Regulator gives NZX a pass mark, wants progress on compliance, conflicts

Tuesday 4th June 2013

NZX has been given a pass mark in the Financial Markets Authority's second review of New Zealand's markets operator though the FMA identified areas for improvement including managing conflicts of interest and enforcing compliance.

The FMA "has concluded that, during the review period, NZX complied with the statutory obligations, with the exception of the adequacy of its arrangements for enforcing compliance with the relevant market rules, and the sufficiency of human resources allocated to the regulation division," the regulator said in its General Obligations Review of the NZX.

By the end of the review period, which ran through calendar 2012, NZX was fully compliance, the FMA says.

In February, the FMA identified improving levels of transparency on the stock exchange was one of four major areas it would keep under review this year, saying it was unimpressed by "poor administrative practices by substantial shareholders, directors and officers, resulting in delays in notifying the market of trading." It also had concerns about "a lack of focus on obligations to investors by some issuers and their directors."

The FMA conducts its general obligations review under changes to the Securities Markets Act made in mid-2011 which established the oversight regime for Registered Exchanges. The regulator gave NZX some dispensation for not having had a full year to implement recommendations in its report for 2011.

"For this review, there was a readiness on NZX's part to accept that in some instances processes need more work, and a willingness to receive feedback in relation to them," the FMA said. "There was also a willingness to admit where some areas of NZX's performance needed enhancing, most notably in the enforcement area."

NZX could improve in the area of 'perception' of conflict of interest, it said.

Last year, NZX's Surveillance and Client Market Services units, which are "essentially regulatory units that are operational in nature", were transferred from what was then the purely regulator Markets Supervision division to a newly created Market Services division. The changes by chief executive Tim Bennett separated other regulatory functions into a separate division, Regulation.

While many of the functions in Market Services "contribute to fair, open and transparent markets, there are nevertheless aspects of the Head of Operations role that are commercially driven," the FMA said.

The division isn't directly responsible for sales of market data and direct subscription products but these products "are a major revenue contributor for NZX" and the Head of Operations is the relationship manager for one of NZX's commercial clients," the FMA said.

The review, which must be conducted annually, should "include consideration of whether there are adequate arrangements for the quarantining of regulatory information within the Market Services division, as the Conflicts Policy requires," it said.

In response to the FMA's report today, Bennett said the NZX has "made solid progress towards strengthening the quality of the operation of our markets, and we are delighted our considerable efforts in these areas are reflected positively in this report."

The regulator also wants progress on compliance, noting that the NZ Markets Disciplinary Tribunal's 2012 report shows only 10 percent of total breaches of market rules were referred to the tribunal. The number of breaches dealt with in other ways indicates "that NZX may be placing a high threshold on the level of breach that is referred," it said.

"In the absence of clear decision criteria...it is not obvious how NZX determines which cases will be referred, or whether breaches are being dealt with in accordance with any underlying policy," the FMA said.

While board oversight of enforcement decision increased in 2012, "it is unclear to FMA how the metrics provide the board with appropriate oversight of the quality of enforcement decisions, particularly in relation to cases not investigated, or to the approximately 90 percent of breaches that are not referred to the tribunal," it said.

NZX shares last traded unchanged at $1.41 and have gained 18 percent in the past year.

BusinessDesk.co.nz

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