Licencing and Operation of Market Operators - Essay Example

Licencing and Operation of Market Operators Name Student Number Institution Course Code Instructor Date of Submission Licencing and Operation of Financial Market Operators The Australian financial market is depicted by the existence of an Australian Stock Exchange Ltd (ASX) which has undergone notable changes from 1997. The licencing, regulation and supervision of financial markets are entrenched in part 7.2 and part 7.2A of the corporation Act 2001 (Cth).1 This essay evaluates the licencing and operation of financial market operators as per the legal standings within the Australian jurisprudence. The requirements as entrenched under the Corporations Act 2001 stipulate that an individual with the intention of providing financial services in Australia must obtain an AFS licence as per the regulations put in place by the Australian Securities and Investments Commission (ASIC). The various instances where an AFS licence is required include; provision of financial product advice to clients, dealing in a financial product, making markets for financial products, operating a registered scheme, providing a custodial or depository service and providing traditional trustee company services.2 The evaluation will span various legal entities that surround the licencing and regulation of financial market operators. This is respect to expounding on the legal requirements in the application of an operating a financial market service in Australia. Australia has a highly regulated environment that is overseen by two independent government agencies; Australian Securities Investments commission (AISC) and Reserve Bank of Australia (RBA) (Parliament of Australia 2014). The two bodies have great powers for regulating and enforcing legal parameters that govern Australian financial markets. The corporate governance is also overseen by the government through supervision of financial markets through ASIC’s regulatory measures, the Australian Prudential Regulation Authority (APRA) and the Australian Competition and Consumers Commission (ACCC) (ASIC 2014). The ASX prior to 1997 was referred to as a securities exchange; which was a company limited by guarantee and had a limited capacity to raise capital (Armson 2013). Further, the ASX market facilities could only be accessed by corporate members of shareholders of the ASX Ltd and was not always an effective regulator of its own member.3 Financial operations are open to any individual pursuant to fulfilling the legal requirements set out by relevant regulatory bodies. Initially, for one to operate a financial market in Australia, unless exempted, one is supposed to acquire an Australian market licence from the Minister who has the mandate to authorise a person to operate in the Australian market (Allens 2014). According to Rubenstein and De Jong (2004) indications, Part 7.4 of the corporations Act 2001 is relevant in the sense that it imposes some limits concerning the involvement with market operators having a licence to operate financial markets in Australia. ASIC produces regulatory guides aimed at assisting the operators understand the intentions of the body in regulating and interprets the obligations that have been imposed by Corporations Act 2001. For individuals from outside the country willing conduct financial services in Australia, ASIC has guides aimed at assisting them effectively to conduct their business operations effectively in Australia.4 General guidance pertaining to the financial services regime in Australia is provided in the guides. Every AFS licence holder is obligated to comply with the financial services laws, as well as the conditions of their licence (RBA 2014). The process of applying for a licence in regard to a corporate body involve applying for an Australian licence by lodging with Australian Securities and Investment Commission (ASIC) which is the chief corporate and financial regulator (Parliament of Australia, 2014). The application consists of information necessary or required by regulations and is made for purposes of licence acquisition, is accompanied by documents which may be required for this purpose and complies with requirements of section 881b pertaining to compensation preparations (Commonwealth of Australia 2012). The next process involves ASIC giving the application to the Minister within a reasonable time with advice concerning the application. However, with changes in the legal structures and requirements with time, some jurisdictions have come up with changes to their already existing regimes for licencing or recognising electronic platforms and exchanges (Armson 2013). This is majorly seen with respect to over the counter (OTC) derivatives regulatory entities. Nevertheless, the Reserve Bank of Australia (2014) indicates that there is currently no proposals to change the Australian licensing regime for markets entrenched in Part 7.2 of the Corporation Act as this provides an existing framework crucial for regulating operators of electronic trading platforms. Pursuant to Part 7.2 of the Corporations Act, it is evident that it explicitly contemplates the prospect of an offshore market operator obtaining a licence in Australia subject to the regulatory regime of the operator’s country being significantly the same as that of Australia.5 In essence, the proposal is that in the case of an obligation being introduced to execute trade purposes, there is need for either obtaining a licence under or exempting from Part 7.2 of the Corporations Act by eligible trading venues (RBA 2014). The amendments made to the Corporations Act brought about new type of rule termed the market integrity rules.6 According to Australian Securities Investment Commission (2014), the rules apply to market operators, market participants, approved entities, as well as financial products that are traded on the relevant markets. Operators within any markets settings are expected to comply with the integrity rules as set out by ASIC, failure to which a regime put in place has been mandated to deal with breaches of the set out integrity rules.7 The requirement for ministerial consent still holds prior to any rules being made, while the rules can be disallowed by the Parliament. As per the new exchange market competition rules, more than one market operator is allowed to give out secondary market trading services within equity market products entrenched in the quotation on the Australian Securities Exchange (ASX).8 With effect from April 29, 2011, the Australian Securities and Investments Commission (ASIC) came up with new Market Integrity Rules which puts in place the regulatory framework for competition within exchange markets; these are termed to as competition MIRs (Allens 2014). Further, Market Integrity Rules were introduced to regulate the operation of a Chi-X market termed as Chi-X MIRs. A good example of establishments resulting from these regulations is the Chi-X Australia Pty Ltd, and was given the operating licence by the Australian Government on May 4, 2011 and has provided a secondary market trading services in ASX-quoted equity market products, which compete effectively with ASX.9 According to ASIC (2014), the introduction of competing exchange market was aimed at enhancing the market quality incorporating depth of market, liquidity and price of information. The result was a much faster and more efficient trading with the introduction of improved technology coupled with reduced costs (Armson 2013). The changes also were crucial in benefiting the clients from new protections like effective execution of rules and regulations, as well as extreme price movement controls. According to Corporations Act Part 7.2,10 domestic financial markets are regulated by requiring that the operating rules incorporating any probable existing market’s listing rules of a given licenced market should have given matters. Further, it stipulates that licensed markets have written procedures in respect of certain matters. The requirements are exempted to the holder of a licence which is given out to a market operator from abroad to carry out business within Australia (RBA 2014). However, ASIC is of the view that rules necessary for operating such a market should generally have similar kinds of matters that are supposed to be within the rules of operation of a given licenced domestic market. For any given changes pertaining to the rules of operation of a domestic market, they can only be disallowed by the Minister.11 Nevertheless, disallowance does not apply to changes made by the holder of a licence that is granted for a market overseas. Failure of operation rules compliance, ASIC in conjunction with other entities have the right to apply through the court for the operation rules to be enforced.12 The current application for a licence of operation occurs predominantly over the internet and via email (Allens 2014.). The result indicates that the process has turned out to be more effective and accessible to many who have the desire to apply for a licence of operating a financial market in any category. Prior to applying for an AFS licence, one ought to determine the kind of financial service they are willing to provide and the type of clients to target (Armson 2013. This step is critical, and professional helps is of the essence to ensure understanding the parameters and strategies to put in place to alive at the best choice of operation. On the same note, it helps in ensuring that after acquisition of licence of operation, one does not engage provision of financial services not licenced for as this amounts to a criminal offence (ASX n.d.). The online process for applying a licence consists of various steps starting with lodging an online form from the licensing e-portal of ASIC (Rubenstein and De Jong 2004). Secondly, the individual submits the signed application by mail together with critical documents describing the proposed business of operation and evidence of sufficient expertise and financial services. A market licensee has legal obligations entrenched in s 792A13 and constitute operation of the market in fair, transparent and orderly manner, as well as make sure there is sufficient preparations to supervise the market. The latter incorporates the arrangements pertaining to conflict handling arising between commercial interests of the licensee and ensure harmonious operation in the market. With changing market settings, there has been a potential risk that has been inherent within market practices especially with respect to OTC derivative markets raising a great concern among regulators globally. These risks have been triggered and escalated by global financial trends and crisis (RBA 2014). In the Australian settings, the Agencies for the Council of Financial Regulators considered various reforms pertaining to Australian OTC derivative markets. The deliberations resulted to recommendations that OTC derivative transactions be managed in a central Financial Market Infrastructure (FMIs).14 The step was aimed at enhancing liquidity and transparency, as well as reduces systemic risk. In context, the recommendations coming up within financial markets targeting operators are aimed at enhancing efficiency and ensuring improved financial operations (Armson 2013). In conclusion, the discussion evidently shows that financial market operators are required by Australian law to have an AFS licence as part of their business requirements unless exempted under conditions discussed above. The legal requirements basically are entrenched in the corporations Act 2001 with Part 7.2 having the major weight pertaining to the licencing and regulation of financial market operators. Thus, it is of the essence for financial market operators to adhere to the legal entities and requirements to ensure compliance and avoid legal conflicts in financial operations. Reference List Allens, 2014. Capital Markets, Linklaters LLP. Accessed on November 2, 2014 from . Armson, E., 2013. Evolution of Australian Takeover Legislation. Monash University Law Review, Vol. 39, No. 3, pp. 654-701. ASX Submission, 2013. Australia’s financial Market Licencing Regime: Addressing Market Evolution. ASX Ltd ABN 98 008 624691. Australian Government, 2012. Corporations Act 2001,. Act No. 50 of 2001 as Amended. Commonwealth of Australia. Australian Securities and Investment Commission (ASIC), 2014. Market Integrity Rules. Accessed on November 1, 2014 from . Australian Securities Exchange (ASX), n.d. ASX Operating Rules Procedures. Sydney, NSW 2000 Australia: ASX Limited. Commonwealth of Australia, 2012. Australian Corporations and Securities Legislation, Volume 1. CCH Australia Limited, Wolters and Kluwer Business. Memorandum of Understanding, 2011. Memorandum of Understanding between Australian Securities and investment Commission and ASX Limited ABN 98 008 624 691. Parliament of Australia, 2012. Corporations Legislation Amendment (Derivative Transactions) Bill 2012. Accessed November 2, 2014 from . Parliament of Australia, 2014. Financial Regulation. Accessed November 2, 2014 from . Reserve Bank of Australia (RBA), 2014. Licensing of Financial Markets Infrastructure. OTC Derivatives Market Reform Considerations. Sydney: Reserve Bank of Australia. Rubenstein, P. and De Jong, L., 2004. Australia, Global Financial Services Regulators- Asia Pacific. Issue 1. Read More