All NZ licensed financial entities should take note of the regulator’s action against the NZX last week, according to Garth Stanish, Financial Markets Authority (FMA) capital markets director.
Stanish said the FMA move, which saw the NZX agree last week to hire a new senior surveillance specialist, showed the regulator was serious about enforcing licensee obligations under the Financial Markets Conduct Act (FMC).
“This is an important reminder across all entities under the FMC licensing regime that circumstances don’t stand still and nor should participants’ responses,” he said. “[FMC compliance] is not set and forget, you have to adapt it to the conditions.”
Following the FMA’s annual review of the stock market operator’s regulatory function, the NZX committed – albeit reluctantly – to hiring “an appropriately experienced person to assist with market monitoring and upskilling of the market surveillance function”.
“The individual will provide specialist support to NZX Surveillance to support ongoing monitoring of trading on NZX markets, and the identification, review and investigation of potential trading misconduct,” the FMA review says.
But Stanish admitted the NZX could take some time to recruit the right person.
Overall, the FMA report says NZX surveillance of market participants over the previous year was “below our expectations” with low-quality information and obscure reasoning around some decisions.
Stanish said the review found some NZX potential trading irregularities were left unexplained for too long while other decisions were made without any visible audit trail.
Despite the procedural concerns, the FMA did not uncover any detrimental market outcomes in the cases in question, he said.
However, the regulator found the NZX was ill-prepared to monitor the rising number of algorithmic trades hitting the local bourse. The NZX was looking to attract more algorithmic (or ‘high-frequency’) stock-traders to the NZ market, the report says, under a new “pricing structure” set to switch on this year.
“NZX also advises it will undertake a thematic review of algorithmic trading, in support of ongoing monitoring of market and compliance trends,” the FMA report says.
As well, the NZX agreed to review its conflict of interest policies after the FMA noted a couple of incidents where the stock market operator’s commercial function potentially clashed with regulatory duties.
“There was nothing systemic,” Stanish said. But there was “always a chance” of conflict given the NZX has both commercial and regulatory units working in the same organisation.
In a statement, the NZX disagreed with the FMA finding that it “did not meet its obligation in respect of surveillance during the review period”.
“The approach taken to staffing and engagement with the FMA on surveillance referrals was consistent with previous periods,” the NZX statement says.
Regardless, Stanish said the FMA review of the NZX indicated the FMC licensing regime was working as intended.
He said the result showed market players could rely simply on “policies and procedures” to meet FMC compliance standards.
“[Policies] are important but not sufficient,” Stanish said with people, business capabilities and operational standards also on the FMA watchlist.