.

NZX will engage with issuers and their advisors through the planning and implementation phases of this initiative.

PARTICIPANT PORTAL

NZX is targeting finalisation of industry testing and implementation of its centralised, web-based

Participant Portal in 2018. Due to competing resource priorities for the exchange’s technology teams in

2017, including integral upgrades of its clearing and settlement system (BaNCS) and web infrastructure,

aspects of this project were deferred.

The portal initiative is designed to:

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

The portal has been designed to facilitate key Participant interactions with the exchange. This includes

both the Clearing House and the Participant Compliance team in NZX Regulation, which has primary

responsibility for conduct and prudential oversight of accredited Participants.

Functionality in the portal will enable:

Online uploading of capital and prudential information and periodic reporting

Access to online forms for completing applications and compliance certificates

Participants to perform a range of regulatory tasks, including the submission of waiver and exemption

applications, individual accreditation applications, and submission of notifications required under the

Rules

Automation of due date reminders for Participants

Access to guidance and template documents

Automation of aspects of the exchange’s internal reporting and enhance analysis of quantitative data


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NZX Limited Level 1 / NZX Centre 11 Cable Street PO Box 2959 WELLINGTON Tel: +64 4 472 7599

[email protected] www.nzxgroup.com

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