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FMA concerned about NZX market surveillance, conflict of interest, continued operational errors

Thursday 28th June 2018

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NZX has been ticked off by the Financial Markets Authority which said the stock market operator's market surveillance wasn't up to scratch, it needs to better manage conflicts of interest, and its continuing operational errors were concerning. 

In its seventh review, covering the 2017 calendar year, the FMA said the NZX was generally compliant with its obligations, however, it noted several exceptions where it wanted improvement. 

The FMA had raised a concern the previous year that NZX had relatively high turnover and had filled vacancies in the NZX surveillance team with less experienced personnel. In this review, it said there was still insufficient depth of market knowledge and experience and the knowledge and skill wasn't at the level required to adequately monitor NZX markets and it was concerned about the exchange's ability to recognise or identify potential misconduct. 

"A lack of market expertise in the market surveillance function means NZX is not meeting its obligation to have adequate arrangements to monitor the conduct of participants on, or in relation to its markets," the FMA said. Information from NZX surveillance was below expectations on a number of occasions, either not what was requested or of poor quality, causing the FMA to question the accuracy of information NZX provides, it said.

NZX said it disagrees that the exchange did not meet its obligation in respect of surveillance during the review period, saying the approach taken to staffing and engagement with the FMA on surveillance referrals was consistent with previous periods. 

However, as a result of the FMA's concern, NZX has agreed to hire an appropriately experienced person to assist with market monitoring and surveillance, which both organisations consider will benefit market integrity.

"While we disagree with the conclusion of this report, both regulators are committed to continuing collaboration on oversight of trading conduct, and ensuring the regulation of New Zealand’s capital markets is fair, orderly and transparent," Wellington-based NZX said in a statement.

The FMA said NZX wasn't sufficiently prepared for market developments, including the increase in smaller, automated trades known as algorithmic trading, even though the market operator had encouraged an increase in this type of trading through changes to its prices. NZX has committed to better understand algorithmic trading in 2018.

NZX is required to manage any actual or perceived conflicts of interest between its commercial interests and its role as a frontline regulator. The FMA highlighted two instances where it was concerned about conflicts of interest, including a staff member from NZX's commercial operations questioning a market participant on matters that should have been dealt with by NZX's regulatory function, and the sharing of non-public trading information with staff members in a commercial area of NZX.

As a result of the FMA's concerns, NZX has put further controls in place, stepped up training, and is reviewing its conflicts policy.

The FMA noted that the NZX had two trading system incidents during its review period, of between 30 and 180 minutes, although it said these didn't indicate a failure to maintain market infrastructure.

NZX's market services unit was responsible for eight operational errors during the period, seven due to human error, which the FMA said had a negative impact, although none caused an inability for NZX to operate the market.

"The number of operational errors is similar to previous review periods and is concerning," the FMA said. "We support NZX continuing its work to reduce the risk of operational errors by continuing to automate processes where possible."

NZX shares last traded at $1.13 and have gained 2.7 percent over the past year.


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