Publications: OVERSIGHT REVIEW OF NZX 2005


	Advanced Search

Print this page.

OVERSIGHT REVIEW OF NZX 2005

EXECUTIVE SUMMARY

The Securities Commission has reviewed NZX's performance of its regulatory functions as a registered exchange under the Securities Market Act 1988. This review, the first oversight review of NZX conducted by the Commission, focussed on NZX's arrangements in the 2005 calendar year for discharging its obligations.
We report on NZX's performance in relation to the following themes:
- conflict management;
- arrangements for supervision of Market Participants;
- arrangements for supervision of Listed Issuers;
- arrangements for release of market information;
- market operations and infrastructure;
- disciplinary arrangements and NZX Discipline;
- supervision of NZX as a Listed Issuer by the Special Division; and
- governance.
The Commission's overall conclusion is that NZX is satisfying its obligation to operate its markets in accordance with its conduct rules.
NZX's performance as a registered exchange is good. However, the Commission has made recommendations for improvements in relation to a number of areas. These recommendations are set out below.
The Commission has communicated its concerns and recommendations to NZX, NZX Discipline and the Special Division. Responses from the parties in regard to the recommendations and the Commission's views on those responses are also set out below.
NZX has already agreed to take specific action in response to certain recommendations and has committed to do so by the end of the 2006 calendar year. If NZX takes these actions within the stated timeframe, the Commission believes this will properly address those recommendations.
In respect of the remaining recommendations made to NZX, NZX has committed to reconsider its position and has undertaken to report back to the Commission by the end of the 2006 calendar year.

Recommendations

Market Supervision Group (general)

NZX should introduce and communicate a formal policy for all Market Supervision staff concerning identifying and declaring personal conflicts of interest.

NZX says that it currently has a policy regarding conflicts of interest and agrees to set this out in writing.

NZX has committed to do this by the end of this calendar year.

Supervision of Market Participants

NZX should take disciplinary action against Market Participants who commit repeat breaches of the Participant Rules.

While NZX indicated in the course of our review that it is likely to do this in future, NZX noted that disciplinary action may not be the appropriate regulatory tool for dealing with breaches. NZX Discipline has indicated that it does not consider it appropriate for all breaches to be referred to it, in particular less material breaches.

The Commission considers that repeat breaches of the Rules can demonstrate particular attitudes towards compliance. NZX needs to use a mechanism to penalise repeat breaches by Market Participants. Currently, taking a case to NZX Discipline is the only avenue for doing this. If NZX is of the view that current NZX Discipline proceedings may not be appropriate in all cases, we think that NZX should consider the sufficiency of the regulatory tools available to it under the Discipline Rules. The Commission plans to keep this under review.

NZX will consider this matter again and has undertaken to report back to the Commission by the end of this calendar year.

Supervision of Listed Issuers

NZX should consider enlarging the membership of the Listing Subcommittee to address potential issues arising from conflicts of interest.

NZX agrees with this recommendation.

NZX has committed to do this by the end of this calendar year.

NZX should ensure that NZX Regulation adheres to its established procedures for timely appointment of and consultation with division members, to avoid delays in addressing applications.

NZX considers that it currently has in place measures to determine compliance with its timing obligations. However, NZX will consider this matter again and has undertaken to report back to the Commission by the end of this calendar year.

NZX should ensure that the delegation of decision-making authority and the accountability for decisions made by NZX Regulation divisions are clearly recorded.

NZX believes that it currently has adequate measures in place.

The Commission considers that these measures need to be more clearly communicated to NZX staff.

NZX will consider the matter again and has undertaken to report back to the Commission by the end of this calendar year.

NZX Discipline

NZX and NZX Discipline should together review the administrative support and resource arrangements in place for NZX Discipline. These resource arrangements should be reviewed regularly to ensure that NZX Discipline receives all the resources it requires to enable it to continue to carry out its functions effectively.

NZX has advised that administrative and resource arrangements are being discussed with NZX Discipline and are close to being settled. NZX advises that it proposes to review these arrangements annually.

NZX has committed to do this by the end of this calendar year.

NZX should establish a periodic review of NZX Discipline members' fees and consult with NZX Discipline members on this. The NZX Discipline Rules should entrench that the fees for members of NZX Discipline may not be reduced by NZX.

NZX is willing to entrench the fees so that they may not be reduced. NZX is willing to review the fees at regular intervals.

NZX has committed to do this by the end of this calendar year.

NZX Discipline should publish its Annual Regulatory Report annually.

NZX agrees with and supports this recommendation.

Special Division

The Special Division, as a body, should determine whether the Special Division has jurisdiction to deal with matters referred to it. Any delegations from the Special Division to its Chairman should be formally recorded.
Given the important role of the Special Division in respect of NZX's compliance as a Listed Issuer, the Special Division should take steps to ensure that it is fully aware of the powers available to NZX Regulation under the Listing Rules in respect of other Listed Issuers, and should exercise those powers as appropriate in relation to NZX as a Listed Issuer.
Given NZX's position as both a Listed Issuer and regulator of all other Listed Issuers listed on its markets, NZX should set an example of full compliance with all lawful directions or requests from the Special Division.

NZX considers that it is entitled, as is any other issuer, to decline to provide information sought where NZX does not consider it relevant or appropriate to provide such information. NZX considers that NZX should only comply with those requests or directions necessary for the Special Division to undertake its enforcement role (as opposed to the role of considering a waiver or ruling application) and within its powers and jurisdiction. NZX is of the view that it cannot compel production of information by issuers in relation to waiver applications.

The Commission considers that in practice NZX does have the power to compel production of information by otherwise refusing to grant waivers if relevant requested information is not provided. We remain of the view that NZX should set an example of full compliance with all lawful directions or requests of the Special Division.

NZX will consider this matter again and has undertaken to report back to the Commission by the end of this calendar year.

The Special Division should discuss its resource requirements with the Board of NZX. The NZX Board should have a formal guarantee of funding for the Special Division should the Special Division need to take NZX to NZX Discipline.

NZX has advised that it will request a meeting between NZX and the Special Division to discuss resource requirements and the guarantee of funding.

NZX has committed to do this by the end of this calendar year.

NZX and the Special Division should develop and implement a communication strategy about the role of the Special Division. Communication should include publication of separate contact details for the Special Division.

NZX has agreed to implement a communication strategy about the role of the Special Division. NZX considers that the Special Division should have considerable involvement with this. The Commission agrees.

NZX has committed to do this by the end of this calendar year.

The Special Division should formalise its delegation to the appointed solicitor and should receive regular reports on work dealt with by the appointed solicitor under delegation.
The Special Division should have and use the same procedures manuals in respect of NZX's compliance as a Listed Issuer that are used by NZX Regulation in respect of all other Listed Issuers. The Special Division should satisfy itself that the appointed solicitor uses the NZX Regulation procedures, including where matters are delegated to that solicitor.
The Special Division should settle internal procedures that it would use, including procedures for communicating with the market, in dealing with a serious compliance matter regarding NZX.
The Special Division should formalise its expectation about the referral of data generated by the SMARTS market surveillance system concerning NZX's listed securities. Where alerts from SMARTS are below the threshold set by the Special Division for referral to it, the appointed solicitor should regularly advise the Special Division of the number of such alerts received in the period and a summary of any alerts that were not referred.
To avoid a situation of conflict for the appointed solicitor, the appointed solicitor should have no role in matters that raise contentious issues, including complaints handling (beyond an initial transmittal of a matter to the Special Division). The Special Division should engage external advisers to assist it in dealing with such matters and be funded to do so. The external advisers should have access to NZX's facilities and regulatory precedents and be able to consult with NZX Regulation.

The Special Division agrees that it would be appropriate for it to handle such matters without the involvement of the appointed solicitor or for the Special Division to engage external counsel if necessary. In respect of waiver and ruling applications the Special Division is of the view that the appointed solicitor should, at the Special Division's request, be able to provide analysis and comment to the Special Division on precedent applications under the Listing Rules.

The Commission considers that in respect of waiver and ruling applications involving contentious matters the Special Division should use its external advisers, and that these advisers should be given access to precedents and other relevant information.

NZX should either formally assure the Special Division that the appointed solicitor will not perform any corporate advisory work for NZX or should revisit the use of an NZX Solicitor for the appointed solicitor role.

NZX and the Special Division consider that it would be suitable if the appointed solicitor was not involved in any commercial work that had Listing Rule content but could carry out other commercial work.

The Commission does not agree. The appointed solicitor should be free to carry out other work for NZXR, but we consider that this person should not undertake corporate advisory work for NZX.

NZX will consider this matter again and has undertaken to report back to the Commission by the end of this calendar year.

The Special Division should report to NZX Discipline all material findings that it makes. NZX Discipline should incorporate that information into its published Annual Regulatory Report.

NZX notes that the Special Division's decisions are published in the same way as NZXR decisions and that this recommendation is unnecessary.

The Commission notes NZX's response but considers that benefit will be derived by both NZX Discipline and the market if the Special Division's activities are included in NZX Discipline's Annual Regulatory Report.

Governance

Given the risk of lack of clarity regarding roles in responding to a crisis, the Commission recommends that responsibilities of the CEO and Head of Regulation for exercising delegated powers be reconsidered by the Board of NZX to ensure that the responsibilities are clarified.

NZX is of the view that these responsibilities are sufficiently clear at present, but has agreed to consider whether any further clarification is desirable, and to report back to the Commission by the end of this calendar year.

The Commission comments, but does not make specific recommendations, in relation to NZX's commercial and regulatory conflict management arrangements, arrangements for release of market information or market operations and infrastructure.

PREVIOUS | CONTENTS | NEXT...