ASIC Temporarily Halts Interactive Brokers' Stock Lending Products

by Arnab Shome
  • The temporary suspension will last for 21 days.
  • The regulator raised concerns about the product's target market determination and disclosure statements.
interactive brokers

The Australian Securities and Exchange Commission (ASIC ) has issued two interim stop orders against Interactive Brokers Australia Pty Ltd, thus temporarily preventing it from issuing Stock Yield Enhancement Program (SYEP) Derivatives to retail investors.

ASIC Takes Action against Interactive Brokers Australia

As announced on Thursday, the regulator found deficiencies in the product's target market determination (TMD) and product disclosure statement (PDS). Now, with the interim stop order, the broker cannot offer or issue a PDS or provide general advice about the SYEP derivatives to retail traders for 21 days unless the order is revoked earlier.

With SYEP Derivatives, retail investors can lend eligible securities to Interactive Brokers, who usually on-lend the securities to short sellers. In return, the original holders of the securities receive interest from the broker, which also puts up cash collateral to secure the obligation to return the securities to the investors.

"ASIC made the interim orders to protect retail investors from acquiring SYEP Derivatives where they may not be suitable for their financial objectives, situation or needs," the regulator stated.

Multiple Violations

The regulator highlighted that Interactive Brokers violated the requirements around TMD of the SYEP Derivatives by inappropriately defining the target market inventors, among other things.

The Aussie regulator pointed out that the SYEP Derivatives are exposed to securities lending risks and counterparty risks in case Interactive Brokers default. Further, the regulator raised concerns about Interactive Brokers's defective PDS as it omitted information like benefits, fees and commissions. On top of that, the PDS included a misleading statement on the forfeiture of voting rights.

"ASIC expects Interactive Brokers to consider the concerns raised regarding the TMD and PDS and take immediate steps to ensure compliance . ASIC will consider making a final order if the concerns are not addressed in a timely manner. Interactive Brokers will have an opportunity to make submissions before a decision is made about any final stop orders," the market supervisor stated.

ASIC's Concerns for Risky Products

ASIC has been raising concerns about risky financial products for a while now. It issued a warning last August, asking brokers to be "careful about or reconsider" offering high-risk investment instruments or products, offerings of securities lending and crypto-assets, to retail investors.

The latest notice also pointed out that the Aussie regulator issued 24 interim stop orders design and distribution obligations (DDOs), which induce orders against SYEP Derivatives. The regulator lifted 19 of those orders as the entities addressed the concerns or withdrew the products.

"A TMD is an important requirement under DDO," ASIC stated. "It is a mandatory public document that sets out the class of consumers a financial product is likely to be appropriate for (the target market) and matters relevant to the product's distribution and review."

"ASIC has targeted surveillances underway to check whether product issuers and distributors are complying with DDO. Where firms are not doing the right thing, ASIC can take quick action under DDO to disrupt poor conduct and prevent potential consumer harm."

The Australian Securities and Exchange Commission (ASIC ) has issued two interim stop orders against Interactive Brokers Australia Pty Ltd, thus temporarily preventing it from issuing Stock Yield Enhancement Program (SYEP) Derivatives to retail investors.

ASIC Takes Action against Interactive Brokers Australia

As announced on Thursday, the regulator found deficiencies in the product's target market determination (TMD) and product disclosure statement (PDS). Now, with the interim stop order, the broker cannot offer or issue a PDS or provide general advice about the SYEP derivatives to retail traders for 21 days unless the order is revoked earlier.

With SYEP Derivatives, retail investors can lend eligible securities to Interactive Brokers, who usually on-lend the securities to short sellers. In return, the original holders of the securities receive interest from the broker, which also puts up cash collateral to secure the obligation to return the securities to the investors.

"ASIC made the interim orders to protect retail investors from acquiring SYEP Derivatives where they may not be suitable for their financial objectives, situation or needs," the regulator stated.

Multiple Violations

The regulator highlighted that Interactive Brokers violated the requirements around TMD of the SYEP Derivatives by inappropriately defining the target market inventors, among other things.

The Aussie regulator pointed out that the SYEP Derivatives are exposed to securities lending risks and counterparty risks in case Interactive Brokers default. Further, the regulator raised concerns about Interactive Brokers's defective PDS as it omitted information like benefits, fees and commissions. On top of that, the PDS included a misleading statement on the forfeiture of voting rights.

"ASIC expects Interactive Brokers to consider the concerns raised regarding the TMD and PDS and take immediate steps to ensure compliance . ASIC will consider making a final order if the concerns are not addressed in a timely manner. Interactive Brokers will have an opportunity to make submissions before a decision is made about any final stop orders," the market supervisor stated.

ASIC's Concerns for Risky Products

ASIC has been raising concerns about risky financial products for a while now. It issued a warning last August, asking brokers to be "careful about or reconsider" offering high-risk investment instruments or products, offerings of securities lending and crypto-assets, to retail investors.

The latest notice also pointed out that the Aussie regulator issued 24 interim stop orders design and distribution obligations (DDOs), which induce orders against SYEP Derivatives. The regulator lifted 19 of those orders as the entities addressed the concerns or withdrew the products.

"A TMD is an important requirement under DDO," ASIC stated. "It is a mandatory public document that sets out the class of consumers a financial product is likely to be appropriate for (the target market) and matters relevant to the product's distribution and review."

"ASIC has targeted surveillances underway to check whether product issuers and distributors are complying with DDO. Where firms are not doing the right thing, ASIC can take quick action under DDO to disrupt poor conduct and prevent potential consumer harm."

About the Author: Arnab Shome
Arnab Shome
  • 6315 Articles
  • 80 Followers
About the Author: Arnab Shome
Arnab is an electronics engineer-turned-financial editor. He entered the industry covering the cryptocurrency market for Finance Magnates and later expanded his reach to forex as well. He is passionate about the changing regulatory landscape on financial markets and keenly follows the disruptions in the industry with new-age technologies.
  • 6315 Articles
  • 80 Followers

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