Proposed financial market supervision
cost recovery model
Consultation Paper
August 2011
© Commonwealth of Australia 2011
ISBN 978-0-642-74730-3
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Version 2, released 1 September 2011
ii
CONSULTATION PROCESS
Request for feedback and comments
This paper seeks industry feedback on the details of the Government’s proposed arrangements for
the recovery of the Australian Securities and Investments Commission’s (ASIC) market supervision
costs.
You are invited to comment on the proposed arrangements canvassed in this paper, which are not
final policy at this stage. In particular, we ask that you provide feedback on the proposed cost
recovery arrangements for the supervision of cash equities markets and the questions posed. Your
comments on any preferred alternatives would also be appreciated.
The paper outlines the proposed approach for determining industry fees to recover the costs
incurred by ASIC for undertaking supervision of some of Australia's domestic licensed financial
markets and for implementing the Government's policy to introduce competition in exchange
services. It should be noted that the calculations and examples set out in this paper in relation to the
cash equities markets are based on estimates and are intended for illustrative purposes only. The
actual fee amounts for the cash equities markets will be calculated based on actual trading activity
commencing from 1 January 2012.
Submissions should include the name of your organisation (or your name if the submission is made
as an individual) and contact details for the submission, including an email address and contact
telephone number where available.
While submissions may be lodged electronically or by post, electronic lodgement is preferred. For
accessibility reasons, please email responses in a Word or RTF format. An additional PDF version may
also be submitted.
All information (including name and address details) contained in submissions will be made available
to the public on the Treasury website, unless you indicate that you would like all or part of your
submission to remain in confidence. Automatically generated confidentiality statements in emails do
not suffice for this purpose. Respondents who would like part of their submission to remain in
confidence should provide this information marked as such in a separate attachment. A request
made under the Freedom of Information Act 1982 (Commonwealth) for a submission marked
‘confidential’ to be made available will be determined in accordance with that Act.
In addition to seeking submissions, Treasury and ASIC will be conducting industry consultation
meetings on this issue.
The final approach will be published in a cost recovery impact statement (CRIS).
iii
Closing date for submissions: 23 September 2011
Email:
MarketSupervision@treasury.gov.au
Mail:
The Manager, Financial Markets Unit
Corporations and Capital Markets Division
The Treasury
Langton Crescent
PARKES ACT 2600
Enquiries:
Enquiries can be initially directed to Percy Bell.
Phone:
02 6263 2048
iv
CONTENTS
FOREWORD ..................................................................................................................................... VI
GLOSSARY .................................................................................................................................... VIII
EXECUTIVE SUMMARY......................................................................................................................... X
PART A: OVERVIEW ...........................................................................................................................1
1
Scope and background ............................................................................................................................ 1
2
Australian Government Cost Recovery Policy ......................................................................................... 6
3
An overview of the Government’s proposed market supervision fee model ....................................... 10
4
Analysis of ASIC’s regulatory activities and costs .................................................................................. 17
PART B: COST RECOVERY FOR SUPERVISION OF CASH EQUITIES MARKETS (ASX LISTED SECURITIES) ...................... 24
5
The proposed approach for calculating the proportional fees applying to market operators
and market participants .................................................................................................................. 24
6
Illustration of fee proposals on operators and participants (cash equities markets) ........................... 29
7
Impact and implementation considerations of the proposed cost recovery fee
arrangements (ASX listed Securities) ............................................................................................... 31
PART C: COST RECOVERY FOR SUPERVISION OF SMALL FINANCIAL MARKETS AND FUTURES MARKETS .................... 40
8
Small financial markets ......................................................................................................................... 40
9
Futures markets .................................................................................................................................... 40
PART D: NEXT STEPS AND FEEDBACK .................................................................................................... 42
10
Next Steps ............................................................................................................................................. 42
11
Summary of feedback sought ............................................................................................................... 43
REFERENCES ................................................................................................................................... 45
APPENDIX:
REVIEW OF APPROACH USED IN OTHER KEY MARKETS...............................................................1
v
FOREWORD
I am pleased to release this consultation paper on the Government’s
proposed cost recovery arrangements for ASIC’s supervision of Australia’s
financial markets.
The transfer of market supervision responsibilities to ASIC on 1 August
2010 and the opening of Australia’s financial markets to competition were
necessary steps towards a competitive and efficient Australian financial
market.
Competition in Australian financial markets will deliver more innovation in
products and services, more choice in markets, and maintain or improve
market quality - including market depth, liquidity and price formation. Based on the experience in
other jurisdictions, it is expected that competition will also attract new players, new trading
strategies and new liquidity.
Although the costs of supervision will be recovered from industry, competition is expected to lower
the costs of transacting in Australian cash equity markets. It is expected that the cost savings for
industry under competition will more than offset the additional supervisory charges on industry.
Since the transfer of supervision, further milestones have been achieved in preparation for
competition.
On 29 April 2011 the Government welcomed the market integrity rules announced by ASIC and a
framework for competition in equity exchange markets; this represents a significant evolution in
Australia’s market infrastructure. To support this new regulatory role, the Government approved
funding to ASIC in 2009-2010 and 2010-2011 to meet the costs associated with transferring
supervision and supporting market competition, subject to funding being recovered through fees
charged to industry.
The proposed market supervision fee model and cost recovery arrangements outlined in this paper
provide a sound basis by which expenditure required to maintain a robust regulatory infrastructure
for the supervision of domestic licensed financial markets can be recovered across industry in an
efficient and market neutral way.
The proposed market supervision fee model represents an important step in our efforts to support
competitive, efficient and innovative equity markets and to ensure that Australia has the market
regulatory capabilities to respond effectively to the challenges of a dynamic market place. The
proposed arrangements in this paper are underpinned by the Government’s Cost Recovery
Guidelines and principles and have been benchmarked against international cost recovery models to
ensure they are robust and accountable.
This consultation paper provides the public, in particular the financial services industry, with the
opportunity to comment on the proposed arrangements for cost recovery, the future direction of
these arrangements and the appropriate review mechanisms to ensure the arrangements align with
changing market conditions in the future.
vi
I look forward to receiving the community’s views on this matter, and thank you for your
engagement.
The Hon Bill Shorten MP
Assistant Treasurer and Minister for Financial Services and Superannuation
vii
GLOSSARY
ACCC
Australian Competition and Consumer Commission
AFMA
Australian Financial Markets Association
AFSL
Australian Financial Services Licence
APRA
Australian Prudential Regulatory Authority
APX
Asia Pacific Exchange Limited
ASEFF
Australian Securities Exchanges Fidelity Fund
ASIC
Australian Securities and Investments Commission
ASX
ASX Limited
ASX 24
Australian Securities Exchange Limited
CFTC
Commodity Futures Trading Commission (US)
Chi-X
Chi-X Australia Pty Ltd
CRIS
Cost recovery impact statement
DoFD
Department of Finance and Deregulation
FINRA
Financial Industry Regulatory Authority (US)
FSA
Financial Services Authority (UK)
FTE
Full-time equivalent
HFT
High frequency trading
IIROC
Investment Industry Regulatory Organization of Canada
IMB
IMB Ltd
IMSS
Integrated Market Surveillance System
IOSCO
International Organization of Securities Commissions
MDP
Markets Disciplinary Panel
MIRs
Market integrity rules
NFA
National Futures Association (US)
viii
NGF
National Guarantee Fund
NSX
National Stock Exchange of Australia
SEC
Securities Exchange Commission (US)
SIM
SIM Venture Securities Exchange Limited
SRO
Self regulatory organization (US)
TRS
Transaction reporting system (Europe)
ix
EXECUTIVE SUMMARY
This consultation paper seeks industry comment on a proposed market supervision fee model (fee model)
and cost recovery arrangements for the recovery of funding provided to ASIC to conduct market
supervision functions in a competitive multi-operator environment. The proposed fee model detailed in this
paper applies specifically to the supervision of cash equities markets (ASX listed securities). The proposed
cost recovery arrangements extend to all market segments over the period — 1 January 2012 to
30 June 2013. Existing cost recovery arrangements in respect of small financial markets and futures markets
will continue to apply.
The paper canvasses a fee model for cash equities markets based on both trades and messages. Individual
market operators and participants will pay a proportional charge based on the number of trades and
messages reported from them to the ASIC IT surveillance system. Under these arrangements, market
participants will also be charged a quarterly market supervision fee.
The proposed allocation of cost recovery fees between market operators and market participants is
approximately 16 per cent and 84 per cent for market operators and market participants respectively.
Alternative fee models based on number of trades only and paying a fixed fee per transaction are also
considered.
The proposed fee model applies the Government’s Cost Recovery Guidelines and principles; aligns the
regulatory cost drivers in determining an efficient allocation of costs across the market; and has had regard
to the cost recovery approaches conducted in other regulatory jurisdictions. The principles of fairness,
transparency and industry competitiveness were used to assess the proposed and alternative fee models.
STRUCTURE OF THE CONSULTATION PAPER
Part A provides an overview of the consultation paper and background to the transfer of market
supervision and the Government’s policy of introducing competition in Australia’s financial market (Section
1). Section 2 explains the Government Cost Recovery Guidelines that have informed the design of the
proposed market supervision fee model. An overview of the Government’s proposed cost recovery model
and alternative models is provided in Section 3. An analysis of ASIC’s regulatory activities and cost drivers is
detailed at Section 4.
Part B provides details of ASIC expenditure and the proposed cost recovery arrangements for supervision
for cash equities markets (for ASX listed securities). It explains how different categories of costs are
proposed to be allocated in relation to market operators and participants of cash equities markets
(Section 5). An illustration of the cost impact of the fee proposals on operators and participants is provided
in Section 6 and information on the estimated impact and implementation considerations of the proposed
cost recovery arrangement, based on ASIC analysis, is included in Section 7.
Part C outlines the cost recovery arrangements for small financial markets (Section 8) and futures markets
(Section 9).
Part D provides information on the next steps (Section 10) and a summary of the feedback sought (Section
11). A discussion of relevant international comparisons is at the Appendix.
x
PART A: OVERVIEW
1
SCOPE AND BACKGROUND
1.1 Scope
This consultation paper seeks industry comment on:
(i) the proposed cash equities market supervision fee model for the recovery of funding provided to ASIC to
perform its market supervision functions following the transfer of market supervision to ASIC in 2010; and
to enhance ASIC’s capability to supervise a competitive, multi-market operator environment in light of the
Government's policy to introduce market competition (Sections 1, 2 and 3); and
(ii) the proposed market supervision cost recovery arrangements (Sections 1, 4 to 6) for the period from
1 January 2012 to 30 June 2013, which will enable the Government to recover over the 18 month period:
•
approximately 43 per cent of the costs associated with the implementation of market competition;1
•
the fixed costs ASIC will need to incur to connect new markets to its integrated market surveillance
system (IMSS); and
•
ongoing costs incurred by ASIC to perform its new market supervision functions following the
transfer of supervision.
The cost recovery arrangements extend to the following domestic licensed financial markets:
1.
Cash equities markets (for ASX listed securities):
–
–
2.
1
2
The following ASX Limited (ASX) electronic order books;
:
TradeMatch, the current ASX order book; and
:
Purematch, a new cash equities order book intended to be launched late in 2011;
Chi-X Australia Pty Ltd (Chi-X), which is working to commence operations of a cash equities
market from 31 October 2011 (at the earliest).
Small financial markets2:
–
National Stock Exchange of Australia Limited (NSX);
–
SIM Venture Securities Exchange Limited (SIM);
This equates to $4.6m ($2.1m for regulatory framework and market structure and analysis implementation costs and $2.5m for
IT implementation costs). The remainder of these costs will be recovered in FY14 and FY15.
Under the Corporations (Fees) Regulations 2001, small markets are grouped into a specific market segment. There are currently
four markets in this segment.
1
3.
–
IMB Ltd (IMB); and
–
Asia Pacific Exchange Limited (APX), which is working to re-launch in October 2011.
Futures markets:
–
Australian Securities Exchange Limited (ASX 24) (formerly Sydney Futures Exchange).
This paper does not include cost recovery estimates of any future funding that may be needed to enable
ASIC’s regulatory capability to keep pace with industry innovation, market structure changes, market
developments, and advances in market surveillance and supervision technology/techniques. These matters
are currently subject to a separate Government financial review of ASIC, as foreshadowed in the
2011-12 Budget. However, the paper does propose an approach for the recovery of these future costs.
1.2 Background
Government's policy to transfer supervision of certain domestic licensed financial
markets to ASIC
On 24 August 2009, the Government announced its decision to transfer the responsibility for supervision of
certain domestic licensed financial markets from market operators to ASIC3. Responsibility for market
supervision transferred to ASIC on 1 August 2010.
The transfer of market supervision from individual market operators to ASIC represents an important first
step in facilitating competition between Australia’s licensed equity markets (market competition). Market
competition is important to ensure that Australia’s financial markets are innovative and efficient, now and
into the future.
Funding was approved in the Mid-year Economic and Fiscal Outlook 2009-104 to support this commitment
and expand ASIC's capabilities to undertake its new regulatory role. The Government also announced that
the additional expenditure incurred by ASIC would be subject to cost recovery through the imposition of
fees on industry.
ASIC’s additional responsibilities following the transfer of supervision specifically include:
•
undertaking real-time market surveillance and post-trade analysis to detect market misconduct (that
is breaches of the market integrity rules (MIRs));
•
monitoring compliance with the MIRs by regulated entities; and
•
administering the disciplinary framework for breaches of the MIRs (including the markets disciplinary
panel (MDP), enforceable undertakings and infringement notices).
3
The transfer of supervision to ASIC did not apply to the following markets under Regulation 10.14.01 of the Corporations
Regulations 2001: BGC Partners (Australia) Pty Limited; Bloomberg Tradebook Australia Pty Ltd; Mercari Pty Ltd; and
Yieldbroker Pty Ltd.
Mid-year Economic and Fiscal Outlook 2009-10, Appendix A: Policy decisions taken since the 2009-10 Budget,
Commonwealth of Australia, November 2009, p.216.
4
2
Government's policy to introduce competition in trading services
On 31 March 2010, the Government announced its support for competition between markets for trading in
listed shares in Australia5.
In order to implement the Government's market competition policy, ASIC’s regulatory infrastructure
capabilities have been enhanced through:
•
development of a regulatory framework to apply on the entry of competition;
•
upgrade of its IMSS capability to enable the real-time surveillance of the Chi-X market, and to handle
multi-market and whole-of-market surveillance and supervision; and
•
increase to the number of its market supervision staff in order to:
–
manage the expected increase in market activity and complexity, as well as for the supervision
of multiple markets;
–
identify, investigate and take enforcement action against new forms of market misconduct
arising from the introduction of market competition; and
–
undertake ongoing review and analysis of the market micro and macro structure and the
regulatory framework to respond to new issues and market developments.
Funding was approved in the Budget Measures 2011-126 to cover the additional costs required by ASIC to
enhance its regulatory infrastructure. This funding was also approved subject to cost recovery from
industry.
ASIC subsequently published MIRs on 29 April 2011 to support the framework for market competition and
specifically for the Chi-X market. These MIRs will take effect on 31 October 2011.
On 4 May 2011, the Government granted Chi-X an Australian market licence under section 795B(1) of the
Corporations Act 2001 (the Corporations Act) on the basis that Chi-X meets certain licence pre-conditions.
Subject to Chi-X meeting its licence pre-conditions and the operator's readiness, the earliest Chi-X can
commence operations is 31 October 2011.
1.3 Summary of the interim cost recovery arrangements
Interim cost recovery arrangements (1 August 2010 to 30 June 2011)
Interim cost recovery arrangements were implemented from 1 August 2010 to 30 June 2011 to facilitate
the recovery of government funding to cover ASIC's additional costs for performing its new regulatory
functions following the transfer of market supervision.
5
6
Media Release, Chris Bowen, Minister for Financial Services, Superannuation and Corporate Law, ‘Government announces
competition in financial markets’, 31 March 2010.
http://mfsscl.treasurer.gov.au/DisplayDocs.aspx?doc=pressreleases/2010/032.htm&pageID=003&min=ceba&Year
=&DocType=0
Budget Measures 2011-12, Budget Paper No. 2 – Part 2: Expense Measures, Commonwealth of Australia, May 2011, p.319.
3
It was intended that Treasury and ASIC would consult with industry in 2011 to review the interim
arrangements and develop a new cost recovery proposal that would be more appropriate for a
multi-market environment.
For the period from 1 August 2010 to 30 June 2011, ASIC’s market supervision costs of $7.7 million were
recovered from two sources:
•
fixed quarterly fees on each domestic licensed financial market under the Corporations (Fees)
Regulations 2001 (the Fees Regulations); and
•
total contribution of $4.2 million from the excess monies in the National Guarantee Fund (NGF) and
the Australian Securities Exchange Fidelity Fund (ASEFF).7
A cost recovery impact statement (CRIS) reflecting these arrangements was agreed by the Department of
Finance and Deregulation (DoFD) in July 2010.
Extension of interim cost recovery arrangements (1 July 2011 to 31 December 2011)
As competition had not begun by 1 July 2011, the interim cost recovery arrangements were extended for a
further six month period to 31 December 2011.
A new CRIS was subsequently published for the period from 1 July 2011 to 31 December 2011 and
amendments were also made to the Fees Regulations to prescribe the fixed quarterly fees that would apply
to the ASX and ASX 24 markets during the third and fourth quarters of the 2011 calendar year, and the
fixed quarterly fee that would apply to Chi-X when it commences operations.
The funding for ASIC's operating costs for performing its new regulatory functions for the period from
1 July 2011 to 31 December 2011 is $4.5 million. These costs will be recovered from two sources:
•
fixed quarterly fees on each domestic licensed financial market under the Fees Regulations; and
•
a total contribution of $2.3 million from the excess monies in the NGF and the ASEFF.
The new interim fee arrangements are summarised in Table 1.1 below.
The proposed cash equities market fee model and cost recovery arrangements will replace the current
interim fee arrangements for the cash equities markets on 1 January 2012. The current arrangements for
the small financial markets and futures markets will continue to apply for a further 18 month period from
1 January 2012.
1.1 Timing of Implementation
To ensure industry has sufficient time to consider the proposed arrangements the Government proposes to
implement the new cost recovery arrangements for a multi-market environment from 1 January 2012.
7
The use of excess monies from the NGF and ASEFF was an interim measure for transfer of supervision costs incurred prior to
the commencement of competition as referred to in the related cost recovery impact statements:
http://www.asic.gov.au/asic/ASIC.NSF/byHeadline/Market%20supervision%20and%20surveillance#cris
4
Table 1.1: Fee structure under the interim cost recovery arrangements (1 July 2011 to 31 December 2011)
Market
Fee type
Previous fee
1-Aug-10 to
30-Jun-11
Small financial markets
Supervision fee
$9,375 per qtr
$9,375 per qtr
ASX 24
Supervision fee
$138,750 per qtr
217,000 per qtr
Note: the $337,500 contribution from the ASEFF w as
applied as an offset to the total cost of supervising the
ASX 24 market.
ASX
Supervision fee
$786,250 per qtr
$860,000 per qtr
Note: the $1.91m contribution from the NGF w as
applied as an offset to the cost of supervising the
ASX market.
Chi-X
Supervision fee
n/a
$46,000 per qtr
Note: Chi-X is assumed to commence operations from
31 October 2011 (at the earliest, subject to Minister's
approval and the operator's readiness). ASIC's
estimated supervisory effort for the Chi-X market is
calculated based on Chi-X achieving 2.5% market
share in the overall trading of ASX listed securities in
November and December 2011. This is a simple
estimate for the purposes of extending the current
interim cost recovery arrangements.
5
New fee
1-Jul-11 to
31-Dec-11
2
AUSTRALIAN GOVERNMENT COST RECOVERY POLICY
2.1 Funding and cost recovery for transfer of supervision and the
introduction of competition
Figure 2.1: The cost recovery process for transfer of supervision and competition
The cost recovery process for the Australian financial market differs from that used in other jurisdictions
where market supervision is performed by industry or self-regulatory organisations. The unique features of
the Australian cost recovery arrangements are:
•
The amount of fees collected is limited to the amount that has been funded by Government for
transfer of supervision and competition.
•
Further funding where required, for example for ASIC to deal with major new market technology
developments, must be approved through the budget process, as a prerequisite to funding being
appropriated subject to cost recovery.
•
The funds proposed for recovery through fee arrangements are returned to Government and are
intended to fully offset funding by Government to meet the costs required to be incurred for transfer
of supervision and competition (see Figure 2.1).
•
The Government’s Cost Recovery Guidelines and principles form a frame of reference from which to
evaluate potential cost recovery models.
2.2 The Cost Recovery Guidelines
The Australian Government adopted a formal cost recovery policy in December 2002 to improve the
consistency, transparency and accountability of its cost recovery arrangements and promote the efficient
allocation of resources. The policy applies to all Financial Management and Accountability Act 1997
agencies and to relevant Commonwealth Authorities and Companies Act 1997 bodies.
The Government’s Cost Recovery policy8 outlined in the Australian Government Cost Recovery Guidelines
(the Cost Recovery Guidelines) require that cost recovery arrangements must be compliant with the Cost
Recovery Guidelines and all significant cost recovery arrangements be subject to a CRIS.
8
The policy is administered by the Department of Finance and Deregulation (DoFD) and outlined in the Australian Government
Cost Recovery Guidelines (the Cost Recovery Guidelines).
6
2.3 Cost recovery guiding principles
A core principle of the Cost Recovery Guidelines is that entities should set charges to recover all integral
costs of products or services where it is efficient and effective to do so, where the beneficiaries are a
narrow and identifiable group and where it would not be inconsistent with Australian Government policy
objectives, while undertaking an appropriate level of consultation with stakeholders. In the case of
regulatory activities, the Cost Recovery Guidelines require that the individuals or groups that have created
the need for regulation should bear the cost of that regulation.
Cost recovery arrangements should seek to recover the costs incurred by regulatory agencies (in
undertaking their regulatory activities) from the entities that they regulate. An alternative approach that
can be taken is to allocate the costs based on the individuals or groups that would benefit from the
provision of the regulatory service. In line with these principles, the Government will seek to recover ASIC's
costs for market supervision across market operators and market participants.
Cost recovery charging seeks to reflect the cost driver/s of undertaking an individual activity. As entities
may not have sufficient information to formulate a model that would enable them to precisely calculate the
costs associated with regulating each entity, entities may use a proxy to attribute costs to a particular
regulated entity.
For the purposes of the policy, costs may be recovered by way of a fee for the product or service, or a levy,
whichever is the more efficient. The Government proposes to recover ASIC's market supervision costs
through the imposition of fees on the basis of efficiency, as fees are more closely linked to the cost of
individual activities than the application of a broad levy on market operators and market participants.
Cost recovery is different from general taxation in that there must be a direct link between an agency’s
costs and the revenue it receives from its charging arrangements. Importantly, cost recovery should not
give rise to an over or under collection during the life of the cost recovery arrangement. By contrast,
general taxation represents a compulsory exaction of money that need not bear any correlation to the
costs for provision of those services.
The table below sets out the key principles of cost recovery9 and how the Government’s proposed market
supervision cost recovery arrangements reflect these principles.
Table 2.1: Cost recovery guiding principles
Key principles of cost recovery
Proposed ASIC market supervision cost recovery arrangements
Agencies should set charges to recover all the costs for
The total amount ASIC will collect through the fees proposed is equal to the costs
products or services where it is efficient to do so, with
ASIC will expend on market supervision and competition for market services. The
partial cost recovery to apply only where new
proposed arrangements do not include the costs of performing ASIC’s core functions
arrangements are phased in, where there are
(that is functions already undertaken by ASIC prior to the transfer of supervision).
government endorsed community obligations, or for
explicit government policy purposes.
Cost recovery should not be applied where it is not cost
The proposed cost recovery arrangements are cost effective, consistent with
effective, where it is inconsistent with government
government policy, and are not intended to stifle the competitiveness of Australia’s
policy objectives or where it would unduly stifle
financial markets.
competition or industry innovation.
9
The key principles have been reproduced from page 2 of the Australian Government Cost Recovery Guidelines, DoFD, July 2005,
Financial Management Guidance No. 4,Canberra 2005. Some principles have been paraphrased and those relating to purely
administrative matters have been omitted.
7
Table 2.1: Cost recovery guiding principles (continued)
Key principles of cost recovery
Proposed ASIC market supervision cost recovery arrangements
Any charges should reflect the costs of providing the
The proposed fees reflect the costs of the market supervision functions ASIC
product or service and should generally be imposed on
undertakes in relation to the market operators and market participants it is
a fee-for-service basis or, where efficient, as a levy.
responsible for regulating.
Cost recovery arrangements should have clear legal
The proposed cost recovery arrangements will be established under the Fees Act and
authority for the imposition of charges.
Fees Regulations.
Costs that are not directly related or integral to the
The costs of performing ASIC’s core functions (that is functions already being
provision of products or services (for example some
undertaken by ASIC prior to the transfer of supervision) are not included in the total
policy and parliamentary servicing functions) should not
cost to be recovered under the proposed cost recovery arrangements.
be recovered. Agencies that undertake regulatory
activities should generally include administration costs
when determining appropriate charges.
Where possible, cost recovery should be undertaken on
The proposed cost recovery arrangements are sensitive to the different supervisory
an activity (or activity group) basis rather than across
effort required by ASIC to regulate the cash equities markets, small financial markets
the agency as a whole. Cost recovery targets on an
and futures markets. For the cash equities markets, ASIC's costs are proposed to be
agency-wide basis are to be discontinued.
allocated between market operators and market participants by reference to
categories of ASIC's market supervision functions. In relation to the small financial
markets and the futures markets, the costs that are proposed to be recovered reflect
the number of FTE employees required for supervising those markets.
Agencies should not cost recover for products and
Costs that are being funded to support ASIC’s regulatory functions prior to the
services funded through the budget process that form
transfer of market supervision in 2010 are not included in the total cost to be
an agency’s ‘basic information product set’, but may
recovered under the proposed cost recovery arrangements.
cost recover, where appropriate, for commercial,
additional and incremental products and services that
are not funded through the budget process.
Portfolio Ministers should determine the most
Consultation will consist of the release of this consultation paper, which seeks
appropriate consultative mechanisms for their
industry feedback on the proposed cost recovery arrangements, meetings with
agencies’ cost recovery arrangements, where relevant.
stakeholders, and the release of the exposure draft amendments to the Fees
Regulations.
Industry will be consulted again during the review of these arrangements (planned to
be undertaken within 18 months of implementation).
Cost recovery arrangements will be considered
The market supervision cost recovery arrangements are considered significant.
‘significant’ depending on both the amount of revenue
and the impact on stakeholders and where ministers
have determined the activity to be significant on a
case-by-case basis.
Agencies with significant cost recovery arrangements
Treasury and ASIC have consulted with DoFD in the development of the proposed
should ensure that they undertake appropriate
cost recovery arrangements and this consultation paper. Consultation with industry
stakeholder consultations, including with relevant
will take place through this consultation paper, meetings with industry, and the
departments.
release of the exposure draft amendments to the Fees Regulations
8
Table 2.1: Cost recovery guiding principles (continued)
Key principles of cost recovery
Proposed ASIC market supervision cost recovery arrangements
Agencies with significant cost recovery arrangements
A CRIS will be developed in consultation with the DoFD and Treasury.
will need to prepare a CRIS. Responsible Ministers must
agree all CRISs. The Expenditure Review Committee will
The CRIS will be published on ASIC’s website prior to the implementation of the final
cost recovery arrangements.
review all major cost recovery arrangements with
receipts in excess of $10 million. Entities must publish
all CRISs on their websites.
Agencies are to review all significant cost recovery
The final cost recovery arrangements will be formally reviewed within 18 months of
arrangements periodically, but no less frequently than
implementation so that any necessary adjustments to the arrangements can be
every five years.
effected via amendments to the Fees Regulations from 1 July 2013.
ASIC will be monitoring the effectiveness of the cost recovery arrangements on an
ongoing basis from the date of commencement.
Industry will be consulted on any proposed adjustments prior to implementation.
2.4 Industry considerations
Consistent with the cost recovery guiding principles, informal industry consultations on the proposed cost
recovery arrangements have identified some key themes (summarised in the table below) as important
reference points for the design and assessment of an appropriate supervision fee model for cash equities
markets.
Table 2.2: Key principles and industry considerations
Principle
Description
Fairness
The fees should reflect the level of trading activity undertaken and the supervisory effort required, and should be
applied in a non-discriminatory way. The Cost Recovery Guidelines state that cross-subsidisation of costs is not
appropriate.
Transparency
The method of charging fees should be transparent and consistently applied to all market operators and market
participants.
Review
The cost recovery arrangements must be subject to ongoing review and robust corporate governance processes.
Market neutrality
Fees structure should be designed to be as neutral as possible so that one marketplace is not favoured over another.
Industry
competitiveness
Fees should not create a barrier to entry for new market entrants or a barrier to market participants connecting to
new market entrants.
Fees should not discriminate between different types of market participants or market operators.
International
competitiveness
Fees should not create a disincentive to trade on Australia’s financial markets.
Certainty
The cost recovery arrangements need to provide certainty to industry as to how much will be charged each quarter.
Market participants and market operators should be able to calculate their fees independently.
The cost recovery burden should not be disproportionate to the amounts cost recovered in comparable international
jurisdictions.
The cost recovery arrangements need to provide certainty to government that the correct amount will be recovered,
and that there will not be over-recovery or under-recovery.
9
3
AN OVERVIEW OF THE GOVERNMENT’S PROPOSED MARKET SUPERVISION FEE MODEL
Key Points
•
This section provides an overview of the proposed cash equities market supervision fee model and
the proposed cost recovery arrangements to support ASIC’s market supervision functions in a
competitive multi-operator market environment.
•
The proposed cash equities market supervision fee model is based on a proportional fee calculated
by reference to trade count (for non-IT costs) and message count (for IT costs). An alternative
approach based on trade count only is also considered, as well as the alternative of charging a flat
fee per trade and/or message.
•
The Government seeks feedback on this model and the proposed alternatives.
The table below summarises the proposed cost recovery arrangements for the three market segments:
equities markets (ASX listed securities), small financial markets and the futures markets; and the costs to be
recovered from each segment from 1 January 2012 to 30 June 2013.
Table 3.1: Proposed cost recovery arrangements for different market segments
Market
Type of cost
Total estimated costs to be
recovered ( 1 January 2012
to 30 June 2013) ($)
Equities markets (for ASX
Market supervision costs
$26.6 million — to be
Allocation of costs between operators and
listed securities) that is
recovered from market
participants: to be allocated by reference to
ASX and Chi-X
operators and market
categories of ASIC's market supervision functions.
(Sections 4 and 5)
participants.
This results in an allocation of approximately
Proposed cost recovery arrangements
84 per cent of the costs to market participants and
16 per cent to market operators.
Allocation of costs to each operator and
participant: non-IT costs allocated by trade count,
and IT costs to be allocated by message count
(which includes both trades and orders).
Collection
Fees to be charged quarterly in arrears based on
each entity’s share of the overall trade and
message count in ASX listed securities over the
quarter.
Fixed costs relating to the
Chi-X $0.286 million; ASX
ASIC's IMSS configuration costs for Chi-X and ASX
configuration of the ASIC
PureMatch $0.182 million
PureMatch are proposed to be recovered directly
IMSS to set-up real-time
plus Chi-X’s and ASX’s IMSS
from each operator over the period from
surveillance for certain
connection costs of
1 January 2012 to 30 June 2013.
markets
approximately $0.1 million.
Separately, a monthly network connection charge
of between $5,000 and $10,000 is proposed for all
market operators.
10
Table 3.1: Proposed cost recovery arrangements for different market segments (continued)
Market
Type of cost
Total estimated costs to be
recovered ( 1 January 2012
to 30 June 2013) ($)
Small financial markets
Market supervision costs
$0.2 million
Proposed cost recovery arrangements
Current fixed quarterly fee of $9,375 per market
will continue to apply.
(NSX, SIM Venture, IMB
Ltd, and APX
(Section 8)
Futures markets — ASX 24
Market supervision costs
$2.3 million
The existing approach, involving the imposition of
a fixed quarterly fee on the operator only, will be
(Section 9)
extended for a further 18 months. The fee
proposed is $386,000 per quarter.
New cost recovery arrangements for futures
markets are proposed to be implemented from
1 July 2013.
Total
$29.8 million
3.1 Overview of the market supervision fee model and cost recovery
arrangements for the cash equities markets (for ASX listed securities)
Allocation of costs between market operators and market participants
To ensure that the burden of cost recovery is borne equitably across the industry the Government proposes
to allocate ASIC’s costs between market operators and market participants. This allows the costs to be
allocated in line with the cost recovery principle that individuals or groups that have created the need for
regulation should bear the cost of that regulation. In doing so, the proposed approach will ensure the costs
assigned are both fair and transparent and that regulated entities have an understanding of the costs that
ASIC incurs for the supervision of their activities and the basis for their liability.
ASIC’s costs will be allocated between market operators and market participants by reference to the
categories of ASIC’s market supervision functions:
•
Costs that are identified as relating to the regulation of market participant activities are allocated to
market participants only.
•
Costs that are identified as relating to the regulation of activities of both market operators and
market participants will be allocated to both groups (to be allocated based on an industry revenue
proxy, as described in Table 5.1).
•
Costs associated with implementing market competition will be allocated between market operators
and market participants in equal proportion. This recognises the need for supervision of competing
markets given that market participants can be expected to access more than one market providing
trading in ASX listed securities.
The result of this proposed cost allocation approach is a split of approximately 84 per cent for market
participants and 16 per cent for market operators.
Section 4 sets out ASIC’s regulatory costs and cost drivers for the cash equities markets (ASX listed
securities) in detail.
11
Allocation of costs to each market operator and participant
Proposed approach: Proportional fee based on trade count and message count
The Government proposes a cost recovery arrangement that is based on trade count (for non-IT costs) and
message count (for IT costs). An arrangement based on both trades and messages would fully reflect the
key drivers of ASIC’s costs.
The proposed approach is intended to provide a link between market operator and market participant fees
and the resources ASIC expends to supervise their activities. The more active a participant is on a market,
the more time and resources will be required by ASIC to monitor its activities. Similarly for market
operators, the more activity occurring on its market, the more time and resources will be required by ASIC
to monitor its market.
(i)
Trade count used to apportion non-IT costs
The Government proposes to apportion ASIC's non-IT market supervision costs among market operators
and market participants based on the number of trades that are reported to ASIC's IMSS each quarter.
As trading activity is a key driver of ASIC's non-IT costs, trade count is considered to be the most suitable
basis for determining the portion of ASIC's non-IT costs that should be borne by each market operator and
participant. This approach is in line with the cost recovery approach introduced in international jurisdictions
(see Appendix).
(ii)
Message count used to apportion IT costs
It is proposed to apportion ASIC's market supervision IT costs among market operators and market
participants based on the number of messages received by the ASIC IMSS each quarter.
As the Government considers the number of messages10 to be the key driver of ASIC's IT costs, message
count is the most suitable basis for determining the portion of ASIC's IT costs that should be borne by each
market operator and participant.
Although revenue may not necessarily flow from a high market share of message count, recovering ASIC's
IT costs based on the number of messages should encourage market participants to more carefully consider
how they are consuming ASIC's IMSS capacity, and in turn the capacity-related costs their message traffic
may impose on the entire industry.
An added benefit to the wider industry is that this cost recovery approach is neutral between participants.
Participants with low message intensity will pay lower fees compared to participants with high message
intensity. In addition, the costs associated with maintaining capacity to cater for high message intensity will
be borne predominantly by the most message-intensive participants and markets.
The Government understands that Canada's Investment Industry Regulatory Organisation (IIROC), which
performs analogous market surveillance functions to ASIC, is close to completing consultation on a new fee
model that is based on both trades as well as messages. Responses to the Canadian consultation were
generally supportive of the proposed fee model.11
10 'Messages' are the total of trades, order entry messages, order amend messages (price and / or volume) and order deletion /
cancellation messages.
11 IIROC, New Market Regulation Fee Model, IIROC Administrative Notice 10-0316, November 30, 2010.
12
The International Organization of Securities Commissions (IOSCO) recently issued a consultation report,
titled Regulatory Issues Raised by the Impact of Technological Changes on Market Integrity and Efficiency.
In its consultation report IOSCO states that the broad issues of market structure and market surveillance
capacity, including the costs of the additional surveillance capacity needed to adequately deal with these
changes, requires particular consideration. One of the questions IOSCO has posed in its consultation report
is whether charges or fees should be on messages, cancellations or high order-to-trade ratios, and if so,
how those fees or charges should be determined and on what basis.12
A proportional fee based on trade count (for non-IT costs) and message count (for IT costs) provides the
most accurate reflection of ASIC’s cost drivers, and therefore is considered to be the most suitable proxy
having regard to the cost recovery principles.
‘Proportional fee’ charging method
The proportional model charges each market operator (or market participant) a fee based on the
operator’s (or participant’s) share of the total number of trades and/or messages occurring across the
market. Charges are determined based on volume in each period and payments are made in arrears. Fees
are calculated at the end of each quarter based on market activity in the previous quarter.13
The main advantage of charging a proportional fee in this way is that it will not result in the over- or underrecovery of ASIC's costs. The costs of supervision will be collected regardless of whether the market shrinks
or grows. Canada's IIROC has been charging its markets regulated entities a proportional fee for several
years. A disadvantage of this approach is that the unit price per trade and per message will not be known
until the end of each quarter.
The proposed approach is different from the financial transaction tax proposals sometimes discussed in
popular media. The proposed approach is intended to recover the costs incurred by ASIC for performing its
new supervisory functions following the transfer of supervision and the costs necessary to support the
introduction of market competition. In line with the Cost Recovery Guidelines, those costs should be borne
directly by both market operators and participants given that the activities of both groups are the drivers
for costs associated with ASIC's regulatory activities and the introduction of market competition.
12 IOSCO, Regulatory issues Raised by the Impact of Technological Changes on Market Integrity and Efficiency, IOSCO, July 2011,
p.12. In its report IOSCO stated that: ‘The increased messaging that has come with extensive use of algorithms raises costs for
many participants, including marketplaces, vendors and competent authorities. This is especially true with respect to HFT. In
addition, algorithmic trading, like all electronic trading, results in the need for changes to the way competent authorities
monitor trading. Increased algorithmic trading has increased the complexity of surveillance for competent authorities. Having
sophisticated systems or algorithms that monitor trading and detect patterns is a necessity in this environment of high speed
and complex trading in order to maintain market integrity and confidence.’
13 The method of calculation for the proportional fee can be described as follows:
Participant A’s
fee
=
Component 1 (Non-IT costs)
=
ASIC non-IT costs
=
ASIC IT costs

+
Component 2 (IT costs)

No. of trades reported/executed by Participant A
total no. of trades reported/executed by all participants
No. of Participant A's messages received by IMSS
total no. of messages received by IMSS from all participants
For example, if a participant executed 10 per cent of the total trades executed by all participants in a quarter, then the first
component of the participant’s fee would be 10 per cent of ASIC’s non-IT costs for that quarter. If the participant generated
20 per cent of all messages IMSS received for that quarter, then the second component of the fee would be 20 per cent of
ASIC’s IT costs in that quarter.
13
Alternatives considered
A number of alternative cost recovery arrangements were also explored during the development of the
proposed cost recovery arrangements detailed above.
First alternative considered: Proportional fee based on trade count only
Under this alternative, ASIC's total market supervision costs would be recovered from each market
operator and each market participant based on their share of the overall trade count in ASX listed securities
during each quarter.
This approach may be administratively simpler as calculations will be based on trades only; therefore there
may be fewer considerations for participants. While Canada is currently considering extending its fee model
to include charging based on messages, there are no jurisdictions that are presently charging market
regulation fees based on trades as well as messages.
Currently trades that are conducted off market are reported to the ASIC IMSS while messages are not. This
means that off-market trades will be subject to cost recovery under the proposed approach while messages
will not. On this basis, the inclusion of messages (that is, under the proposed cost recovery approach) may
be less neutral between dark and lit venues. However, messages reported to the IMSS are the key cost
driver for ASIC’s IT costs.
Cost recovery based on trades only may have a lower cost recovery burden on market operators and
market participants that rely on high numbers of messages as part of their business model. However as
there is a fixed amount that is to be recovered, the burden on industry in total will be the same in either
model.
This alternative approach may, however, result in higher cost recovery for ASIC's IT costs from less message
intensive participants rather than those who cause ASIC to incur these costs (that is, high message intensity
participants/markets).
Section 6 provides an illustration of the approximate fees payable under a proportional fee based on trades
and message count and based on trade count only. This will assist market operators and market
participants in comparing the impact of the two approaches for activity-based charging. The illustrations
show that for most participants the difference in fees payable between the two fee models is marginal.
Excluding messaging from fee calculations under the alternative proposal would mean that most
participants and existing market operators would pay slightly more, but HFTs and new market operators
with message intensive business models would pay slightly less.
Second alternative considered: Fixed fee per trade and/or message count
Under this alternative, market participants and market operators will be charged a fixed fee per trade
and/or message.14
This option would require the Government to set a fee at a level that would enable it to conservatively
achieve sufficient cost recovery. Setting the fee per trade and message precisely so that the correct amount
14 The method of calculation for the fixed fee per trade model can be described as follows:
Participant A’s fee
=

Fee per trade
Examples of the potential fees are provided in Section 6.
14
No. of trades reported/executed by Participant A
is cost recovered each quarter poses a challenge. Where activity on the market grows there will be the risk
of over-recovery unless the fees are continuously revised down. Equally, if there is an unexpected decrease
in activity on the market the fixed fee will result in under-recovery of costs.
Under the proposed proportional method, if a participant or market operator maintains a relatively stable
proportion of activity on the market, its fees will also be relatively stable. In contrast, with a fixed fee
model, periods of unexpected volatility could lead to substantially higher charges for a participant or
operator even where it maintains a stable share of activity on the market.
To deal with the problem of over-recovery and under-recovery of costs, the fixed fees for trades and/or
messages would require regular adjustment.
The trend for some years has been that trade count has been increasing even if total turnover has not been
increasing at the same rate, resulting in a reduction in the average trade size. Chart 3.1 below shows the
inherent volatility in trade and order count with just one market operator, ASX. It is likely that, over the 18
month duration of the next cost recovery arrangements (1 January 2012 to 30 June 2013), the Government
would over-recover its costs unless the fees were regularly revised.
Chart 3.1: Trade Count and Traded Value on ASX (Common base = 100)
Percentage points
Percentage points
1200
1200
1107
1000
1000
1013
800
600
600
709
377
400
243
397
277
340
124
128
110
108
FY02
FY03
150
135
FY04
336
400
325
193
200
0
FY01
800
832
200
242
172
FY05
FY06
Trade count
(base 100 @ FY01)
FY07
FY08
FY09
FY10
0
FY11
Trade value
(base 100 @ FY01)
Sources: IRESS (Trade type Equity only: pre-FY10 with slight adjustments to reconcile better with aggregate ASX statistics; FY10 &
FY11 no adjustments), Government analysis.
Feedback sought
1.
Do you prefer the proposed proportional fee approach (based on trades and messages) or the first
alternative (proportional fee based on trades only)?
2.
Do you prefer the proposed approach of charging proportionally in arrears to the alternative fixed
fee per trade approach?
3.
Are there any other approaches you would propose in respect of charging for supervising cash
equity market trading activity in an efficient and effective way?
15
Review process
Initial review 18 months after the commencement of the proposed supervision fee model and
cost recovery arrangements
The Government intends to review the proposed cost recovery arrangements within 18 months of
implementation. The review will assess the impacts of the cost recovery arrangements on industry and
Australia’s financial markets more generally, and determine whether any changes or adjustments need to
be made to the approach. Where adjustments are required following the review, a new CRIS that will
commence from 1 July 2013 will be developed with input from industry.
Separately to the proposed cost recovery arrangements, a more general review of ASIC’s overall funding
structure for its activities is being conducted, which may have some impact on the proposed cost recovery
regime, as well as ASIC’s funding arrangements in the future. Should the review result in material changes
to the proposed cost recovery arrangements, an addendum or a new CRIS may be prepared prior to those
changes being introduced.
Regular review framework
The Government also intends to implement a process of regular reviews beyond 2013 to maximise
transparency and accountability around the cost recovery arrangements into the future. It is proposed that
the reviews will be conducted with industry input and participation as appropriate.
Feedback sought
4.
What measures do you think need to be in place to ensure a strong framework of accountability
and transparency?
5.
Do you think an ongoing framework for reviewing the market supervision cost recovery
arrangements is desirable?
6.
Do you think an industry stakeholder committee could usefully form part of the review process?
16
4
ANALYSIS OF ASIC’S REGULATORY ACTIVITIES AND COSTS
4.1 Establishing ASIC's regulatory costs
Costs to be recovered from industry under the proposed cost recovery arrangement
From 1 January 2012 to 30 June 2015, the total estimated cost for ASIC’s market supervision functions and
the implementation of competition is approximately $62.6 million. This is comprised of $28.2 million for
competition and approximately $34.4 million for transfer of supervision (see Table 4.1 below).
For the duration of the cost recovery arrangement that applies from 1 January 2012 to 30 June 2013, the
total cost to be recovered is approximately $29.8 million (see Table 4.2 below). This represents costs to be
recovered of $10.9 million in the second half of FY12 and $18.9 million in FY13.
Table 4.1: Total estimated cost for ASIC’s market supervision functions and the implementation of
competition from 1 January 2012 to 30 June 2015
$million
2nd half FY12
FY13
FY14
FY15
Total
Transfer of supervision
4.74
9.90
9.90
9.90
34.44
Competition
6.16
8.97
6.72
6.31
28.16
Total
10.90
18.87
16.62
16.21
62.60
Note: ASIC's market competition expenditure is expected to be higher during 2nd half FY12 and FY13 due to the higher IT and regulatory
framework development costs associated with implementing the project.
ASIC's expected costs by function and type of cost (for the period from 1 January 2012 to
30 June 2013)
Table 4.2 outlines ASIC's new regulatory functions and the costs associated with carrying out these market
supervision regulatory activities.
17
Table 4.2: Estimated costs for ASIC’s market supervision functions and the implementation of
competition by function (1 January 2012 to 30 June 2013)
1 January 2012
to 30 June 2013
$million
1 January 2012
to 30 June 2013
per c ent
Annualised
c ost
$million
Core func tion
Ke y a c tivitie s
Market supervision
(inc luding real- time
market surveillanc e)
• Supervision of trading ac tivities on domestic
lic ensed financ ial markets
• Undertaking real- time market surveillanc e and
post- trade analysis to detec t market misc onduc t
(inc luding breac hes of MIRs on domestic
lic ensed financ ial markets)
• Undertaking whole- of- market monitoring
(inc luding c ross- market alerts and reports)
• Managing the inc rease in market ac tivity and
c omplexity arising from the entry of Chi- X
and the move to a multi- market environment
6.11
20.5
4.08
Partic ipant
supervision
• Building effec tive regulatory relationships with
market partic ipants, inc luding understanding
partic ipant business models
• Undertaking surveillanc es and targeted themed
c omplianc e reviews on market partic ipants,
inc luding referrals from ASIC c ase management
• Implementing and monitoring required remediation
for partic ipants and their representatives
• Assessing, rec ording and managing the expiry
of waivers, ac c reditations and c ertific ations
issued to market partic ipants and their
representatives
• Monitoring c omplianc e with MIRs (for example
best exec ution)
• Monitoring possible new forms of market
misc onduc t arising from the introduc tion of
c ompetition
• Monitoring partic ipant c omplianc e with ongoing
c apital requirements
3.87
13.0
2.58
Regulatory Framework
framework (MIRs) &
market struc ture
analysis
• Developing and implementing ASIC's MIRs,
inc luding a regulatory framework to apply
on the entry of Chi- X
• Harmonizing MIRs ac ross markets
• Undertaking ongoing review and analysis of the
market mic ro and mac ro struc ture and the
regulatory framework to respond to new issues
and market developments
5.13
17.2
3.42
• Conduc ting advanc ed surveillanc es,
investigation and enforc ement based on
referrals relating to breac hes of MIRs and the
Corporations Ac t from the market supervision
team, inc luding:
– preparing and serving draft and final
statement of reasons to market partic ipants
– negotiating appropriate outc omes with market
partic ipants for prompt settlement of matters,
inc luding infringement notic es and/or
enforc eable undertakings
– appearing, where nec essary, before the MDP
• Investigating and taking enforc ement ac tions
against new forms of market misc onduc t
3.74
12.6
2.49
(inc ludes projec t
management and
governanc e)
Investigations and
enforc ement
18
Table 4.2: Estimated costs for ASIC’s market supervision functions and the implementation of
competition by function (1 January 2012 to 30 June 2013) (continued)
Core function
Key activities
Markets Disciplinary
Panel (MDP)
• The MDP functions as an independent peer
review body. Its members largely comprise
people w ho currently hold senior roles in the
markets
• The MDP is responsible for:
1 January 2012
to 30 June 2013
1 January 2012
to 30 June 2013
Annualised
c ost
$million
per cent
$million
1.64
5.5
1.10
– hearing and determining alleged breaches of
the ASIC MIRs
– exercising ASIC's pow ers to issue
infringement notices and accept enforceable
undertakings relating to breaches of the MIRs
– making its decisions, as far as practicable,
independently of ASIC
IT
• Upgrading the capability of ASIC's IMSS to
handle multi-market and w hole-of-market
surveillance and supervision
• Connecting the Chi-X market to ASIC's IMSS
• Project management and governance to deliver
IT projects relating to market competition
7.10
23.9
4.74
ASIC shared services
• Indirect costs
2.17
100.0
7.3
19.85
1.44
29.77
100.0
19.85
Total
Table 4.3: Cost components of ASIC's market supervision functions
1 January 2012
30 June 2013
$million
2.64
0.56
2.91
6.11
1 January 2012
30 June 2013 Annualised cost
per cent (a)
$million
8.9
1.76
1.9
0.37
9.8
1.94
20.5
4.08
Core function
Market supervision
(incl. real-time
market surveillance)
Cost allocation
Employees
Goods & Suppliers
IT costs
Total
Allocation
per cent (a)
43.3
9.2
47.5
100.0
Participant supervision
Employees
Goods & Suppliers
Total
94.4
5.6
100.0
3.65
0.22
3.87
12.3
0.7
13.0
2.43
0.15
2.58
Regulatory framew ork
(MIRs) & market
structure analysis
Employees
Goods & Suppliers
Deferred project
implementation costs
Total
33.0
26.8
1.69
1.38
5.7
4.6
1.13
0.92
40.2
100.0
2.06
5.13
6.9
17.2
1.38
3.42
Investigations and
enforcement
Employees
Goods & Suppliers
Total
76.9
23.1
100.0
2.87
0.86
3.74
9.7
2.9
12.6
1.92
0.58
2.49
Markets disciplinary
panel (MDP)
Employees
Goods & Suppliers
Total
32.2
67.8
100.0
0.53
1.11
1.64
1.8
3.7
5.5
0.35
0.74
1.10
Employees
IT costs
Deferred project
implementation costs
Total
2.5
62.4
0.18
4.43
0.6
14.9
0.12
2.95
35.1
100.0
2.49
7.10
8.4
23.9
1.66
4.74
Indirect costs
Total
100.0
100.0
2.17
2.17
7.3
7.3
1.44
1.44
Total
29.77
100.0
(a) Note that the allocation percentages refer to percentage of each core function and then percentage of the total.
19.85
IT
ASIC shared services
19
4.2 Market supervision costs relating to specific market segments
A. Cash equities markets (for ASX listed securities)
ASX and Chi-X are the only two markets that are currently expected to be in operation within this segment.
Chi-X is working to commence operations in late 2011 (subject to Chi-X meeting its licence pre-conditions
and the operator's readiness, the earliest Chi-X can commence operations is 31 October 2011).
For the period from 1 January 2012 to 30 June 2013, ASIC's total supervisory cost for the cash equities
markets (for ASX listed securities), including the cost of implementing the Government's policy to introduce
competition in trading services, is $26.6 million.
Fixed costs relating to specific market operators
As outlined in the CRIS for 1 July 2011 to 31 December 2011, ASIC will incur costs to connect markets that
require real-time surveillance and supervision to its IMSS. Currently, ASX is the only market that is
connected to ASIC's IMSS.
Chi-X
ASIC will incur specific costs for setting up real-time surveillance of the Chi-X market, including:
•
FIX15 environment software configuration for Chi-X;
•
the integration of Chi-X to ASIC's IMSS to ensure the IMSS has a feed of trading data, the data is
properly sequenced with the data from the other markets, and data from Chi-X is utilised as
appropriate in trade alerts and reports; and
•
consequential changes to ASIC's other systems (for example, data warehouse changes).
The total cost for undertaking the activities above for Chi-X is estimated at approximately $286,000. It is
noted that larger or more complex markets may incur a higher IMSS configuration fee to reflect their size or
complexity. ASIC’s surveillance system supplier advises us that the monthly network connection charge for
Chi-X will be between $5,000 and $10,000. This covers fully redundant lines to the IMSS primary site and to
the secondary site and is a cost passed on to ASIC by its IMSS system provider. This cost will vary depending
on a market's expected number of messages per day.
ASX
ASIC will also incur specific costs for setting up real-time surveillance for ASX PureMatch. The total cost for
connecting ASX PureMatch is estimated at approximately $182,000. The cost for connecting ASIC's IMSS to
ASX PureMatch is lower compared to the cost for the Chi-X market as ASIC's systems already have
connections to ASX's other markets in place since the initial transfer of market supervision on
1 August 2010. The monthly network connection charge for ASX is estimated to be between $5,000 and
$10,000.16
Key drivers of ASIC’s cash equities market supervision costs
A review of ASIC’s core market supervision regulatory functions and activities to determine their cost
drivers indicate that:
15 The Financial Information eXchange (‘FIX’) Protocol is a series of messaging specifications for the electronic communication of
trade-related messages.
16 This is based on ASIC’s surveillance system supplier estimate.
20
•
the number of trades is the primary driver of ASIC's costs — with the exception of its IT costs — as
the resources required to perform its market supervision activities are mainly driven (either directly
or indirectly) by the number of trades undertaken on the market; and
•
the number of messages is the primary driver of ASIC's IT costs.17 Based on the experience of other
markets, significant evolution in trading activity is expected following the introduction of market
competition in Australia that will result in a significant increase in the message to trade ratio.
Table 4.4: Key drivers of ASIC’s cash equities market supervision costs
Core function
Cost drivers
Market supervision (incl. real-time market surveillance)
Non-IT costs: Number of trades
IT costs: number of messages (incl. trades and messages)
Participant supervision
Resources expended impacted by number of trades
Investigations and enforcements
Number of cases reviewed (triggered by trades, influenced by messages)
Markets Disciplinary Panel
Number of cases reviewed (triggered by trades, influenced by messages)
Other
To be allocated based on number of trades
ASIC has made significant investments in its real-time market surveillance IT infrastructure and capacity.
One of the key considerations for ASIC's surveillance IT infrastructure is the flexibility and scalability of the
IMSS to handle additional volumes, new reports and additional users.
Experience in overseas markets has shown that following the introduction of competition the ratio of
messages to trades increases substantially. Chart 4.1 shows the scale of change that might reasonably be
expected to occur in our market. It shows an over four-fold increase in ASX's order to trade ratio can be
expected if it were to exhibit similar characteristics as the Toronto Stock Exchange (TSX) in Canada (an
increase from 7:1 to 28:1), and the likely order to trade ratio for the new market entrant, Chi-X (that is, it
may experience over 100 messages to every executed trade).
17 On 30 November 2010, IIROC published for public comment a proposed market regulation fee model (IIROC Notice 10-0316)
and recommended a market regulation fee model that is based on both the number of messages and number of trades. IIROC
noted that the total number of messages processed by its surveillance system is the key driver of the costs of the surveillance IT
system.
21
Chart 4.1: Comparative Message Rates (per trade per destination) — Canada v Australia, February to
April 201118
160
160
140
140
120
120
100
100
80
80
60
60
40
40
20
20
0
0
Canada - TSX
Canada - Chi-X
Canada - Alpha
21 April 2011
Canada - Pure
Australia - ASX
As a comparison, the Canadian markets had an increase in messages from an average of 10 million per day
in 2006 to an average of more than 180 million per day in 2010, with an intraday peak of more than
330 million. With projections of potential peak daily volumes of 725 million in 2011, IIROC is currently
planning an upgrade to its market surveillance system to handle up to 1 billion messages per day.19
Even with current market conditions being more subdued than those of 2010, recent Canadian experience
nonetheless illustrates that managing trading and trade surveillance systems' capacity will be a key
challenge for the industry in the future. This is especially the case in periods of high volatility such as has
been seen most recently in early August 2011.
B. Small financial markets and futures markets
At this stage, it is proposed to charge these markets on a fixed quarterly fee basis at the market operator
level. As such, these markets will not be included in the activity-based approach proposed for cash equities
markets (for ASX listed securities). For relevant details, refer to Section 8 for small financial markets and
Section 9 for futures market.
C. Potential future scenarios that may impact ASIC's market supervision costs
As noted in Section 1, where further enhancements to ASIC’s supervisory capabilities are considered
necessary to meet market and technology developments and these enhancements cannot be met within
the existing market supervision funding appropriations outlined in this paper, application for additional
Government funding through the discipline of the budget process will be required.
18 Note: Research by ASIC shows that the alternative operators in Canada have been in operation on average less than three
years. Pure Trading launched in September 2007, followed by Chi-X Canada in February 2008 and Alpha Trading in November
2008. Chart 4.1 was developed based on information from the IRESS full year results presentation (dated 24 February 2011).
The presentation is available from the following address: http://www.iress.com.au/news_category.aspx?view=48
19 ‘IIROC's Regulatory Agenda for Canadian Equity Marketplaces’, speech by Susan Wolburgh Jenah, Trade Tech Canada
Conference, December 7, 2010.
22
Examples of costs that are not currently contemplated by ASIC's transfer of supervision and market
competition funding appropriations may include:
•
Extended trading hours.
–
•
New platforms, products or order types (introduced by existing market operators, including Chi-X).
–
•
ASIC may need to incur costs for: the connection to a new platform (an example of such a
platform is ASX PureMatch); additional IMSS capacity for the expected increase in the number
of trades and messages; new IMSS alerts and reports; changes to processes; and additional
staff to manage the expected increase in the number of trades and messages.
New product or order types — changes to operating rules.
–
•
ASIC may incur additional IT and non-IT costs to accommodate the increase in trading volumes,
as well as to ensure that sufficient IT and non-IT staff are available during the extended trading
hours.
Additional resources may be required to provide advice on the potential supervisory
implications associated with the introduction of a new product or order type into the
Australian market place. Prior to the transfer of supervision the work was carried out by ASX's
supervision unit.
Enhancements to ASIC's surveillance capacity and supervision capabilities to respond to market and
technology developments.
–
ASIC may need to incur additional supervisory costs to enhance its market surveillance and
supervision capacity and technology to respond to the evolution in trading activity and to keep
pace with technological developments. It is noted that some of the securities regulators of
other sophisticated markets (for example US, Germany and Canada) are currently in the
process of implementing initiatives such as cross-product monitoring and post-trade analysis
(for example pattern recognition) to detect market abuse.20
The proposed approach for the recovery of the future costs above is outlined in Section 5.
20 IOSCO's consultation report, titled Regulatory issues Raised by the Impact of Technological Changes on Market Integrity and
Efficiency, (IOSCO, July 2011, p.28) stated that: ‘The submission of large numbers of orders and trades across multiple venues
poses significant challenges to market authorities. Many trading strategies used by HFT participants are so sophisticated that
they raise an issue as to whether market authorities have the necessary resources to conduct effective market surveillance. It is
necessary that market authorities’ market surveillance capabilities keep pace with HFT, in terms of both technological
infrastructure and market knowledge, in order to maintain a high degree of investor protection in a speed and fragmented
trading environment.’
23
PART B: COST RECOVERY FOR SUPERVISION OF CASH EQUITIES MARKETS (ASX
LISTED SECURITIES)
5
THE PROPOSED APPROACH FOR CALCULATING THE PROPORTIONAL FEES APPLYING TO
MARKET OPERATORS AND MARKET PARTICIPANTS
This section outlines the proposed approach for calculating the proportional fees applying to market
operators and market participants trading in ASX-listed securities. Working illustrations of the proposed
approach are provided in Section 6: Illustration of fee proposals on operators and participants (cash
equities markets)
5.1 Allocation of costs between market operators and market participants
It is proposed that market supervision costs be allocated between market operators and market
participants by reference to categories of ASIC's market supervision functions as follows:
A. Costs relating to market participants only
Costs relating to the following functions:
•
Participant supervision;
•
Investigations and enforcement; and
•
Markets disciplinary panel
will be recovered from market
participants only as the functions relate to
the regulation of market participants'
activities.
B. Allocation of ‘shared’ costs between market operators and market participants
Costs relating to the following functions:
•
Market supervision;
•
Regulatory framework; and
•
Market structure and analysis
will be recovered from both market
operators and market participants as the
functions relate to the regulation of
activities undertaken by both groups.
It is proposed to allocate these costs using
an industry revenue proxy, as summarised
in Table 5.1.
24
Similarly, cost relating to the implementation of market competition:
•
IT implementation costs; and
•
Regulatory framework implementation
costs
will also be recovered from market
operators and market participants.
It is proposed to allocate these costs in
equal proportion (that is 50:50) given that
the activities of both groups drive the
costs for the supervision of competing
markets.
Table 5.1: Cash equity market revenue — Market operators relative to market participants(a), (b)
Cash Market Revenue
(based on CY2010 data)
Market operators
$m
368.2
%
15
Com m ent
This includes cash market revenue, listings revenue, a proportion of information
services revenue, and market connectivity revenue.
Listings revenue and other cash market related revenue have
been included in the calculation of market operators' total revenue
to ensure that it is an appropriate comparable to the revenue
figure being used for market participants (i.e. it includes other revenue
streams in addition to trade execution fees).
Market participants
2,093.8
85
This figure includes brokerage for cash market products only cash equities, debt and w arrants
Total
2,462.0 100
(a) ASX's 2011 Half Year Report (period ending 31 Dec 2010): page 16 states: ‘In the first half of 2011, approximately 84 per cent of
information services revenue related to cash market and equity option data’.
(b) 84 per cent of ASX's market connectivity revenue was applied to the cash market — this is consistent with consistent with the
proportional split applied to the information services revenue.
The cost allocation method proposed above is an indication of the approach the Government may take. A
final policy on this will take into account feedback on the proposed approach for the allocation of costs
between market operators and market participants.
C. Overall impact on market operators and market participants after cost allocations by
function
Tables 5.2 and 5.3 below illustrate the overall impact of the functional cost allocations and proposed
allocation of ‘shared’ costs on market operators and market participants as discussed above.
Table 5.2: Allocation of costs between market operators and market participants — summary
(1 January 2012 to 30 June 2013)
Group
1 January 2012 to
1 January 2012 to
30 June 2013
30 June 2013
Annualised cost
$million
per cent
$million
Market operators
4.33
16.3
2.89
Market participants
22.27
83.7
14.85
Total
26.60
100.0
17.73
Note: The total cost reflected in this table is net of the estimated cost of supervising the small financial markets, the ASX 24 market and
the IMSS configuration fees for Chi-X and ASX PureMatch (that is $3.2 million).
25
Table 5.3: Allocation of costs between market operators and participants by
function
Table 5.3: Cost components of ASIC's market supervision functions
1 January 2012
30 June 2013
$million
0.77
4.36
5.13
1 January 2012
30 June 2013
per cent
2.9
16.4
19.3
Annualised
cost
$million
0.51
2.91
3.42
Core function
Market supervision(a)
(incl. real-time
market surveillance)
Cost allocation
Market operators
Market participants
Total
Allocation
per cent
15.0
85.0
100.0
Participant supervision
Market operators
Market participants
Total
0.0
100.0
100.0
0.00
3.30
3.30
0.0
12.4
12.4
0.00
2.20
2.20
Regulatory framework
(MIRs) & market
structure analysis
Market operators
Market participants
Total
29.2
70.8
100.0
1.42
3.45
4.87
5.4
13.0
18.3
0.95
2.30
3.25
Investigations and
enforcement
Market operators
Market participants
0.0
100.0
0.00
3.15
0.0
11.8
0.00
2.10
Total
100.0
3.15
11.8
2.10
Markets disciplinary
panel (MDP)
Market operators
Market participants
Total
0.0
100.0
100.0
0.00
1.47
1.47
0.0
5.5
5.5
0.00
0.98
0.98
IT costs (incl. deferred IT
implementation costs and
ongoing IT management costs)
Market operators
Market participants
Total
27.3
72.7
100.0
1.86
4.95
6.81
7.0
18.6
25.6
1.24
3.30
4.54
Market operators
Market participants
Total
Market operators
Market participants
15.0
85.0
100.0
16.3
83.7
0.28
1.60
1.88
4.33
22.27
1.1
6.0
7.1
16.3
83.7
0.19
1.06
1.25
2.89
14.85
ASIC shared services
Total
Total
Total
All
100.0
26.60
100.0
17.73
(a) This includes the ongoing costs of the ASIC IMSS.
Note: The total cost reflected in this table is net of the estimated cost of supervising the small financial markets, the ASX 24 market and
the IMSS configuration fees for Chi-X and ASX PureMatch (that is $3.2 million).
Feedback sought
7.
Do you agree with the proposed approach for the allocation of costs between market operators
and market participants? If not, please specify and explain an alternative approach for the
allocation of costs between market operators and market participants.
8.
Do you agree with the proposed revenue based proxy for allocating some of the shared costs
between market operators and market participants? Do you agree with the inclusion of listing and
other revenue in the allocation of shared costs to market operators? If not, please specify and
explain an alternative proxy.
5.2 Allocation of costs to each market operator and participant
A. Proposed approach: Proportional fee based on trade count and message count
It is proposed that each market operator and each market participant be charged a proportional quarterly
fee based on each entity's share of the trade count and message21 count in ASX listed securities during each
21 'Messages' are the total of trades, order entry messages, order amend messages (price and/or volume) and order
deletion/cancellation messages.
26
quarter. Such fees are to be based on the trades and messages received by ASIC's IMSS, and are to be
collected quarterly in arrears.
An activity based approach ensures that the fee paid by each market participant reflects its activity on the
markets and therefore the level of resources required for monitoring its trading activities. Similarly, this
approach ensures that the fee paid by each market operator reflects the level of trading activity on its
markets and therefore the level of resources required for monitoring its markets.
This approach should also provide market participants the ability to assess the impact of the proposed
approach on their business models with a high degree of certainty.
Trade count to apportion non-IT costs
As noted in Section 3.1, trade count is the primary driver of ASIC's cash equities markets supervision costs,
particularly its non-IT costs. As such, it is proposed to apportion ASIC's non-IT market supervision costs
among both market operators and market participants based on the number of trades that are reported to
ASIC's IMSS each quarter (see Section 3.1).
Message count to apportion IT costs
It is proposed to apportion ASIC's total IT costs to each market operator and market participant based on
each entity's share of the message count (for both trades and messages) received by ASIC's IMSS during
each quarter.
The volume of message traffic is the primary driver of ASIC's cash equities market supervision IT costs (see
Section 3.1). For the period from 1 January 2012 to 30 June 2013, the total IT costs that will be allocated
based on ASIC's IMSS message count is $9.0 million (see Table 5.4).
Table 5.4: IT and non-IT costs relating to the cash equities markets (for ASX listed securities)
(1 January 2012 to 30 June 2013)
1 January 2012 to 30 June 2013
1 January 2012 to 30 June 2013
Annualised cost
$million
per cent
$million
IT costs(a)
9.04
34.0
6.03
Non-IT costs
17.56
66.0
11.71
Total
26.60
100.0
17.73
(a) This figure relates to all of ASIC’s cash equities market IT costs (i.e. it includes deferred IT implementation costs, ongoing IT
management costs, and the ongoing costs of the ASIC IMSS).
Feedback sought
9.
Do you consider that the proposed cost recovery arrangements for the cash equities market
supervision costs (for ASX listed securities) provides the most reasonable basis for recovering costs
from each market operator and each market participant? If not, please explain your preferred
alternative.
10.
What impact does the proposed approach have on your business model? Can you provide
examples of how the proposed approach would affect your business in dollar terms?
5.3 Market and technology development fees
A. Fixed costs relating to specific market operators
It is proposed to recover ASIC's costs for connecting its IMSS to Chi-X ($286,000) and ASX's PureMatch
($182,000) directly from each market operator over 18 months from 1 January 2012 to 30 June 2013. In line
27
with the Cost Recovery Guidelines, it is proposed to recover ASIC's implementation/establishment costs
directly from the entity that causes ASIC to incur those additional costs. The ongoing costs would be
recovered from market operators and market participants based on the proposed cost recovery approach
for the cash equities markets.
Feedback sought
11.
Do you have any comments about the approach for recovering fixed costs relating to specific
market operators, including the proposed timeframe for the recovery of the costs?
B. Potential future scenarios that would impact on ASIC's market supervision costs
The Government proposes to recover ASIC's future market supervision costs from both market operators
and market participants, with the implementation costs being recovered directly from the market operator
that initiates such a change and the ongoing costs being shared among market operators and market
participants based on the proposed cash equities market supervision fee model detailed in this paper.
More detail on potential future market supervisions costs is outlined in Section 4.2.
Feedback sought
12.
Do you have any comments about the proposed approach for recovering ASIC's future market
supervision costs?
5.4 Penalties for late payment of fees and failure to pay
Current regime under the Corporations Fees Regulations 2001
Currently, the Fees Regulations prescribe a late payment penalty if fees are not paid on the due day22. The
late payment penalty fee is calculated by multiplying the amount of the fee liability by the yield to maturity
rate (expressed as a percentage) quoted by the Reserve Bank of Australia and applicable on the due day.
22 Under Regulation 9, a late penalty fee applies if a fee prescribed under Regulation 8 of the Fees Regulations, in relation to the
performance by ASIC of its functions under Part 7.2A (Supervision of financial markets) of the Corporations Act, is not paid on
the day on which liability for the fee is incurred (the due day).
28
6
ILLUSTRATION OF FEE PROPOSALS ON OPERATORS AND PARTICIPANTS (CASH EQUITIES
MARKETS)
This section provides working illustrations of how the proposed cost recovery approach would apply for
each market operator and segment of market participants in the cash equities market (ASX listed securities)
under projected market conditions. Working illustrations of the first alternative approach (that is, the
proportional fee based on trade count only) is also shown.
These illustrations have been developed based on a projection of market participants' trade and message
related activity and their level of market operator patronage. These illustrations should therefore be taken
as indicative only. In general, it was assumed that the levels and trends in trade and message related
activity in FY11 will continue until 31 December 2011, and that market participants' behaviour changes in
response to competition from the beginning of the 2012 calendar year.
6.1 Illustration of proposed approach and first alternative
To assist market operators and market participants to compare the two methods for activity-based
charging, Tables 6.1 and 6.2 below are provided to illustrate the approximate fees that they could expect
under the proposed cost recovery approach and the first alternative.
The tables demonstrate that including messages in the calculation will increase the fees payable by market
operators and market participants with more message intensive business models but reduce the fees for
those with less message intensive business models.
As shown in Tables 6.1 and 6.2, if alternative 1, applying cost recovery to trades only, was chosen instead of
the preferred option (based on trades and messages), it is expected that new markets and HFTs in
particular would pay less but this would be made up by the other market operators and participants.
Table 6.1: Proposed approach and alternative 1 — Illustrative example market operator cost recovery (by
market)
Market
Illustrative share of
Illustrative share of
Illustrative quarterly
Illustrative quarterly
trade count end
message count end fee - preferred option
fee - alternative 1
FY 2013
FY 2013 (trade and messages)
(trade only)
per cent(a)
per cent(a)
$
$
ASX (TradeMatch)
65.6
54.3
504,288
524,304
ASX (Purematch)
16.1
22.7
106,594
94,642
Chi-X
18.3
23.0
111,248
103,183
Total
100.0
100.0
722,129
722,129
(a) Note that the table assumes that trade and message percentage will have reached these levels by the end of the cost recovery
period. Earlier in the period the differences between trades and messages are expected to be smaller.
29
Table 6.2: Proposed approach and alternative 1 — Illustrative example market participant (by segment
and assuming 5 per cent share of that segment)(a)
Segment
Illustrative share of
trade count end
FY 2013
per cent(a)
79.2
2.3
Illustrative share of
Illustrative quarterly
message count end fee - preferred option
FY 2013 (trade and messages)
per cent(a)
$(b)
71.7
145,227
0.5
3,625
Illustrative quarterly
fee - alternative 1
(trade only)
$(b)
146,148
4,725
Institutional
Small institutional
Retail - execution only,
no advice
6.8
1.0
10,619
14,518
Retail - full service
3.0
0.3
4,831
6,907
Other (incl w arrants)
1.4
0.7
2,918
3,140
Unclassified (c)
0.3
0.1
625
779
New HFT-style entrants
6.9
25.6
17,735
9,363
Total
100.0
100.0
3,711,619
3,711,619
(a) Note that the table assumes that trade and message percentage will have reached these levels by the end of the cost recovery
period. Earlier in the period the differences between trades and messages are expected to be smaller.
(b) All fee estimates are calculated based on a broker with 5 per cent share of the activity in each segment. The numbers can be
multiplied or divided for higher or lower activity. That is if you have 10 per cent of activity, double the number.
(c) Other types of participants identified in government analysis but not able to be categorised (e.g. ABN Amro Clearing).
Notes: Largest institutional broker includes: Credit Suisse; Nomura; UBS; Macquarie Institutional; Citigroup; Instinet; Deutsche; RBS;
Goldman Sachs; JP Morgan; Morgan Stanley; CBA Equities; ITG; and Merrill Lynch.
Small institutional broker includes: Euroz; Petra Capital; BBY; Foster Stockbroking; BTIG; Moelis Securities; CLSA Singapore;
CLSA; Investec; CCZ Statton; RBC Securities; Intersuisse; Daiwa; Lodge Partners; and Veritas Securities.
6.2 Second alternative approach: Fixed fee per trade
This alternative is a different method for charging rather than a different method for allocating costs. The
allocation of costs between market participants and market operators will be the same as those shown in
Tables 6.1 and 6.2 above, provided there are no unexpected changes in trade and message activity and fees
are adjusted to deal with anticipated increases in trade and message activity.
30
7
IMPACT AND IMPLEMENTATION CONSIDERATIONS OF THE PROPOSED COST RECOVERY FEE
ARRANGEMENTS (ASX LISTED SECURITIES)
Key Points
•
This section illustrates the estimated costs of establishing a framework for market supervision
under competition and compares the impact of the proposed cost recovery with several other
international jurisdictions.
•
It is expected that the additional supervisory fees imposed on industry by the proposedcost
recovery arrangement will be more than offset by the anticipated benefits of competition. A
summary of the potential benefits that may be experienced by industry stakeholder type has been
provided, along with estimates provided by ASIC to illustrate potential cost savings. Industry
feedback on the benefits and impacts discussed in this section is invited.
•
Although the costs of supervision will be recovered from industry, competition is expected to
lower the costs of transacting in Australian cash equity markets. Overall, Australia's
competitiveness and ranking in global cash equity market trading is estimated to improve under
competition.
7.1 Basis Points Impact of supervision costs
To aid in assessing the impact of the proposed cost recovery arrangements a basis point impact of ASIC's
market supervision cost recovery on industry is shown below using several possible turnover growth
scenarios. This allows for international comparisons of similar charges in other jurisdictions. It also
provides an indication of the scale of the costs to be recovered in terms of the industry’s turnover (traded
cash market value).
A conservative assumption of no growth in turnover from 1 July 2011 to 31 December 2011 has been used,
and growth rates ranging from 0 per cent up to 20 per cent per annum are applied thereafter for illustrative
purposes (Table 7.1).
Table 7.1: Impact of ASIC’s market supervision costs relative to projections of industry turnover
$million
Transfer of supervision
Competition
Total
2nd half FY12
4.74
6.16
10.90
FY2011 turnover(a)
Impact assuming grow th rate p.a.
(in bp per side)(b)
1,373.4
0%
5%
10%
15%
20%
(a) Source: IRESS; trade type equity only. Downloaded 6 July 2011.
(b) Growth in FY12 only applied for 1H2012.
31
0.0794
0.0775
0.0757
0.0740
0.0725
FY13
9.90
8.97
18.87
FY14
9.90
6.72
16.62
FY15
9.90
6.31
16.21
0.0687
0.0638
0.0595
0.0557
0.0523
0.0605
0.0536
0.0477
0.0427
0.0384
0.0590
0.0498
0.0423
0.0362
0.0312
International comparisons — Canada (IIROC)
In FY2010, IIROC charged both market operators and participants a total of CAD $23.1 million23
(approximately AUD $25.6 million at the time24) for the type of supervision encompassed by market
supervision and competition. This represents a 0.125 bp25 charge to the Canadian industry in terms of
overall traded value that, when applied per side of trade, is equivalent to 0.0625 bp.
However, IIROC's investments in advanced surveillance technology are made from a 'restricted fund' and
are not subject to full industry cost recovery. As such, the proposed implementation and ongoing costs are
in line with those in Canada.
International comparisons — USA (FINRA)
The Government obtained the revenue FINRA receives for services comparable to the market supervision
cost recovery arrangements from FINRA's 2009 and 2010 annual reports — FINRA's revenue streams of
‘regulatory fee revenue’, ‘contract services revenue’ and ‘activity assessment’.
Although this is not exactly comparable to the regulatory services provided by ASIC that are subject to cost
recovery, this is considered the best proxy for this jurisdiction. These FINRA costs to industry were
compared with aggregate turnover data sourced from the SEC, adjusted for 2010 FINRA industry coverage
(see Table 7.2).
Table 7.2: Key FINRA revenue(a), (b), (c)
$US million
Regulatory fee revenue
Contract services revenue
Activity assessment
Comparable' revenue (A)
CY2010
428.60
111.10
295.20
834.90
CY2009
387.90
57.10
341.40
786.40
CY2008
453.40
72.00
154.80
680.20
CY2007
345.00
62.70
281.60
689.30
Im pact of (A) (bp per side)
0.0815
0.0821
0.0518
0.0651
(a) FINRA 2009 Annual Report (p. 3-7, 30) and 2010 Annual Report (p. 3-14). Government analysis performed on 19 May 2011;
updated on 20 July 2011.
(b) ‘Comparable’ revenue is not exactly comparable to the services provided for ASIC fee recovery, but this is the closest data available
for this jurisdiction.
(c) Denominator = 80 per cent of aggregate dollar amount of sales published by the SEC at http://www.sec.gov/rules/other/2011/
34-64373.pdf. 80 per cent adjustment applied as FINRA stated on p.3 of their 2010 Annual Report that they are ‘responsible for
surveillance, investigation and enforcement of more than 80 per cent of U.S. equity trading’. 80 per cent adjustment applied to prior
years, although this may not be the appropriate adjustment to apply in those years.
This analysis does not, however, include all market regulation costs imposed on the industry in the US. For
example, the SEC also levies investors for regulation via brokers.
More details about comparable jurisdictions can be found in the Appendix.
7.2 Estimated industry benefits
Since the introduction of competition in different overseas jurisdictions, new entrant platforms have
directly competed with traditional stock exchanges for customer order flow. As a result, trading costs have
reduced significantly.
23 IIROC 2009-10 Annual Report.
24 Using an exchange rate AUDCAD of 0.9.
25 IIROC 2009-10 Annual Report; Note that IIROC conducts similar but not exactly the same market supervision functions as ASIC.
32
This reduction has largely reflected cuts in fees and commissions charged by trading venues from brokers
and traders, as platforms vie for market share. However, a number of jurisdictions have also seen
improvements in liquidity, and the consequent reduction in market-related trading costs such as bid-ask
spreads and market impact.26 Usually, jurisdictions where competition has been introduced have more
efficient markets than those in which the principal exchange still operates as a monopoly.
Experience shows that competition also fosters innovation and promotes the use of new and more efficient
technologies and business strategies. The benefits of competition can broadly be characterised as:
(a)
reduction in exchange and brokerage fees;
(b)
improved market efficiency including the narrowing of bid-ask spreads; and
(c)
greater innovation.
This section estimates only two of the potential benefits that could accrue to stakeholders as competition
among exchange platforms is introduced in Australia. It is expected that market competition will benefit
markets through two main channels: reductions in exchange fees and narrowing of bid-ask spreads.27
The impacts proposed in this section are based on estimates provided by ASIC. These figures should be
taken as illustrations to inform further discussion. They should not be taken as forecasts. At the end of this
section, industry input on the potential benefits and costs of competition for their business and their
investors is invited. The Government also seeks industry views on the impact on the Australian financial
sector as a whole of the opening up of the market for competition.
‘No growth’ hypothetical scenario
The most conservative scenario in which competition could play out assumes zero growth in cash equity
market turnover from current levels all the way to FY2015. This assumption gives rise to cost savings of
$100.9 million due to the reduction in exchange fees and around $166.8 million reflecting a narrowing of
bid-ask spreads.
‘High growth’ hypothetical scenario28
Alternatively, if strong growth in market turnover (of around 20 per cent per year) is assumed, the benefits
from lower exchange fees would accrue to $146.5 million over FY2011 to FY2015 and $242.3 million due to
narrower bid-ask spreads.
26 Bid-ask spreads are the difference between the highest available bid (buy) and the lowest available ask (offer to sell) at any
specific time in the market. Traders willing to transact immediately (and therefore willing to ‘cross the spread’) will incur a cost
equal to the prevailing bid-ask spread in order to access immediate liquidity. Market impact is the adverse price movement that
a trader experiences as his or her large order is executed. Large buy (sell) orders would push prices higher (lower) as they are
implemented, resulting in a higher (lower) average executed price than the trader might have initially intended. Markets with
higher liquidity (turnover and depth of book at appropriate prices) tend to operate with lower spreads and market impact.
27 In some jurisdictions where competition has been introduced, there has been some reduction in brokerage commissions. In
Australia, market participants already operate in a competitive framework. Because of this, the brokerage commission cuts in
response to competition among operators have not been estimated.
28 Australian cash equity market turnover was broadly flat from FY2010 to FY2011, but it grew by over 20 per cent per year from
FY2001 to FY2008. These figures suggest that our growth scenarios are plausible.
33
How to interpret the scenarios
Importantly, the benefit due to exchange fee reductions over FY2011 to FY2015 (between $100.9 million
under ‘no growth,’ and $146.5 million under ‘high growth’) has already began to materialise. The ASX last
year reduced exchange fees and this has already benefited markets by $23 million dollars in FY2011 alone.
It is generally accepted that this was in response to the threat of competition,
The predictions that competition would give rise to cost savings have already begun to be realised.
Competition (or the threat of it) may already have had some preliminary impact in reducing bid-ask
spreads. However, it is likely that these effects will be more evident after a few years of fully competitive
market operation. This has been the experience in jurisdictions that have adopted competition and has
been corroborated in the academic literature.
Apportioning the benefits to stakeholder groups
The total ‘no growth’ scenario benefits will affect stakeholders in different ways. For instance, participants
may choose to absorb the reduction in exchange fees in full. In this hypothetical scenario, market operators
would see a ‘cost’ of $100.9 million (representing the end of the monopoly rent receipts) and participants
would see a benefit of equal size. In turn, investors would see a benefit of $166.8 million in the form of
lower bid-ask spreads. To the extent that a large number of participants also trade in principal accounts,
they too would enjoy the benefits of narrower spreads. It is also possible that if competitive pressures
among participants intensify, some participants could transfer a fraction of the exchange cost cuts to
investors.
In most markets where it has been introduced, competition has also led to higher turnover. If this takes
place in Australia, operators and participants could reap additional receipts for increased volume.
Competition has also been associated overseas with a push for greater technological progress (leading to
productivity gains), that benefit all market stakeholders and the broader economy in the long term. The net
benefit by type of stakeholder is summarised in Table 7.3.
34
Table 7.3: Potential benefits by stakeholder type
Market
operators
Market
participants
Investors
Issuers
Gain
Lose
· Increased turnover as investors · Per trade fee reductions
respond to low er costs of trading. (loss of the capacity to earn
Vertical integration also means
monopoly rents).
that some operators could benefit
from higher turnover through their · Have to invest in research and
listing and clearing facilities.
development to accommodate
· Increased turnover as investors
for accelerated pace of
and participants respond to an
technological innovation
accelerated pace of technological
(e.g. low latency and coand business innovation (such as
location facilities).
low latency trading, maker-taker
pricing etc).
Net im pact
· Might be positive if the increase
in the number of trades times the
reduced fees per trade exceeds
the revenue foregone by the
reduction in unit prices and
remunerates R&D outlays or if
innovation drives cuts in
operational expenses
· Low er exchange fees.
· Have to invest in research and
· Greater choices of execution
development to accommodate
venues. Ability to choose venue
for accelerated pace of
according to business model,
innovation (e.g. high frequency
prioritising w hat is more
trading capabilities).
important (pricing, latency, cost
of trading, market-making
incentives etc).
· Increased turnover as investors
respond to low er costs of trading.
· Increased turnover as investors
respond to new technologies
(such as low latency trading).
· Principal trading w ill become
cheaper, as market impact
(including spreads) costs decline.
· New cross-platform arbitrage
opportunities for principal traders.
· Very likely to be positive and
large as monopoly exchange
fees have been historically high.
Brokerage sector in Australia
already operates competitively.
Adjustments to accelerated pace
of innovation likely to be ‘sunk’
costs. Some technological
solutions and new trading
strategies could be imported
from US and European
subsidiaries, or bought ‘off-theshelf’ from specialised firms.
· Low er market impact (including
· It is possible that some trade
· Very likely to be positive and
spreads) costs.
fragmentation across exchange
large in net terms.
· Greater choice of execution
platforms could increase
venues.
volatility and negate some of
· Scope for HFTs and the possibility the impact of deeper markets.
of arbitraging across platforms.
· Higher liquidity in secondary
· It is possible that some trade
· Very likely to be positive and
markets may increase the
fragmentation across exchange
large in net terms.
attractiveness of primary and
platforms could increase
secondary issuance. It is possible volatility and negate some of
that IPO and secondary raisings
the impact of deeper markets.
discounts and brokerage/
underw riting costs could fall.
Estimating the benefits of competition
The estimation of the benefits of competition is by necessity imprecise. This section proposes a
methodology for such an exercise and suggests some numbers for the benefits resulting from competition.
These numbers should be taken as generic guidelines to inform further discussion and refining, not as
forecasts.
In this exercise, it is assumed that the benefits of competition will arise from two main factors:
(i)
a reduction in exchange fees in preparation for competition (this reduction has already been
announced by ASX in July 2010); and
(ii)
narrowing of bid-ask spreads, as a result of increased turnover and depth of book at appropriate
prices.
35
A third possibility is that stakeholders could also benefit from a decline in market impact costs.29 However,
these potential cost savings have not been estimated, given that they are highly dependent on the
quantum and the characteristics of the projected increase in liquidity (that is, how much the depth of the
order book would grow, and how close to the midpoint of the spread would the prices be at which
additional orders would be placed). In addition, bid-ask spreads are a component of market impact costs.
Because of this, the simulation of a reduction in spreads can be seen as a minimum value for the estimation
of the benefits of reduced market impact costs.
Competition is also expected to promote innovation and advancements in trading technology in the market
more generally. Similarly, the more substantial potential benefits of innovation have not been estimated in
the analysis below.
It is assumed that there will be no further reductions in exchange fees other than what was announced by
ASX in June 2010. Should any further reductions take place (for instance, via maker-taker pricing or other
models) the actual benefits of competition could be higher than estimated.
Exchange fees
In June 2010, the ASX reduced its fees for headline trades30 (those in the central limit order book) from
0.28 bp to 0.15 bp (a reduction of 0.13 bp per side); for on-order book crossings from 0.15 bp to 0.1 bp (a
reduction of 0.05 bp per side); and for off-order book crossings from 0.075 bp to 0.05 bp (a reduction of
0.025 bp per side).
These reductions take place per trade side (that is, on the buy side and on the sell side). As such, the total
reductions per trade are doubled to 0.26 bp for headline trades, 0.1 bp for on-order book crossings and
0.05 bp for off-order book crossings. As a result, the total estimated benefit from FY2011 to FY2015 is
$88.8 million for headline trades, $7.5 million for on-order book trades and $4.6 million for off-order book
trades — assuming no growth in turnover. This equates to $100.9 million over the period from FY2011 to
FY2015 (Table 7.4).
29 Market impact is defined as the adverse price dislocation from the desired price that takes place as large orders are
implemented. Market impact costs tend to be higher when spreads are wide; the depth of the book is small or when book
orders are placed at prices substantially far from the midpoint of the spread.
30 ASX fees and activity rebates, ASX, 3 June 2010. Excludes auctions and capped trades.
36
Table 7.4: Potential benefits from reductions in exchange fees, accruing over 5 years from FY2011 to
FY2015, assumes zero growth in turnover from FY2011
FY2011
20,247
FY2012
18,922
FY2013
17,685
FY2014
16,528
FY2015
15,446
0.147
0.138
0.129
0.12
0.112
Headline
$’000
(FY2011 dollars)
Bp (tw o-sided)
(of FY2011 turnover)
On-order
book
crossings
$’000
(FY2011 dollars)
Bp (tw o-sided)
(of FY2011 turnover)
1,703
1,592
1,488
1,390
1,299
0.012
0.012
0.011
0.01
0.009
Off-order
book
crossings
$’000
(FY2011 dollars)
Bp (tw o-sided)
(of FY2011 turnover)
1,044
976
912
852
796
0.008
0.007
0.007
0.006
0.006
Total
88,828
7,472
4,579
$’000
22,994
21,490
20,084
18,770
17,542
100,879
(FY2011 dollars)
Bp (tw o-sided)
0.167
0.156
0.146
0.137
0.128
(of FY2011 turnover)
Explanatory notes: uses a turnover of $1,373 billion for FY2011 (single-sided); cost reductions of 0.26 bp for headline trades (that
account for 56.7 per cent of turnover, excluding open auction, close auction and capped trades, according to the ASX ‘Australia Cash
Equity Markets, March 2010), 0.1 bp for on-order book crossings (that account for 12.4 per cent of turnover) and 0.05 bp for off-order
book crossings (that account for 15.2 per cent of turnover); assumes a discount factor of 7 per cent per year, as prescribed by the
Australian Government Best Practice Regulation Handbook of June 2010, paragraph E35.
Source: ASIC analysis.
Total
Using the same approach as in Table 7.4, but assuming turnover growth, it is estimated that the benefits of
the reduction in exchange fees could reach $146.5 million if turnover grows by 20 per cent per year from
FY2011 to FY2015 (Table 7.5).
Table 7.5: Potential benefits from reductions in exchange fees, added across FY2011 to FY2015,
hypothetical turnover growth scenarios
Headline
$’000
(FY2011 dollars)
No grow th
88,828
5% pa
97,521
10% pa
107,073
15% pa
117,548
20% pa
129,009
25% pa
141,523
On-order
book
crossings
$’000
(FY2011 dollars)
7,472
8,203
9,006
9,887
10,851
11,904
Off-order
book
crossings
$’000
(FY2011 dollars)
4,579
5,028
5,520
6,060
6,651
7,296
$’000
(FY2011 dollars)
100,879
110,751
121,600
133,495
146,511
160,723
Total
Explanatory notes: uses a turnover of $1,373 billion for FY2011 (single sided); cost reductions of 0.26 bp for headline trades (that
account for 56.7 per cent of turnover, excluding open auction, close auction and capped trades, according to the ASX ‘Australia Cash
Equity Markets, March 2010), 0.1 bp for on-order book crossings (that account for 12.4 per cent of turnover) and 0.05 bp for off-order
book crossings (that account for 15.2 per cent of turnover); assumes a discount factor of 7 per cent per year, as prescribed by the
Australian Government Best Practice Regulation Handbook of June 2010, paragraph E35.
Source: ASIC analysis.
Bid-ask spreads
Analysis using 2010 data suggests that almost all of the highest market capitalisation stocks (top 50 stocks
in the S&P/ASX 200) already trade at, or are very close to, the minimum tick size. Because of this, further
reductions in spreads for these stocks are unlikely. The next grouping of stocks — ranking from 51 to 140 —
tend to trade at spreads that are 3 bp wider than the top 50 stocks. The final grouping, from 141 to 200,
trade at spreads that are on average 9.6 bp wider than the top 50 stocks.
37
These spread estimates are used in combination with the experiences in overseas markets to estimate the
potential for reductions in bid-ask spreads in Australian stocks. It is assumed that the increased market
efficiency brought about by competition should reduce the abovementioned spread differences by half.
That is, the ‘51-to-140’ stock grouping that trades at spreads 3 bp above that of large stocks would see a
reduction of 1.5 bp in spreads. The ‘141- to-200’ stock grouping that trades at spreads 9.6 bp above the
largest stocks, would see a reduction in spreads of 4.8 bp. It is assumed that there will be no improvement
for the top 50 stocks or for stocks outside the top 200.31
These assumptions lead to a potential FY2011 to FY2015 cost saving of $166.8 million, assuming zero
growth in turnover (Table 7.6). Assuming 20 per cent growth per year in turnover, potential cost savings
rise to $242.3 million (Table 7.7).
Table 7.6: Potential benefits from reductions in bid-ask spreads, accruing over 5 years from FY2011 to
FY2015, assumes zero growth in turnover from FY2011
Stocks 51
to 140
$’000
(FY2011 dollars)
Bp (tw o-sided)
(of FY2011 turnover)
FY2011
24,070
FY2012
22,496
FY2013
21,024
FY2014
19,649
FY2015
18,363
0.175
0.164
0.153
0.143
0.134
Total
105,602
$’000
13,951
13,038
12,185
11,388
10,643
61,204
(FY2011 dollars)
Bp (tw o-sided)
0.102
0.095
0.089
0.083
0.077
(of FY2011 turnover)
$’000
38,021
35,534
33,209
31,036
29,006
166,806
(FY2011 dollars)
Total
Bp (tw o-sided)
0.280
0.260
0.240
0.230
0.210
(of FY2011 turnover)
Explanatory notes: uses a turnover of $1,373 billion for FY2011 (single-sided); cost reductions of 0.26 bp for headline trades (that
account for 56.7 per cent of turnover, excluding open auction, close auction and capped trades, according to the ASX ‘Australia Cash
Equity Markets, March 2010), 0.1 bp for on-order book crossings (that account for 12.4 per cent of turnover) and 0.05 bp for off-order
book crossings (that account for 15.2 per cent of turnover); assumes a discount factor of 7 per cent per year, as prescribed by the
Australian Government Best Practice Regulation Handbook of June 2010, paragraph E35.
Source: ASIC analysis.
Stocks 141
to 200
Table 7.7: Potential benefits from reductions in bid-ask spreads, added across FY2011 to FY2015,
hypothetical turnover growth scenarios
Stocks 51
to 140
$’000
(FY2011 dollars)
No grow th
105,602
5% pa
115,936
10% pa
127,292
15% pa
139,745
20% pa
153,370
25% pa
168,248
$’000
61,204
67,193
73,775
80,992
88,889
97,512
(FY2011 dollars)
$’000
166,806
183,129
201,068
220,737
242,260
265,760
Total
(FY2011 dollars)
Explanatory notes: uses a turnover of $1,373 billion for FY2011; cost reduction of 1.5 bp on spreads for stocks ranking 51 to 140
(accounting for 11.68 per cent of turnover) and a cost reduction of 4.8 bp on spreads for stocks ranking 141 to 200 (accounting for
around 2.11 per cent of turnover); assumes a discount factor of 7 per cent per year, as prescribed by the Australian Government Best
Practice Regulation Handbook of June 2010, paragraph E35.
Source: ASIC analysis.
Stocks 141
to 200
7.3 Estimate of overall net benefits — Summary table
The table below (Table 7.8) provides a comparison of the costs of supervision in a multi-market
environment and some of the potential benefits of competition from 1 January 2012 to 30 June 2015. This
table reflects the two quantifiable components of potential benefits – benefits resulting from reductions in
31 If Chi-X initially only allows trade on S&P/ASX 200 stocks in its platform, high-frequency traders and other market participants
are likely to be more active in these stocks. It is possible that more stocks could benefit from narrower spreads if Chi-X allows
trading on S&P/ASX 300 stocks. This means that the benefits would likely be greater than what is estimated here.
38
exchange fees and bid-ask spreads.
Table 7.8: Summary of estimated average benefits, costs and net benefits 1 Jan 2012 — 30 Jun 2015
$million
FY2011 turnover
(single- sided)(a) 1,373.4
Impac t assuming(b)
0%
growth rate p.a.
5%
(in bp per side)
10%
15%
20%
Estimated
total benefit
Average
benefits
(bp p.a.)
Estimated
total c osts
Average
c osts
(bp p.a.)
Estimated
total net
benefits
Average
net benefits
(bp p.a.)
178.16
202.93
230.29
260.43
0.1881
0.1927
0.1973
0.2017
62.60
62.60
62.60
62.60
0.0669
0.0612
0.0563
0.0521
115.56
140.33
167.69
197.83
0.1212
0.1316
0.1410
0.1496
293.54
0.2061
62.60
0.0486
230.94
0.1575
(a) Source: IRESS; trade type Equity only. Downloaded 6 July 2011.
(b) Growth in FY12 only applied for H1 2012.
Note: ASX announced exchange fee reductions in July 2010; this table only reflects the benefits from exchange fee reductions that
accrued from 1 January 2012.
Feedback sought
13.
What benefits and costs from competition have you experienced in your business or in those of
your clients? What future benefits and costs from competition do you expect for your business and
for your clients?
14.
Do you have any views on whether the introduction of competition will achieve an improvement in
Australia’s competitiveness and ranking in global cash equity market trading?
39
PART C: COST RECOVERY FOR SUPERVISION OF SMALL FINANCIAL MARKETS
AND FUTURES MARKETS
8
SMALL FINANCIAL MARKETS
The Government proposes to continue to charge the small financial markets (that is NSX, SIM, IMB and
APX) a fixed quarterly fee. As ASIC does not currently undertake real time market surveillance on the small
financial markets the Government considers it more appropriate to continue to recover ASIC's costs for
supervising these markets based on the supervisory effort expended by ASIC in terms of full time
equivalent (FTE) employees.
ASIC's total cost for supervising the small financial markets, as outlined in the market supervision CRIS for
1 July 2011 to 31 December 2011, is currently approximately $150,000 per annum. The supervisory effort
required for the small financial markets is based on the current risk profile and trading activity on the four
markets that comprise the small financial markets segment and ASIC's estimate of the supervisory effort
required to supervise these markets. Apart from employee costs, ASIC will not incur any other costs to
supervise the four markets within the small financial markets segment. For the period from 1 January 2012
to 30 June 2013 ASIC's total supervisory cost for the small financial markets is $225,000; this means that
the proposed fixed quarterly fee for each small financial market is $9,375 per quarter. These fees are to be
collected quarterly in arrears. Participants on small financial markets will not pay any fee under this
proposal.
9
FUTURES MARKETS
It is proposed to extend the existing cost recovery approach for the ASX 24 market for 18 months.32 This
involves the imposition of a fixed quarterly fee on the market operator only — participants in futures
markets will not pay a direct fee to ASIC under this proposal. The extension will provide time to consult on
the principles for the recovery of ASIC’s futures markets costs to ensure that fair and transparent cost
recovery arrangements that appropriately reflect the complex nature of the futures markets are
implemented.
The Government proposes to consult further during the 18 months from 1 January 2012 with a view to
developing activity based cost recovery arrangements that apply to both operators and participants of
futures markets.
New cost recovery arrangements for futures markets are proposed to be implemented from 1 July 2013.
As outlined in the CRIS for 1 July 2011 to 31 December 2011, ASIC's supervisory effort for the ASX 24
market includes seven FTE employees. Apart from employee costs, ASIC will also incur systems/IT costs,
MDP costs, and IT and non-IT overhead expenses to supervise the ASX 24 market. ASIC's total cost for
supervising the ASX 24 market is currently approximately $1.5 million per annum.
32 At this point, the only market within this segment is ASX 24.
40
For the period from 1 January 2012 to 30 June 2013, ASIC's total supervisory cost for the ASX 24 market is
approximately $2.3 million. The proposed fixed quarterly fee for the ASX 24 market for the period from
1 January 2012 to 30 June 2013 is therefore $386,000 per quarter. This fee is to be collected quarterly in
arrears.
The increase in the fixed quarterly fee from $217,000 per quarter during the period from 1 July 2011 to
31 December 2011 reflects the fact that no further contributions from the ASEFF are anticipated to offset
ASIC's costs for supervising the ASX 24 market from 1 January 2012.
Feedback sought
15.
Do you have any comments regarding the proposed 18 month extension to the existing cost
recovery arrangements for the ASX 24 market - that is, the imposition of a fixed quarterly fee on
the market operator only?
16.
Either now or for the future, what in your view are the key principles that should be applied to the
allocation of costs between market operators and market participants for the futures market?
17.
Either now or for the future, what is a reasonable basis for the allocation of supervisory costs
between market operators and market participants (for example contracts traded, open
positions)?
41
PART D: NEXT STEPS AND FEEDBACK
10 NEXT STEPS
10.1 Legislation to support the new market supervision fees
The ASIC supervision cost recovery arrangements will be established by legislative amendments to the
Corporations (Fees) Act 2001 (the Fees Act) and the Fees Regulations.
The Fees Act provides legal authority for the charging of market operators for the performance by ASIC of
its functions under Part 7.2 (supervision of financial markets) of the Corporations Act. Currently, only
market operators are liable to be charged under the Fees Act.
A bill will be introduced to Parliament in the 2011 Spring sittings. The purpose of this amendment is to
enable the direct charging of market participants in addition to market operators under the Fees Act.
Section 6A of the Fees Act states that the Fees Regulations may prescribe a fee for a chargeable matter by
specifying an amount as the fee or by specifying a method for calculating the amount of the fee.
The Fees Regulations will be amended prior to 1 January 2012 in order to incorporate the new methods of
fee calculations under the Government’s market supervision cost recovery arrangements. The current Fees
Regulations will cease to operate at the end of 2011.
Further consultation
Industry comments on this consultation paper will inform the development of the Fees Regulations. An
exposure draft of the Fees Regulations will be released for public comment in the final quarter of 2011.
10.2 Cost recovery impact statement
Under the Australian Government's Cost Recovery Guidelines all agencies with significant cost recovery
arrangements are required to prepare a CRIS. Your comments on this consultation paper will inform the
development of the CRIS.
A CRIS reflecting the final cost recovery arrangements will be published on the ASIC website before the
amendments to the Fees Regulations giving effect to the new cost recovery arrangements come into effect
on 1 January 2012.
While the proposed cost recovery framework contemplates competition in a multi-operator environment,
the proposed cash equity market supervision fee model in this paper is readily adaptable to a single market
operator environment for all or part of a period as fees are allocated based on activity.
42
11 SUMMARY OF FEEDBACK SOUGHT
This consultation paper seeks your views on the proposed market supervision fee model for the cash
equities markets (for ASX listed securities), as well as the proposed cost recovery arrangements more
generally. An index to these questions and the context in which they have been posed is provided below.
Section
Feedback questions
3.1 Overview Of The Market Supervision
1. Do you prefer the proposed proportional fee approach (based on trades and
Fee Model And Cost Recovery
Page
15
messages) or the first alternative (proportional fee based on trades only)?
Arrangements For The Cash Equities
Markets (For ASX Listed Securities)
2. Do you prefer the proposed approach of charging proportionally in arrears to the
15
alternative fixed fee per trade approach?
3. Are there any other approaches you would propose in respect of charging for
15
supervising cash equity market trading activity in an efficient and effective way?
4. What measures do you think need to be in place to ensure a strong framework of
16
accountability and transparency?
5. Do you think an ongoing framework for reviewing the market supervision cost
16
recovery arrangements is desirable?
6. Do you think an industry stakeholder committee could usefully form part of the
16
review process?
5.1 Allocation Of Costs Between Market
Operators And Market Participants
7. Do you agree with the proposed approach for the allocation of costs between
26
market operators and market participants? If not, please specify and explain an
alternative approach for the allocation of costs between market operators and
market participants.
8. Do you agree with the proposed revenue based proxy for allocating some of the
26
shared costs between market operators and market participants? Do you agree
with the inclusion of listing and other revenue in the allocation of shared costs to
market operators? If not, please specify and explain an alternative proxy.
5.2 Allocation Of Costs To Each Market
Operator And Participant
9. Do you consider that the proposed cost recovery arrangements for the cash
27
equities market supervision costs (for ASX listed securities) provides the most
reasonable basis for recovering costs from each market operator and each market
participant? If not, please explain your preferred alternative.
10. What impact does the proposed approach have on your business model? Can you
27
provide examples of how the proposed approach would affect your business in
dollar terms?
5.3 Market / Technology Development
Fees
11. Do you have any comments about the approach for recovering fixed costs relating
28
to specific market operators, including the proposed timeframe for the recovery of
the costs?
12. Do you have any comments about the proposed approach for recovering ASIC's
future market supervision costs?
43
28
7 Impact and implementation
13. What benefits and costs from competition have you experienced in your business
considerations of the proposed cost
or in those of your clients? What future benefits and costs from competition do you
recovery fee arrangements
expect for your business and for your clients?
14. Do you have any views on whether the introduction of competition will achieve an
39
39
improvement in Australia’s competitiveness and ranking in global cash equity
market trading?
9 Futures Markets
15. Do you have any comments regarding the proposed 18 month extension to the
41
existing cost recovery arrangements for the ASX 24 market - that is, the imposition
of a fixed quarterly fee on the market operator only?
16. Either now or for the future, what in your view are the key principles that should be
41
applied to the allocation of costs between market operators and market
participants for the futures market?
17. Either now or for the future, what is a reasonable basis for the allocation of
supervisory costs between market operators and market participants (for example
contracts traded, open positions)?
44
41
REFERENCES
ASIC, Cost Recovery Impact Statement, Supervision of domestic licensed financial markets, 1 July 2011 to
31 December 2011, 2011.
ASIC, Cost Recovery Impact Statement, Supervision of Australia’s Financial Markets, July 2010.
Commonwealth of Australia, Budget Measures 2011-12, Budget Paper No. 2 Part 2: Expense Measures, p.
319, May 2011.
Commonwealth of Australia, Mid-year Economic and Fiscal Outlook 2009-10, Appendix A: Policy decisions
taken since the 2009-10 Budget, p. 216, November 2009.
Corporations (Fees) Regulations 2001.
Department of Finance and Deregulation, Australian Government Cost Recovery Guidelines July 2005,
Financial Management Guidance No. 4, Canberra 2005.
Former Minister for Financial Services, Superannuation and Corporate Law Chris Bowen, ‘Government
Announces Competition in Financial Markets’ media release, 31 March 2010.
FSA, Fees Manual, 2011
IIROC Annual Report 2009-10.
IIROC, IIROC’s Regulatory Agenda for Canadian Equity Marketplaces speech by Susan Wolburgh Jenah,
President and Chief Executive Officer IIROC, Trade Tech Canada Conference, December 7 2010.
IIROC, New Market Regulation Fee Model, IIROC Administrative Notice 10-0316, November 30, 2010.
IOSCO, Regulatory issues Raised by the Impact of Technological Changes on Market Integrity and Efficiency,
July 2011
IRESS, Half Year Results Presentation, IRESS Market Technology, 25 August 2010.
IRESS, Full Year Results Presentation, IRESS Market Technology, 24 February 2011.
45
APPENDIX: REVIEW OF APPROACH USED IN OTHER KEY MARKETS
KEY POINTS
•
International approaches to recover costs associated with supervision of secondary markets
are diverse.
•
Funding arrangements vary across the different jurisdictions. For example, the FSA is fully
financed by the UK financial services industry (as it does not receive any government funding),
and consults annually on its fee proposals. The US Congress determines the funding for the
Securities and Exchange Commission (SEC), while IIROC has specific periodic review provisions
in place.
•
There are a number of different international approaches to recover costs associated with
supervision of financial markets with a general theme of moving towards imposing
activity-based fees.
INTERNATIONAL COMPARISONS
•
Australia compares relatively well in terms of the cost of trading in cash equity markets. The
total cost that institutional investors faced in Australia — as surveyed by market research
house Elkins McSherry — averaged 23.5 bp (of value traded) from 2008 to 2010 (Chart A.1).
This places Australia among the most competitive markets in the Asia Pacific region, with
lower costs than jurisdictions such as Hong Kong, Singapore and Taiwan.
–
•
The additional fee proposed under cost recovery is too small to affect our rankings.
Australia is also internationally competitive in terms of brokerage and exchange fee costs
faced by institutional investors (Chart A.2).
A1
Chart A.1: Total Cost of Trading for Institutional Investors — Average costs from 2008 to 2010(a),
expressed as basis points of the average trade size
140
120
120
100
100
80
80
60
60
40
40
20
20
0
0
US - NYSE
Japan
US - NASDAQ
UK - Sells
France
Germany
Netherlands
Sweden
Switzerland
Denmark
South Africa - Sells
Italy
Portugal
New Zealand
Canada
Norway
Luxembourg
Australia
Spain
Ireland - Sells
Singapore
Mexico
Poland
Hong Kong
Czech Republic
Brazil
Malaysia
Thailand
Greece
Korea
South Africa - Buys
Taiwan
Indonesia
India
China
UK - Buys
Ireland - Buys
140
Source: Elkins/McSherry. Note: Data for 2010 includes the first three quarters only and is based on calendar years.
Chart A.2: Brokerage and exchange fee costs faced by institutional investors — 2010 (basis points)
30
25
25
20
20
15
15
10
10
5
5
0
0
Indonesia
Thailand
Poland
India
Czech Republic
Malaysia
Taiwan
Brazil
Mexico
Korea
Greece
China
South Africa - Buys
Singapore
South Africa - Sells
Hong Kong
Canada
Australia
Luxembourg
Ireland - Buys
UK - Buys
Switzerland
France
Netherlands
US - NASDAQ
US - NYSE
Germany
UK - Sells
Norway
Italy
Japan
Spain
Denmark
Sweden
Ireland - Sells
Portugal
New Zealand
30
Source: Elkins/McSherry. Note: Data for 2010 includes the first three quarters only and is based on calendar years.
INTERNATIONAL APPROACHES TO COST RECOVERY
This part describes the key funding arrangements for supervising secondary markets that apply in the
United Kingdom (UK), the United States of America, Canada, Singapore and Hong Kong.
A2
United Kingdom
The Financial Services Authority (FSA) has been the single regulator for financial services in the UK
since December 2001 and has a wide range of rule-making, investigations and enforcement powers
to enable it to meet its four statutory objectives:
•
market confidence — maintaining confidence in the UK financial system;
•
financial stability — contributing to the protection and enhancement of stability of the UK
financial system;
•
consumer protection — securing the appropriate degree of protection for consumers; and
•
the reduction of financial crime — reducing the extent to which it is possible for a regulated
business to be used for a purpose connected with financial crime.
The FSA is responsible for the market supervision function and is fully financed by the UK financial
services industry; it does not receive any government funding. The FSA consults annually on its fee
proposals with stakeholders.
FSA’s revenue streams include33:
•
initial and ongoing annual fees from firms undertaking a regulated activity;
•
fees to register a person with a controlled function at a firm;
•
fines for market misconduct or other non-compliance with the Financial Services and Market
Act 2000 or FSA Handbook;
•
fees for submitting periodic reports to the FSA through FSA systems; and
•
fees for transaction reporting. Firms that report transactions through the FSA’s TRS are
charged £235 per annum in addition to a per transaction fee as set out in the FSA’s Fees
Manual.34
Table A.1: Transaction fee applying to firms reporting transactions through the FSA’s TRS
Num ber of transactions
First 1000
1,001 - 1,000,000
1,000,001 - 4,000,000
4,000,001 - 8,000,000
8,000,001 - 13,000,000
13,000,001 - 20,000,000
> 20,000,000
Price in pence
0.00
1.91
1.70
1.49
1.28
1.06
0.85
33 Fees received by the FSA vary depending on the nature of activity (for example insurer, deposit taker, dealer) and the
size of the firm (number of approved persons). In order to determine contributions to the transaction reporting system
(TRS), an algorithm is applied to the total monies out of this pool received.
34 The FSA Fees Manual is available at http://fsahandbook.info/FSA/html/handbook/FEES.
A3
Canada
Canadian securities regulation is managed through laws and agencies established by Canada's
13 provincial and territorial governments. Each province and territory has a securities commission or
equivalent authority and its own provincial or territorial legislation. Unlike any other major
federation, Canada does not have a securities regulatory authority at the federal government level.
To ensure effective and independent marketplace integrity exchanges and alternative trading
systems outsource market surveillance to IIROC. IIROC is a Canadian, not-for-profit, independent
self-regulatory organisation that, among other things, oversees trading in exchanges and
marketplaces.
On 30 November 2010, IIROC released its proposed new market regulation fee model for comment.
IIROC’s Recognition Order35 stipulates that it must operate on a cost recovery basis. In developing the
fee model, IIROC was guided by the principles of fairness, transparency, industry competitiveness
and cost recovery.
IIROC developed its new fee model with the involvement of an industry committee that was
specifically established to consider this issue. The new market supervision fee model proposed is
based on messages and the number of trades as the cost drivers for recovery of market supervision
costs.
The features of IIROC’s proposed market regulation fees are:
•
a minimum monthly fee of $4,800 per marketplace member;
•
a fee charged to each marketplace based on that marketplace’s share of the total number of
messages processed by IIROC’s surveillance system during the month — this component
recovers the IT costs of the surveillance system;
•
a fee charged to each marketplace based on that marketplace’s share of the total number of
trades during the month — this component recovers all other regulation costs; and
•
IIROC will continue to recover marketplace-specific costs directly from the marketplace that
incurs such costs.
IIROC also proposes to extend an earlier discount for market makers36, and endorsed submissions
received that:
•
market makers’ performance of their obligations provides liquidity, promotes price discovery,
mitigates price volatility and supports order flow for retail investors; and
•
removing the market maker discount may create an unintended incentive for Dealer Members
to internalise order flow.37
35 Ontario Securities Commission Recognition Order, Schedule 1, part 4, May 16 2008.
36 Market makers in Canada have a number of obligations in their stocks of responsibility, including maintaining a twosided market, maintaining the bid-ask spread within a certain target range, assisting during the opening and with
inquiries and anomalies, providing guaranteed fills for small orders and servicing odd lot orders. In exchange for
assuming these obligations, market makers are entitled to direct benefits that include discounted trading fees charged
by the marketplace for active trading and the right to participate in trades. Market makers also benefit from their status
by attracting increased order flow for their stocks of responsibility because of their expert status in those stocks.
A4
United States of America
Securities regulation in the United States covers various aspects of transactions and other dealings
with securities and is usually understood to include both Federal and State level regulation by purely
governmental regulatory agencies. Sometimes it may also encompass listing requirements of
exchanges like the New York Stock Exchange and rules of self-regulatory organizations like FINRA.
On the Federal level, the primary securities regulator is the SEC. However, futures and some aspects
of derivatives are regulated by the Federal Commodity Futures Trading Commission (CFTC).
Securities Exchange Commission (SEC)
The SEC is funded by US Congress. The Investor and Capital Markets Fee Relief Act (Public Law
107-123, 115 Stat. 2390-2401) (the Fee Relief Act) requires that the SEC annually adjusts key fee
rates so that their projected revenues equate to annual targets specified in the Fee Relief Act.
The relevant SEC market regulation fee to consider in this paper (specified under Section 31 of the
Securities Exchange Act 1934) is levied twice annually on self regulatory organisations (SRO). The SRO
will typically pass these fees on to its members. The SROs have adopted rules that require their
broker members to pay per-transaction charges that the SROs use to pay these SEC fees. In turn,
brokers generally charge their customers per-transaction charges to recoup these fees. However,
neither the SEC nor the Fee Relief Act prescribe the manner in which SROs may obtain funds to make
such payments, nor is a direct obligation imposed on brokers or their clients.
Commodity Futures Trading Commission (CFTC)
The CFTC is solely funded by US Congress. Since the 1980s, successive US administrations have
proposed that CFTC impose fees designed to recover costs. Currently, the Obama administration's
fiscal 2012 budget plan proposes charging user fees to entities supervised by the CFTC. Allowing CFTC
to charge user fees would bring it into line with all other federal financial regulators.
Exchange SROs
The New York Stock Exchange (NYSE) Regulation Inc performs the NYSE market surveillance function
on listed company compliance. It has a base budget that is set as a percentage of NYSE trading fees
paid by all broker-dealers. It typically requires additional funding that is negotiated between the
NYSE CEO and the CEO of NYSE Regulation Inc.
Financial Industry Regulatory Authority
FINRA regulates brokers across several markets and is self-funded through collection of regulatory
fees, user fees, dispute resolution fees, transparency services fees, and fines. FINRA also performs
market regulation under contract for the major U.S. stock markets, including the NYSE, NYSE Arca,
NYSE Amex, NASDAQ and the International Securities Exchange which is funded by contract services
fees.
37 IIROC Administrative Notice 11-0125
A5
(i)
Regulatory fees
Regulatory fees represent fees to fund regulatory activities, including the supervision and regulation
of firms through examination, policy making, rulemaking and enforcement activities. Regulatory fees
include the Trading Activity Fee (TAF), Gross Income Assessment (GIA), Personnel Assessment (PA)
and Branch Office Assessment (BOA).
•
The TAF is calculated on the sell side of all transactions by firms in all covered securities,
regardless of where the trade is executed, and is assessed directly on the firm responsible for
clearing the transaction. The TAF is self-reported by firms, and the revenue is recognised in the
month the transactions occur. As the TAF is a self-reported revenue stream, subsequent
adjustments by firms may occur and are recognised as an adjustment to revenue in the period
the adjustment becomes known.
•
The GIA and PA represent annual fees charged to firms and representatives.
•
The BOA has an initial fee component in addition to annual fees. The initial fee is recognised
over the estimated business relationship period and the annual fee over the related annual
period.
The SEC authorised changes to several FINRA fees effective 1 Jan 2010. The PA and GIA were
amended to achieve a more consistent and predictable funding stream as the economic and industry
downturns experienced in 2008 and 2009 strained FINRA resources. The updated details are:
•
•
The PA has a three-tier rate structure and assessment amounts were increased to (from) per
registered person :
–
members with one to five registered representatives and principals: $150 ($75) each;
–
6-25 registered persons: $140 ($70) each; and
–
26 or more registered persons: $ 130 ($65) each.
The GIA (the most important component of FINRA’s regulatory funding) is assessed through a
seven-tier rate structure with a minimum GIA of $1,200.00 per annum and is calculated as
follows:
–
•
GIA = Maximum of:
:
1.
current GIA calculated as per the rate structure below; and
:
2.
a three-year average of the GIA to be calculated by adding the current year
plus the GIA assessed on the firm over the previous two calendar years,
divided by three
Current GIA rate structure:
–
$1,200.00 on annual gross revenue up to $1 million;
–
0.12 per cent of annual gross revenue greater than $1 million up to $25 million;
–
0.26 per cent of annual gross revenue greater than $25 million up to $50 million;
A6
–
0.05 per cent of annual gross revenue greater than $50 million up to $100 million;
–
0.04 per cent of annual gross revenue greater than $100 million up to $5 billion;
–
0.04 per cent of annual gross revenue greater than $5 billion up to $25 billion; and
–
0.09 per cent of annual gross revenue greater than $25 billion.
For a newer firm that has only been assessed in the prior year, FINRA will compare the current year
GIA to the firm’s two-year average and assess the greater amount.
(ii)
User fees
Fees are charged for initial and annual registrations, qualification exams, FINRA-sponsored
educational programs and conferences, reviews of advertisements and corporate filings (corporate
financing fees). Registration fees primarily include both initial and annual fees charged on all
registered representatives and investment advisers. Qualification fees consist of examination and
continuing education fees. Advertising fees represent fees charged for the review of firms’
communications to ensure that they are fair, balanced and not misleading. Corporate financing fees
consist of fees charged for reviewing proposed public offerings.
(iii)
Dispute resolution fees
Fees are levied during the arbitration and mediation processes. For example, administrative filing
fees are charged to each party when the parties agree to mediate their case with FINRA dispute
resolution or parties must pay a mediation session deposit, covering the anticipated fees for the
mediator's time and expenses.
(iv)
Transparency services fees
Fees are charged for the use of TRACE and the ADF (Alternative Display Facility). In addition, fees are
charged for services related to quoting of certain OTC Equities on the OTCBB (OTC bulletin board)
and trade reporting of OTC Equities through the ORF (OTC reporting Facility). TRACE fees include
market data fees as well as fees charged on secondary market transactions in eligible fixed income
securities reported to FINRA. ADF fees include market data fees as well as fees for posting quotes.
OTCBB is a regulated quotation service in which fees are charged for a variety of services related to
the display of real-time quotes in OTC Equity securities that are eligible for quotation on the OTCBB.
In addition, fees are earned for the sale of market data from the OTCBB and the ORF.
(v)
Contract services fees
Amounts are charged by FINRA and FINRA REG for regulatory and registration services provided
under contractual arrangements (e.g. for exchanges and trade reporting facilities regarding
surveillance, monitoring, technology development, legal and enforcement activities).
(vi)
Fines
Sanctions for rule violations — FINRA do not view fines as part of their operating revenues and have
processes in place designed to guard against potential conflicts in FINRA's collection and use of fine
monies, including that fine revenue is separately accounted for, are not included in operating
budgets, and not used for employee compensation amongst others.
A7
National Futures Association (NFA)
The NFA is an industry-wide self-regulatory organisation for the U.S. futures industry. Membership in
NFA is mandatory. The NFA has no ties to any specific marketplace. It is funded exclusively from
membership dues and from assessment fees paid by the users of the futures markets.
Member firms are required to pay annual membership dues as part of a firm's annual filings and are
subject to a late payment charge of $25.00 per month if paid after the date that they are payable.
Table A.2: NFA annual membership dues schedule
Fee
Am ount ($US)
Futures Commission Merchant - Exchange is Designated Self-Regulatory Organization
1,500
Futures Commission Merchant - NFA is Designated Self-Regulatory Organization
5,625
FCM Forex Dealer Member - Exchange is Designated Self-Regulatory Organization that has
agreed to examine the Forex Dealer Member's forex activities
13,500
FCM Forex Dealer Member - NFA is Designated Self-Regulatory Organization w ith annual
forex revenue of $500,000 or less(a)
50,000
FCM Forex Dealer Member - NFA is Designated Self-Regulatory Organization w ith annual
forex revenue of more than $500,000 but not more than $2 million(a)
75,000
FCM Forex Dealer Member - NFA is Designated Self-Regulatory Organization w ith annual
forex revenue of more than $2 million, but not more than $5 million(a)
100,000
FCM Forex Dealer Member - NFA is Designated Self-Regulatory Organization w ith annual
forex revenue of more than $5 million(a)
125,000
Commodity Pool Operator
750
Commodity Trading Advisor
750
Introducing Broker
750
(a) FCM Forex Dealer Member dues will be assessed on membership renewal date. Regular FCM dues apply to initial
application.
In addition to annual membership dues, Forex dealer members are required to pay an annual fee
based on the highest number of unregulated solicitors and account managers that they were
responsible for any given time for the 12 month period preceding the members’ annual dues notice.
The following table lists the fee levels.
Table A.3: Number of unregulated entities annual fee
Num ber of unregulated entities
0
1 to 4
5 to 19
20 to 99
100 or more
Annual fee ($US)
0
5,000
10,000
25,000
50,000
Singapore
The Singapore Stock Exchange (SGX) maintains the surveillance of all trading activities. SGX conducts
surveillance of trading activities of the securities and derivatives markets to detect unusual trading
activities and prohibited trading practices or conduct, including insider trading and market
manipulation.
For securities supervision, SGX utilises a real-time market surveillance system that employs
technology to automatically alert them to irregular market behaviour such as unusual price and
volume movements.
Surveillance of derivatives is conducted via a two pronged approach that combines electronic
surveillance and exception reports review.
A8
Costs associated with the supervision of the market are recovered through trading fees, possibly
explaining slightly higher costs to market participants as per Chart A.1.
Hong Kong
The Securities and Futures Commission (SFC) is an independent statutory body established by the
Securities and Futures Commission Ordinance (SFCO). The SFCO and nine other securities and futures
related ordinances were consolidated into the Securities and Futures Ordinance, which came into
operation on 1 April 2003.
The SFC has six regulatory objectives to:
•
keep the securities and futures markets fair, efficient, competitive, transparent and orderly;
•
help the public understand how the securities and futures industry works;
•
protect investors’ interests;
•
minimise market crime and misconduct;
•
reduce systemic risks in the industry; and
•
help maintain the financial stability in Hong Kong.
In carrying out its regulatory objectives, the SFC seeks to establish and maintain a sound regulatory
regime that is consistent with prevailing international practices, for example, the objectives and
principles of securities regulation developed by the International Organization of Securities
Commissions (IOSCO).
Major sources of funding for the SFC include:
•
levies collected by the Stock Exchange of Hong Kong Ltd (SEHK) and Hong Kong Futures
Exchange Ltd (HKFE) on transactions recorded on the Exchanges at rates specified by the Chief
Executive in Council; and
•
Fees and charges related to its functions and services according to the provision of subsidiary
legislation.
A levy is payable on:
•
every sale and purchase of any securities that is recorded on a recognised stock market or
notified to a recognised exchange company under its rules;
•
every sale and purchase of any futures contract traded on a recognised futures market; and
•
every sale and purchase of any securities or futures contracts traded by means of authorised
automated trading services.
In October 2010, the SFC effected a 25 per cent reduction in the levy payable in respect of trading in
securities, futures or options contracts after a review of its reserves position.
A9
The levy payable by the seller and the purchaser on the sale or purchase of financial products from
1 October 2010 are outlined in the table below:
Product
Levy
i.
Securities
0.003% of the consideration
ii.
Futures contracts
HKD 0.60
iii.
Mini-Hang Seng Index Futures Contract; Mini-Hang Seng Index Options Contract; or
HKD 0.12
Mini-Hang Seng China Enterprises Index Futures Contract
Where the exchange has collected the levy on behalf of the SFC, it pays the levy 15 days following the
collection of the levy.
A 10