Printed from: http://www.seccom.govt.nz/publications/documents/access/17.shtml?print=true on Wed 25 November 2009

An Inquiry Into the Performance by NZX of its Regulatory Functions as a Registered Exchange During 2003 and 2004 Prior to the Collapse of Access Brokerage

13 December 2005

REFERRAL AND CONCLUSION

  1. The Commission's inquiry has reviewed procedures in place at NZX in 2003 and 2004, and has identified issues arising from this. Since the period under review there have been changes at NZX that address many of these issues. The Commission refers this report to the NZX Board for consideration of the Commission's recommendations, and appropriate action.
  2. The Commission's inquiry, and this report, arose from the collapse of Access. The focus of the inquiry has been on compliance processes and procedures associated with client funds accounts held by NZX Participants. Under New Zealand law investment brokers other than NZX Participants are not required to hold client funds on trust. Non-NZX investment brokers must simply advise potential clients whether or not their funds will be held on trust. Only NZX Participants must hold client funds in trust accounts. This is a significant legal protection.
  3. NZX is a registered exchange, the only one in New Zealand. This means that NZX Market Participants are, in many areas, subject to higher standards than are most in the advisory industry. The benefit of this is that investors can take confidence that there are intermediaries who are subject to such standards for the protection of investors, and whose compliance is monitored by a registered exchange. This is important not only for investors in New Zealand, but also for the reputation overseas of New Zealand's capital markets. The Commission welcomes the increased focus by NZX on its regulatory functions, since its demutualisation in 2002 and since the events detailed in this report. Performance of these functions is a significant contributor to confidence in our country's capital markets.

APPENDIX A

TERMS OF REFERENCE

The Securities Commission ("the Commission") is conducting an inquiry, under sections 10(b), 10(c), and 10(caa) of the Securities Act 1978, into regulatory and market issues arising from the default of Access Brokerage Limited (in liquidation) ("Access Brokerage") under the New Zealand Exchange Limited ("NZX") Conduct Rules in September 2004. The Commission is inquiring into the performance by NZX of its regulatory responsibilities as a registered exchange under the Securities Markets Act 1988. In particular the Commission will consider:

  1. steps taken by NZX to ascertain whether there are poor practices among NZX Participants in respect of Participant client fund accounting and reporting;
  2. client fund accounting rules and practices under the NZX Conduct Rules, including the treatment of client fund accounts maintained at financial institutions and the presentation of these to clients;
  3. the rules, procedures, and practices relating to participant supervision and inspection by NZX as these applied in the case of Access Brokerage;
  4. the role, sufficiency, and use of the NZX Fidelity Guarantee Fund; and
  5. any other matters relevant to the inquiry;

AND accordingly, will obtain, consider and utilise information for the purposes of any recommendation, report or comment the Commission may decide to make under sections 10(b), 10(c) or 10(caa) of the Securities Act 1978 in relation to the above matters.

SUBJECT to the Commission's discretion to amend these Terms of Reference as it may consider fit.

February 2005

APPENDIX B

PROVISIONS OF NZSE REGULATIONS 2002 REGULATION 3 - CLIENT ASSETS AND CLIENT FUNDS ACCCOUNT

3.1
Definitions: For the purposes of this Regulation 3:
  1. Client Assets means
    1. Securities held by NZSE Firms in their Transfer Accounts and in their Client Funds Accounts;
    2. Securities purchased or sold by an NZSE Firm for or on behalf of a client;
    3. Funds received and held by NZSE Firms for undelivered buy contracts; and
    4. Funds received and held on account.
  2. Outstanding Broker Obligations means an agreement or arrangement between an NZSE Firm and its client where:
    1. Securities of the client have been transferred by the NZSE Firm to settle a sale or proposed sale of the Securities, and the NZSE Form has not paid the amount owing or that will be owing by it to the client on that sale or proposed sale; or
    2. The client has paid money to the NZSE Firm for the purchase of Securities and the Securities have not been transferred to the client (or as directed by the client); or
    3. The client has paid money to the NZSE Firm for any other purpose and the amount paid is required by Regulation 3.6 to be held by the NZSE Firm in its Client Funds Account and the NZSE Firm has not applied the amount paid (less permitted fees or commissions) for that other purpose; and
  3. Client Funds Account means a trust account held by an NZSE Firm at a Bank for the benefit of the NZSE Firm's clients for its Outstanding Broker Obligations.

3.2
3.2 Client Assets to exceed Outstanding Broker Obligations: Total Client Assets held by an NZSE Firm must at all times match or exceed the NZSE Firm's total Outstanding Broker Obligations.

3.3
Client Assets held on trust:
  1. Each NZSE Firm shall hold its Client Assets on trust for its clients at all times.
  2. All Securities recorded as being held in an NZSE Firm's Transfer Account shall be held by the NZSE Firm on trust for its clients with uncompleted contracts.

3.4
NZSE Firms to have Client Funds Accounts: An NZSE Firm shall open and maintain a Client Funds Account. If an NZSE Firm has more than one Client Funds Account, this Regulation 3 shall apply as if the Client Funds Accounts were a single Client Funds Account.

3.5
Requirements for Client Funds Accounts: NZSE Firms:
  1. Must obtain from the Bank holding the Client Funds Account a written acknowledgement of the trust status of the account, and must ensure that the words "Client Funds Account" appear in the title of the Client Funds Account;
  2. Must ensure that Client Funds Accounts are not overdrawn; and
  3. May not use funds in their Client Funds Accounts as security for any obligation of the NZSE Firm, or of any other person.

3.8
Application of funds: All amounts required to be paid into a Client Funds Account under Regulation 3.6 shall be held upon trust and applied:
  1. in reimbursing the NZSE Firm for any amount paid by it in settling the purchase of Securities for clients, including the transfer to an intraday same day funds settlement account operated by the NZSE in FASTER for true DVP settlement where it is to be applied to the payment against the transfer of such Securities to the NZSE Firm's Transfer Account;
  2. in payment to selling clients of the sale price for Securities transferred into the NZSE Firm's Transfer Account by the client;
  3. in payment to any other person for whom funds have been held in the Client Funds Account; and
  4. in payment of brokerage and other charges properly payable to the NZSE Firm by its clients for transactions under Regulations 3.8(a) and (b).


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