ASIC Finalizes Framework for Trading of Commonwealth Government Securities on the ASX

Australian financial markets regulator ASIC has amended existing market integrity rules and related guidance to help with the introduction of

Australian financial markets regulator ASIC has amended existing market integrity rules and related guidance to help with the introduction of retail trading of Commonwealth Government Securities (CGS) depository interests on the Australian Securities Exchange (ASX).

The rules are one element of the regulatory framework for the retail trading of CGS depository interests on public exchanges. The Australian Government has previously announced that it is encouraging retail investors to trade CGS.

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ASIC has updated Regulatory Guide 223 Guidance on ASIC market integrity rules for competition in exchange markets (RG 223) to reflect these changes. RG 223 provides guidance on how market operators and market participants can comply with their obligations under the competition market integrity rules.

The changes facilitate the Australian Government’s initiative to allow retail trading of CGS depository interests on public exchanges. The initiative, part of the Australian Government’s ‘Competitive and Sustainable Banking System’ package, was released on 12 December 2010.

Background

Depository interests are beneficial interests in the underlying security, and provide the holder with the same economic rights as if they were the legal holder of the CGS. While professional investors could previously trade in CGS on over-the-counter (OTC) markets, these amendments now mean retail investors can gain exposure to CGS through trading depository interests on public exchanges. Depository interests can be traded on retail-accessible markets, such as the ASX, and in a manner similar to trading shares.

The initiative is supported by legislation through the Commonwealth Government Securities Legislation Amendment (Retail Trading) Act 2012, which amends the Commonwealth Inscribed Stock Act 1911 and the Corporations Act 2001(Corporations Act).

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The ASX successfully tendered to develop a retail market for the Government and it is proposed that trading in these products will commence in April 2013.

Amendments have been made to specifically include CGS depository interests within existing ASIC Market Integrity Rules Competition in Exchange Markets 2011 (competition market integrity rules) and ASIC Market Integrity Rules (ASX Market) 2010 (ASX market integrity rules).

Consultation Paper 181 Retail trading in Commonwealth Government Securities (CP 181), released in July 2012, indicated ASIC’s likely approach to extending the competition market integrity rules to facilitate the trading of CGS depository interests. Our approach is broadly consistent with earlier consultation in CP 181, meaning that for CGS we have extended the scope of market integrity rules relating to:

• extreme price movements
• best execution
• pre- and post-trade transparency
• regulatory data for market surveillance
• market operator obligations in a multi-market environment, and
• market participant obligations.

ASIC has also amended the existing ASX market integrity rules to clarify that the rules applicable to dealing in ‘Cash Market Products’ will also apply to dealings in CGS depository interests. Participants will also be subject to their general obligations under the existing ASX market integrity rules regarding the conduct and supervision of their business, when dealing in CGS depository interests.

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