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9 May, 2018
A new two tiered licensing regime
On 4 May 2018 ASIC released its new guidance on its approach to regulating financial markets, whether they are open exchange market platforms or proprietary professional trading platforms.
New Regulatory Guide 172 Financial Markets: Domestic and overseas operators (RG172) introduces a new two tiered licensing regime under which less onerous conditions will be imposed on those markets which are not considered significant to the Australian economy, the integrity and efficiency of the financial system, or investor confidence. It brings an end to the long standing ASIC policy of granting exemptions to professional market platforms in the OTC, FX and fixed income sector. These platforms will now be required to transition to market licences. It also provides a new more flexible regime to support the development of Fintech and other start-up market venues and platforms in Australia.
Who does this affect?
RG172 is relevant to all "financial markets" which operate in Australia. A "financial market" is any exchange, platform or other facility which matches or introduces buyers and sellers or counterparties. This includes:
Overview of the new guidance
Two tier licence regime
RG172 introduces a new two tier licensing system as follows:
- Tier 1: Market venues which are, or are expected to become, significant to the Australian economy or the efficiency and integrity of, and investor confidence, in the financial system. This will include traditional exchanges and other domestic venues which seek international regulatory equivalence.
- Tier 2: Other market venues which do not satisfy the "significance" test.
Whether a particular market venue meets the Tier 1 "significance" threshold will be determined by ASIC having regard to various criteria such as the risk of market disruption, the impact on competition in trading, the importance of price formation and the risk to investor confidence. ASIC has indicated it will not be prescriptive as to which market venues will fall within which tier.
Whether a market venue is a Tier 1 or Tier 2 market has a significant impact in how ASIC will apply the licence conditions, in two ways. First, ASIC has indicated it will be flexible in how it applies the licence regime, having regard to the nature, scale and complexity of the market venue. In other words, ASIC adopt a proportionate approach in applying the licensing obligations, having regard to these factors. Secondly, ASIC has indicated it would propose to exempt Tier 2 licensees from certain obligations which are not appropriate or which are unnecessary.
Key obligations of licensees
The obligations of licensees are set out in the Corporations Act and the Regulations, and in licence conditions issued by ASIC (under delegated authority of the Minister).
Whilst all of the licence obligations in Part 7.2 of the Corporations Act will apply to Tier 1 market venues, RG172 provides guidance on the which obligations will, and will not, apply to Tier 2 market venues. For example, RG172 provides that Tier 2 markets will not need to comply with some of the requirements under the Regulations for operating rule content.
Market licensees are subject to a number of obligations under licence conditions and the Corporations Act. Key obligations include:
- to do all things necessary to ensure the market venue is fair, orderly and transparent
- to have sufficient financial, technological and human resources (and any outsourcing must be appropriate)
- to have adequate arrangements for operating the market, including to manage conflicts of interest and to monitor and enforce compliance with the market's operating rules
- to notify ASIC of certain matters such as breaches or likely breaches of obligations and changes to its operating rules
- in the case of an overseas market venue which relies on its offshore authorisation, to maintain that authorisation
- in the case of a market which has retail participation, to have adequate compensation arrangements.
Overseas market venues
As noted above, an offshore market venue may be considered to be "operating in Australia" if it has users (participants) which access the market venue to trade, or if the venue is "targeted at Australian investors".
Operators of offshore market venues which are authorised to operate the venue in a foreign country, in which their principal place of business is located, may apply for a licence in Australia. Section 795B(2) provides an "alternative" licensing route for such operators. To qualify, the offshore operator must be authorised under a regime in their home country which is subject to requirements and supervision that are sufficiently equivalent to the Australian regime as it relates to investor protection and market integrity.
A licence obtained under this route is subject to many of the conditions to which a "domestic" licence is subject. Key differences are that an overseas operator which qualifies under section 795B(2) is not required to have certain content in its operating rules, is not required to submit its rules to ASIC for non-disallowance (ie. approval) and is not required to have compensation arrangements in place which meet the Corporations Act requirements.
Nevertheless, there is considerable flexibility in the regime as it applies to offshore operators, and ASIC can impose additional conditions on their licences. ASIC has also made it clear in RG172 that an offshore market venue may be either a Tier 1 or Tier 2 licensed venue.
Traditionally offshore market venues which are professional markets (such as for derivatives, FX and fixed income products) have been able to operate under exemptions. Exemptions are now far less likely to be considered appropriate by ASIC.
Transitioning from an exemption to a licence
Existing market venues which operate under exemptions will be expected to transition to a licence. We understand that ASIC is considering an approach which will facilitate an orderly transition as soon as possible. Transitioning operators will need to assess their existing arrangements in light of the new guidance in RG172 and consider whether they will be regulated as Tier 1 or Tier 2 venues.
They will also need to consider the financial implications of their venues becoming subject to ASIC's supervisory and service fee arrangements which take effect on 1 July 2018.
For further information, please contact:
Jonathan Gordon, Partner, Ashurst
jonathan.gordon@ashurst.com
