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NZX Regulatory and Policy Agenda2018
NZX Regulatory and Policy Agenda
This is the third annual NZX Regulatory and Policy
Agenda.
As a licensed market operator, the New Zealand
exchange plays a key part in the capital markets
ecosystem. It has a critical role in delivering strong
and liquid capital markets that operate with integrity
and rigour.
NZX is committed to ensuring that:
its markets remain fair, orderly and transparent
it continues to respond to industry trends and
developments
Issuers and Participants are provided with tools
and guidance that supports them to operate on
the exchange.
In delivering on this commitment in 2017, NZX
completed a number of significant policy initiatives
such as implementation of the revised NZX
Corporate Governance Code and the review of
NZX’s Participant Rules. It also saw NZX
Regulation’s inaugural thematic review on
continuous disclosure, update of the Continuous
Disclosure Guidance Note, and the publication of
more than 20 issuer practice notes.
NZX’s key regulatory focusareas are:
Market Engagement
Market Development
Orderly Markets
Market Infrastructure
Risk-Based Approach to Regulation
This NZX Regulatory and Policy Agenda sets out
detail on the work NZX will do in these areas.
Delivering on initiatives and ongoing activity that
support these focus areas is part of NZX
Regulation’s aim to regulate the markets, and the
participants in those markets, in a pragmatic,
effective and collaborative way that drives
compliance-focussed outcomes.
NZX Policy will also continue to pursue policy
initiatives that will contribute to deeper and more
liquid market activity, and modern rules that are
relevant to New Zealand’s evolving capital markets.
In 2018, this will include a substantive review of the
Main Board/Debt Market Listing Rules and the rule-
settings relevant to secondary market trading.
We look forward to continuing to collaborate with
you in 2018.
Joost van Amelsfort
Head of MarketSupervision
Hamish Macdonald
General Counsel andHead of Policy
NZX Regulatory and Policy Agenda
02
Contents
NZX Regulatory and Policy Agenda 04
NZX Policy Initiatives 06
NZX Regulation Initiatives 09
NZX Regulatory and Policy Agenda
03
NZX Regulatory and Policy Agenda
2018 Areas of focus
M
arke
t
Infras
truc
ture
Orderly
Markets
Marke
t
Eng
agem
ent
Risk-based approach to Regulation
Mar
ket
Dev
elopm
ent
NZX’s market rules and guidance:
• Balance the need for informed, confidentparticipation in NZX’s markets, and theefficient operation of those markets
• Appropriately reflect international best practiceand principles, as well as technologicaland legal trends
• Encourage on-markettrading of securities
• Deliver comprehensive and effectivefrontline monitoring and enforcementof trading misconduct on NZX’s markets
• Ensure market participants effectivelymonitor and mitigate risks associated withpotential market misconduct at anoperational level
• Ensure market participants understandthe scope of permissible trading conduct onNZX’s markets, and proactively demonstrateNZX recommendations and expectations onbest practice
• Support and facilitate thedevelopment of issuer and participantcompliance frameworks
• Set expectations for how issuersand participants approach organisationalculture and conduct, with proactiveownership by boards and management
of compliance obligations under NZX’s market rules
• Enhance NZX’s risk-basedregulatory approach
• Prioritise and target resourcing to issuers,participants and financial products which presentthe more significant risks to the operation of fair,orderly, and transparent markets
• Market development is supportedthrough the application of clear,appropriate standards of conduct,disclosure and reporting
• NZX’s policy framework createsa market environment that is conduciveto the listing and quotation of newissuers and financial products, andaccess to comprehensive tradingand advisory services for productslisted on NZX’s markets
These areas, and the objectives for each, reflect NZX’s statutoryobligations, the current economic environment, and NZX’sobservation of the risks and trends that are impacting or willimpact operation of NZX’s markets.
NZX Regulatory and Policy Agenda
04
As a market operator licensed under the Financial Markets Conduct Act 2013, NZX is responsible for:
monitoring and enforcing NZX’s market rules; and
developing and enhancing the market rules, practices and policies under which the market operates.
Further information on NZX Regulation and NZX Policy can be found at: https://www.nzx.com/regulation.
Each year, NZX Regulation undertakes a programme of work in support of its regulation of the markets. This includes a number of strategic initiatives that contribute to achieving the objectives outlined above, in the key areas of regulatory focus. Details on the initiatives for 2018 are set out below at pages 9 to 12.
NZX Regulation’s work also includes significant ongoing activity and resource dedicated to:
engaging with issuers, participants, and their external advisers, and providing guidance, tools and
advice on regulated activity under the rules
prudential and conduct monitoring of issuers’ and participants’ compliance
real time monitoring of trading
reviewing and providing support of regulated transactions
undertaking investigation and enforcement, including publication of case studies and market education
This ongoing work includes continued delivery of the outcome of initiatives undertaken in previous years.
In 2018, for example, this will include publication of NZX Regulation’s second Oversight and Engagement
Report and the publication of additional Practice Notes.
NZX Regulatory and Policy Agenda
05
NZX Policy Initiatives
NZX MAIN BOARD / DEBT MARKET LISTING RULES REVIEW
As noted in last year’s agenda, in 2017 NZX commenced a review of the NZX Main Board/Debt Market
Rules. The review marks the first holistic review of those rules since 2003 and includes consideration of
NZX's broader equity market structure. In September 2017, NZX published a discussion document seeking
feedback on the proposed objectives of the review, and subject areas for proposed updated rule settings.
The objectives of the review are to:
Reduce complexity with the current three equity market structure and build scale in the Main Board
Enhance investor protections to increase confidence and participation in our markets and reduce the
cost of capital for issuers
Accommodate the listing of a broader range of financial products and issuers with fit for purpose rules
for smaller issuers, funds and debt issuers
Improve access for foreign listings to expand the range of investable products for New Zealand investors
Remove unnecessary compliance costs, introduce tools to reduce the cost of compliance and ensure
the rules are easy to navigate and use
NZX received strong feedback to the first stage of the review with close to 70 submissions and survey
responses. In H1 2018, NZX will publish an exposure draft of the proposed revised rules for further feedback.
NZX anticipates that it will be in a position to submit formal application to the Financial Markets Authority
in Q3 2018 for approval of revised rules. NZX will then focus on assisting issuers, as well as their boards
and management, through the rules transition period. This will include commencing work to review the
guidance notes and practice notes that support the Listing Rules, prior to implementation at the end of
that transition period.
SECONDARY MARKETS ACTIVITY
NZX released its revised strategy in November 2017, including details of activity in support of secondary
market development. Consistent with that strategy, NZX announced in December 2017 that it would seek
to implement changes to its trading and clearing pricing structure in the second half of 2018.
In parallel with this change, NZX intends to commence a formal consultation process by the end of Q1
2018 on potential changes to the NZX Participant Rules to promote market integrity and advance towards
global standards.
Consultation will seek feedback on rule settings that impact order execution, price transparency and
decisions whether to trade on or off-market. These proposals would seek to align NZX’s rules more
closely with secondary activity rule settings in other jurisdictions, on:
“Best execution” requirements, in order to ensure that order execution best meets client outcomes
NZX Regulatory and Policy Agenda
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Eligibility criteria for trades to be executed as “Crossings”, possibly through application of minimum
value thresholds
The requirements for bringing orders to market, including the current ability of Participants to utilise
standing written client authorities to accumulate and bundle orders, and delay order execution at the
Participants’ discretion
NZX considers that there are opportunities to better support secondary market activity, in a manner that
will further improve market integrity through enhanced price transparency and clear expectations of order
execution methodology.
DERIVATIVE MARKET RULES
In conjunction with changes made to the Participant Rules in 2017, NZX also amended the Derivatives
Market Rules and Clearing and Settlement Rules and Procedures to ensure that the changes to the capital
adequacy sections are consistent across the rule sets. Those changes came into effect on 1 December 2017.
NZX intends to make further amendments to the Derivatives Market Rules to reflect other changes made
to the Participant Rules in 2017, for implementation in 2018.
That review will seek to replicate, as appropriate, the changes already made in the Participant Rules in the
following main areas:
Financial advice
Discretionary Investment Management Services (DIMS)
“Know your Client” obligations
Contract notes
Order records
Disclosure of interests
Employee and Prescribed Person trading
Direct Market Access (DMA) and surveillance tools
NZX will consider a broader review of the Derivatives Market Rules beyond 2018.
VOICE RECORDING
In 2018, NZX will implement amendments to the Participant Rules requiring mandatory voice recording
of all pre-order and order placement discussions for personnel on the wholesale sales & trading and
principal (both facilitation and proprietary) desks of NZX Trading Participants. The proposed changes will
apply to NZX’s cash markets. Voice recording requirements already apply to NZX’s derivatives market.
Voice recording will further enhance NZX’s and the FMA’s surveillance capabilities, by providing another
form of evidence of client order conversations and instructions. These recordings will supplement physical
and electronic order records, and align with the expectations set in NZX’s revised trading conduct and
conflicts management guidance notes.
NZX Regulatory and Policy Agenda
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NZX Policy published a consultation paper in late 2017, seeking feedback on the scope of the proposed
obligations, recording retention period and implementation timetable.
NZX will seek to publish an exposure draft of revised Participant Rules in H1 2018 to give effect to
mandatory voice recording. It is anticipated that those revised rules will come into effect in H2 2018,
following second round consultation and formal approval of amended rules by the FMA. Given the extent
of technological changes that some Participants will need to implement, NZX envisages a longer term
transition period will apply.
NZX Regulation will engage with Participants through this period to review and provide assurance on the
extent to which Participants’ proposed technology solutions and procedures will satisfy the mandatory
recording requirements.
NZX Regulatory and Policy Agenda
08
NZX Regulation Initiatives
PARTICIPANT INSPECTION SCHEDULE
As part of NZX Regulation’s ongoing monitoring programme, accredited Participants are subject to
annual risk assessments, and on-site or desk-based inspections.
NZX Regulation implemented a targeted inspection programme for the period 2015 – 2017, focusing on
specific areas that arose from trends analysis work and which had otherwise been determined to be of
strategic importance. In 2017, this included particular emphasis on Direct Market Access (DMA)
arrangements and compliance monitoring plans.
NZX Regulation’s inspection programme for 2018 will be a comprehensive review with a particular focus
applied to areas affected by the Participant Rules changes. The programme will focus on reviewing key
policies and procedures, as well as testing controls in a number of areas, including (but not limited to):
Capital Adequacy
Client Assets
Compliance Monitoring
Conflicts Management
Governance and Supervision
Prescribed Persons Trading
C&S Credit Events, Settlements and Margins
Trading Conduct
Direct Market Access
NZX’s Participant Compliance team will also assess how Participants are transitioning to the revised
Participant Rules and applying areas of the updated guidance.
NZX Regulation will collaborate with the FMA on the 2018 inspection programme, given the FMA’s role
in the oversight of brokers and financial advice under the Financial Advisers Act 2008, and explore
opportunities for joint engagement.
Following the recent publication of NZX’s Trading Conduct guidance note, NZX Regulation will also work
with the FMA on potential industry engagement on matters arising out of that guidance. In 2018, that is
likely to include joint market engagement on regulatory expectations relevant to facilitation practices.
This reflects some differences of understanding by Participants recently observed by NZX Regulation in
relation to the difference between active facilitation and pure proprietary trading.
ALGORITHMIC TRADING
NZX Regulation proposes to enhance its focus on algorithmic trading in 2018, to better support oversight
of electronic order flow to the exchange. This follows a number of changes being made to the Participant
NZX Regulatory and Policy Agenda
09
Rules in 2017 to enhance operational requirements and surveillance capabilities that support oversight
of electronic trading flows.
NZX Regulation anticipates that its focus in 2018 will include further:
analysis of the scope of algorithmic trading on NZX’s markets
assessing the impact of algorithmic trading on market behavior and order execution
considering whether additional quantitative tools would enhance NZX’s real time monitoring of
potential misconduct arising from algorithmic trading
NZX Regulation will seek to collaborate with the FMA on this work. NZX Regulation will undertake
aspects of this work together with its thematic review (discussed on page 11 in this agenda).
SMARTS AND X-STREAM TRADING SYSTEM FUNCTIONALITY
NZX Surveillance performs real time and post-trade monitoring of trading on NZX’s markets. This includes
analysis of abnormal trading, and referral of possible market misconduct to other internal NZX Regulation
teams or to the FMA.
NZX Surveillance uses SMARTS market-monitoring software and market information from the NZX’s
trading system (X-stream) in performing its functions.
In the period to early-2018, NZX Surveillance will implement a number of enhancements to SMARTS
surveillance functionality. This will include:
The upgrade and roll-out of SMARTS version 6.6, which provides an improved interface and other
system features
Calibration of various “alert” settings. This will significantly decrease the number of false positive
alerts generated, provide access to more statistically relevant data and enable NZX Surveillance to be
more targeted in its investigation activities.
Introducing new alerts, focusing on (i) “double printing” (i.e. monitoring of the principal trading book
for instances of crossings occurring at the same price, with the broker trading on different sides of the
crossing), (ii) trading at the client level in the NZX dairy derivatives market, and (iii) “layering” (i.e. the
practice of high level order placement and cancellation, usually as part of a high-frequency trading algorithm).
Introducing an upgrade to support the scheduled launch of calendar spreads1 trading in the dairy
derivatives market in March 2018, by enabling oversight of implied orders that arise out of calendar
spread orders in the market and for real time analysis of volatility that may be caused by such trades.
In 2018, NZX Regulation also intends to introduce infrastructure enhancements that align with recent
changes made to the Participant Rules requiring all orders and trades submitted by accredited Dealers to
be identifiable in the NZX trading system. This will involve utilisation of a trader’s identification details to
automatically attach to all orders and trades entered into the trading system.
These changes will allow NZX Surveillance to identify the specific accredited dealer that entered each
order or trade into the trading system. This will result in more focused surveillance activities, improved
alert functioning, and reduce the number of routine Participant enquiries that focus on identifying the
1. A calendar spread is a spread order that involves simultaneously entering buy and sell orders on the same derivative product butwith different delivery months, for execution of both order legs at the same time.
NZX Regulatory and Policy Agenda
10
dealer. More generally, it will improve the transparency of trading on the markets, including where
dealers use a third party service provider to connect to the trading system rather than connecting directly
to the X-stream trading system.
THEMATIC REVIEW – NZX SURVEILLANCE
In 2018, NZX Regulation will undertake its second thematic review in support of the ongoing monitoring
of market and compliance trends. This follows the release of NZX Regulation’s inaugural thematic review
in 2017, which addressed continuous disclosure practices adopted by listed issuers. NZX Regulation
proposes that the subject of the 2018 thematic review will be on issues, practices and conduct in relation
to algorithmic trading activity on the markets.
This topic has been selected in recognition of broader market perceptions of the influence that
algorithmic trading may be having on the markets. It also reflects the anticipated future importance of
algorithmic trading as an order execution model, including an expected increase in the prevalence of
electronic order flow as a result of NZX’s recent targeted trade pricing review.
It is anticipated that the review will include analysis of the:
Type, extent and origination of algorithmic trading
Trends and risks of observed algorithmic trading
Pre-trade and post-trade monitoring and control mechanisms implemented by Participants and the
technology providers that facilitate access to the trading system
International trends on the regulation of electronic trading
A preliminary assessment of the impact of the enhanced surveillance capabilities implemented through
the 2017 Participant Rule changes
NZX Regulation will publish its findings and any recommendations.
MARKET ANNOUNCEMENT PLATFORM - ENHANCEMENT PROJECT
In 2017, changes were implemented to the administrative processes and to the Listing Rules for the
receipt and release of market announcements. Those changes mean issuer announcements are now
released directly to market using the Market Announcement Platform (MAP). Issuers are now required to
confirm whether the announcement falls within a prescribed announcement category or otherwise
contains “material information” (for the purposes of Listing Rule 10.1.1), to automate the application of
administrative trading halts.
In 2018, NZX will further enhance the capabilities of MAP by enabling issuers to enter their own reporting
data into MAP directly. This task is currently undertaken by the exchange’s Product Operations team. The
changes will result in information being directly captured by databases, with automated generation and
release of a corresponding market announcement. It is anticpated that this will improve operational
efficiency and data accuracy, and will provide issuers with greater control and management of corporate
information.
There will be a staged approach to these MAP enhancements. It is intended that the initial stage will
facilitate self-management by issuers of a number of standard administrative notifications.
NZX Regulatory and Policy Agenda
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A number of Rules changes are likely to be required, to ensure that the Rules requirements for the
lodgement of these notifications align with revised MAP operational processes. This initiative is part of an
ongoing focus on providing issuer tools. In 2017, that included the publication of more than 20 practice
notes and templates for issuers. The first stage of these MAP enhancements is intended to align with one
of the stated objectives of the Listing Rules review, namely the removal of unnecessary compliance costs
and the introduction of tools that make the Listing Rules easier to navigate and use.
The exchange intends to explore the viability of additional future enhancements to enable further self-
management of information by issuers. This will likely include the ability for issuers to process corporate
actions, such as rights issues, share consolidations, name changes and dividend/interest payments.
NZX will engage with issuers and their advisors through the planning and implementation phases of this initiative.
PARTICIPANT PORTAL
NZX is targeting finalisation of industry testing and implementation of its centralised, web-based
Participant Portal in 2018. Due to competing resource priorities for the exchange’s technology teams in
2017, including integral upgrades of its clearing and settlement system (BaNCS) and web infrastructure,
aspects of this project were deferred.
The portal initiative is designed to:
Significantly improve the efficiency of the interaction between NZX and accredited participants
Remove a significant number of manual processes currently in place that relate to the maintenance
of governance and administrative information
Further enhance data integrity
The portal has been designed to facilitate key Participant interactions with the exchange. This includes
both the Clearing House and the Participant Compliance team in NZX Regulation, which has primary
responsibility for conduct and prudential oversight of accredited Participants.
Functionality in the portal will enable:
Online uploading of capital and prudential information and periodic reporting
Access to online forms for completing applications and compliance certificates
Participants to perform a range of regulatory tasks, including the submission of waiver and exemption
applications, individual accreditation applications, and submission of notifications required under the
Rules
Automation of due date reminders for Participants
Access to guidance and template documents
Automation of aspects of the exchange’s internal reporting and enhance analysis of quantitative data
NZX Regulatory and Policy Agenda
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NZX Limited Level 1 / NZX Centre 11 Cable Street PO Box 2959 WELLINGTON Tel: +64 4 472 7599
[email protected] www.nzxgroup.com