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Monash Business Review |
Ten years after the idea was first mooted in Australia to establish a regulatory ‘licensed market operator’ and six years after it was enacted in the Financial Services Reforms, there is still little understanding, even within financial markets, of the role of the ASX: is it a regulator; does it prudentially regulate brokers?
The Australian Securities Exchange’s (ASX) capacity to enforce standards is limited to the rules which the ASX itself created rather than rules imposed on it by legislation or regulators. The ASX is not a financial market ‘regulator’ as it has no legislated power to enforce the provisions of the Corporations Act. Nor should it. The ASX is best described as a regulated entity with limited supervisory functions (see diagram).
For the objectives of the regulatory framework to be fully achieved, there needs to be considerable co-ordination and co-operation between the ASX, regulatory agencies and the Government. This co-ordination and co-operation contributes to the occasional misunderstanding among some stakeholders as to the separate roles undertaken by supervisors, regulators and legislators. However, this has traditionally been seen as a price worth paying to maintain a regulatory framework that successfully leverages the multilateral contract structure underpinning listing, trade execution, clearing and settlement venues to achieve public interest goals.
While the law administered by ASIC and the rules administered by the ASX both establish minimum standards for brokers, the areas of overlap are quite small, confined to a narrow area of ASX-listed products for only those financial service providers who have a direct contractual relationship with the ASX.
Securities exchange rules actually pre-date legislation as a means of regulating equity and derivative markets. However, over time governments have recognised the public policy benefits of many market standard-setting rules and have incorporated these into law. The end result is that in most developed countries, the market operator’s supervisory role has narrowed as Governments progressively assume more of the responsibility for intermediary regulation.
This is not to suggest that the functions that remain with market operators are unimportant. The ‘front-line’ role of monitoring particular types of conduct by particular types of market users that have a trade execution and settlement focus remains fundamental to achieve market integrity. Without this there could be no enforcement action, whether taken by a market operator in relation to its rules or another body in relation to legislation.
The ASX sets rules and establishes minimum standards that define the operation of its markets. The rules are multilateral contracts between the ASX and its direct customers: listing rules, market rules and clearing and settlement rules. Because this contract structure provides the opportunity to shape the behaviour of market users, the Corporations Act sets out minimum content requirements for the rules.
The ASX monitors only those activities that are directly connected with ASX service offerings: a broker’s trade execution activities, but not its securities lending, equity swaps or other off-market activities. On this basis, the ASX can be distinguished from ASIC and APRA which are regulators with powers conferred by Government.
Thus, the ASX has no capacity to create a market-wide standard precluding investors (who are not contractually bound to observe ASX rules) from engaging in insider trading, market manipulation, or the spreading of false rumours. This is done by legislation.
By virtue of having established a multilateral contract with listed companies, brokers and others, the ASX has created for itself an ability to oversee the conduct of these financial market participants. Where ASX monitoring of conduct by market users reveals a breach of standards established by the ASX, rather than by law, the ASX has the power to initiate disciplinary proceedings only if the offending conduct was undertaken by an organisation, such as a broker, that had entered into a contract with the ASX.
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To view this paper in full, see www.mbr.monash.edu.au
This article is an excerpt from a paper presented at the Monash Macquarie Financial Services conference held on 18 July 2008.
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URL: http://www.austlii.edu.au/au/journals/MonashBusRw/2008/59.html