appendix: review of approach used in other key markets
appendix: review of approach used in other key markets
appendix: review of approach used in other key markets
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Proposed f<strong>in</strong>ancial market supervision<br />
cost recovery model<br />
Consultation Paper<br />
August 2011
© Commonwealth <strong>of</strong> Australia 2011<br />
ISBN 978-0-642-74730-3<br />
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Version 2, released 1 September 2011<br />
ii
CONSULTATION PROCESS<br />
Request for feedback and comments<br />
This paper seeks <strong>in</strong>dustry feedback on the details <strong>of</strong> the Government’s proposed arrangements for<br />
the recovery <strong>of</strong> the Australian Securities and Investments Commission’s (ASIC) market supervision<br />
costs.<br />
You are <strong>in</strong>vited to comment on the proposed arrangements canvassed <strong>in</strong> this paper, which are not<br />
f<strong>in</strong>al policy at this stage. In particular, we ask that you provide feedback on the proposed cost<br />
recovery arrangements for the supervision <strong>of</strong> cash equities <strong>markets</strong> and the questions posed. Your<br />
comments on any preferred alternatives would also be appreciated.<br />
The paper outl<strong>in</strong>es the proposed <strong>approach</strong> for determ<strong>in</strong><strong>in</strong>g <strong>in</strong>dustry fees to recover the costs<br />
<strong>in</strong>curred by ASIC for undertak<strong>in</strong>g supervision <strong>of</strong> some <strong>of</strong> Australia's domestic licensed f<strong>in</strong>ancial<br />
<strong>markets</strong> and for implement<strong>in</strong>g the Government's policy to <strong>in</strong>troduce competition <strong>in</strong> exchange<br />
services. It should be noted that the calculations and examples set out <strong>in</strong> this paper <strong>in</strong> relation to the<br />
cash equities <strong>markets</strong> are based on estimates and are <strong>in</strong>tended for illustrative purposes only. The<br />
actual fee amounts for the cash equities <strong>markets</strong> will be calculated based on actual trad<strong>in</strong>g activity<br />
commenc<strong>in</strong>g from 1 January 2012.<br />
Submissions should <strong>in</strong>clude the name <strong>of</strong> your organisation (or your name if the submission is made<br />
as an <strong>in</strong>dividual) and contact details for the submission, <strong>in</strong>clud<strong>in</strong>g an email address and contact<br />
telephone number where available.<br />
While submissions may be lodged electronically or by post, electronic lodgement is preferred. For<br />
accessibility reasons, please email responses <strong>in</strong> a Word or RTF format. An additional PDF version may<br />
also be submitted.<br />
All <strong>in</strong>formation (<strong>in</strong>clud<strong>in</strong>g name and address details) conta<strong>in</strong>ed <strong>in</strong> submissions will be made available<br />
to the public on the Treasury website, unless you <strong>in</strong>dicate that you would like all or part <strong>of</strong> your<br />
submission to rema<strong>in</strong> <strong>in</strong> confidence. Automatically generated confidentiality statements <strong>in</strong> emails do<br />
not suffice for this purpose. Respondents who would like part <strong>of</strong> their submission to rema<strong>in</strong> <strong>in</strong><br />
confidence should provide this <strong>in</strong>formation marked as such <strong>in</strong> a separate attachment. A request<br />
made under the Freedom <strong>of</strong> Information Act 1982 (Commonwealth) for a submission marked<br />
‘confidential’ to be made available will be determ<strong>in</strong>ed <strong>in</strong> accordance with that Act.<br />
In addition to seek<strong>in</strong>g submissions, Treasury and ASIC will be conduct<strong>in</strong>g <strong>in</strong>dustry consultation<br />
meet<strong>in</strong>gs on this issue.<br />
The f<strong>in</strong>al <strong>approach</strong> will be published <strong>in</strong> a cost recovery impact statement (CRIS).<br />
iii
Clos<strong>in</strong>g date for submissions: 23 September 2011<br />
Email: MarketSupervision@treasury.gov.au<br />
Mail: The Manager, F<strong>in</strong>ancial Markets Unit<br />
Corporations and Capital Markets Division<br />
The Treasury<br />
Langton Crescent<br />
PARKES ACT 2600<br />
Enquiries: Enquiries can be <strong>in</strong>itially directed to Percy Bell.<br />
Phone: 02 6263 2048<br />
iv
CONTENTS<br />
FOREWORD ..................................................................................................................................... VI<br />
GLOSSARY .................................................................................................................................... VIII<br />
EXECUTIVE SUMMARY ......................................................................................................................... X<br />
PART A: OVERVIEW ...........................................................................................................................1<br />
1 Scope and background ............................................................................................................................1<br />
2 Australian Government Cost Recovery Policy .........................................................................................6<br />
3 An overview <strong>of</strong> the Government’s proposed market supervision fee model .......................................10<br />
4 Analysis <strong>of</strong> ASIC’s regulatory activities and costs ..................................................................................17<br />
PART B: COST RECOVERY FOR SUPERVISION OF CASH EQUITIES MARKETS (ASX LISTED SECURITIES) ...................... 24<br />
5 The proposed <strong>approach</strong> for calculat<strong>in</strong>g the proportional fees apply<strong>in</strong>g to market operators<br />
and market participants ..................................................................................................................24<br />
6 Illustration <strong>of</strong> fee proposals on operators and participants (cash equities <strong>markets</strong>) ...........................29<br />
7 Impact and implementation considerations <strong>of</strong> the proposed cost recovery fee<br />
arrangements (ASX listed Securities) ...............................................................................................31<br />
PART C: COST RECOVERY FOR SUPERVISION OF SMALL FINANCIAL MARKETS AND FUTURES MARKETS .................... 40<br />
8 Small f<strong>in</strong>ancial <strong>markets</strong> .........................................................................................................................40<br />
9 Futures <strong>markets</strong> ....................................................................................................................................40<br />
PART D: NEXT STEPS AND FEEDBACK .................................................................................................... 42<br />
10 Next Steps .............................................................................................................................................42<br />
11 Summary <strong>of</strong> feedback sought ................................................................................................................43<br />
REFERENCES ................................................................................................................................... 45<br />
APPENDIX: REVIEW OF APPROACH USED IN OTHER KEY MARKETS ...............................................................1<br />
v
FOREWORD<br />
I am pleased to release this consultation paper on the Government’s<br />
proposed cost recovery arrangements for ASIC’s supervision <strong>of</strong> Australia’s<br />
f<strong>in</strong>ancial <strong>markets</strong>.<br />
The transfer <strong>of</strong> market supervision responsibilities to ASIC on 1 August<br />
2010 and the open<strong>in</strong>g <strong>of</strong> Australia’s f<strong>in</strong>ancial <strong>markets</strong> to competition were<br />
necessary steps towards a competitive and efficient Australian f<strong>in</strong>ancial<br />
market.<br />
Competition <strong>in</strong> Australian f<strong>in</strong>ancial <strong>markets</strong> will deliver more <strong>in</strong>novation <strong>in</strong><br />
products and services, more choice <strong>in</strong> <strong>markets</strong>, and ma<strong>in</strong>ta<strong>in</strong> or improve<br />
market quality - <strong>in</strong>clud<strong>in</strong>g market depth, liquidity and price formation. Based on the experience <strong>in</strong><br />
<strong>other</strong> jurisdictions, it is expected that competition will also attract new players, new trad<strong>in</strong>g<br />
strategies and new liquidity.<br />
Although the costs <strong>of</strong> supervision will be recovered from <strong>in</strong>dustry, competition is expected to lower<br />
the costs <strong>of</strong> transact<strong>in</strong>g <strong>in</strong> Australian cash equity <strong>markets</strong>. It is expected that the cost sav<strong>in</strong>gs for<br />
<strong>in</strong>dustry under competition will more than <strong>of</strong>fset the additional supervisory charges on <strong>in</strong>dustry.<br />
S<strong>in</strong>ce the transfer <strong>of</strong> supervision, further milestones have been achieved <strong>in</strong> preparation for<br />
competition.<br />
On 29 April 2011 the Government welcomed the market <strong>in</strong>tegrity rules announced by ASIC and a<br />
framework for competition <strong>in</strong> equity exchange <strong>markets</strong>; this represents a significant evolution <strong>in</strong><br />
Australia’s market <strong>in</strong>frastructure. To support this new regulatory role, the Government approved<br />
fund<strong>in</strong>g to ASIC <strong>in</strong> 2009-2010 and 2010-2011 to meet the costs associated with transferr<strong>in</strong>g<br />
supervision and support<strong>in</strong>g market competition, subject to fund<strong>in</strong>g be<strong>in</strong>g recovered through fees<br />
charged to <strong>in</strong>dustry.<br />
The proposed market supervision fee model and cost recovery arrangements outl<strong>in</strong>ed <strong>in</strong> this paper<br />
provide a sound basis by which expenditure required to ma<strong>in</strong>ta<strong>in</strong> a robust regulatory <strong>in</strong>frastructure<br />
for the supervision <strong>of</strong> domestic licensed f<strong>in</strong>ancial <strong>markets</strong> can be recovered across <strong>in</strong>dustry <strong>in</strong> an<br />
efficient and market neutral way.<br />
The proposed market supervision fee model represents an important step <strong>in</strong> our efforts to support<br />
competitive, efficient and <strong>in</strong>novative equity <strong>markets</strong> and to ensure that Australia has the market<br />
regulatory capabilities to respond effectively to the challenges <strong>of</strong> a dynamic market place. The<br />
proposed arrangements <strong>in</strong> this paper are underp<strong>in</strong>ned by the Government’s Cost Recovery<br />
Guidel<strong>in</strong>es and pr<strong>in</strong>ciples and have been benchmarked aga<strong>in</strong>st <strong>in</strong>ternational cost recovery models to<br />
ensure they are robust and accountable.<br />
This consultation paper provides the public, <strong>in</strong> particular the f<strong>in</strong>ancial services <strong>in</strong>dustry, with the<br />
opportunity to comment on the proposed arrangements for cost recovery, the future direction <strong>of</strong><br />
these arrangements and the appropriate <strong>review</strong> mechanisms to ensure the arrangements align with<br />
chang<strong>in</strong>g market conditions <strong>in</strong> the future.<br />
vi
I look forward to receiv<strong>in</strong>g the community’s views on this matter, and thank you for your<br />
engagement.<br />
The Hon Bill Shorten MP<br />
Assistant Treasurer and M<strong>in</strong>ister for F<strong>in</strong>ancial Services and Superannuation<br />
vii
GLOSSARY<br />
ACCC Australian Competition and Consumer Commission<br />
AFMA Australian F<strong>in</strong>ancial Markets Association<br />
AFSL Australian F<strong>in</strong>ancial Services Licence<br />
APRA Australian Prudential Regulatory Authority<br />
APX Asia Pacific Exchange Limited<br />
ASEFF Australian Securities Exchanges Fidelity Fund<br />
ASIC Australian Securities and Investments Commission<br />
ASX ASX Limited<br />
ASX 24 Australian Securities Exchange Limited<br />
CFTC Commodity Futures Trad<strong>in</strong>g Commission (US)<br />
Chi-X Chi-X Australia Pty Ltd<br />
CRIS Cost recovery impact statement<br />
DoFD Department <strong>of</strong> F<strong>in</strong>ance and Deregulation<br />
FINRA F<strong>in</strong>ancial Industry Regulatory Authority (US)<br />
FSA F<strong>in</strong>ancial Services Authority (UK)<br />
FTE Full-time equivalent<br />
HFT High frequency trad<strong>in</strong>g<br />
IIROC Investment Industry Regulatory Organization <strong>of</strong> Canada<br />
IMB IMB Ltd<br />
IMSS Integrated Market Surveillance System<br />
IOSCO International Organization <strong>of</strong> Securities Commissions<br />
MDP Markets Discipl<strong>in</strong>ary Panel<br />
MIRs Market <strong>in</strong>tegrity rules<br />
NFA National Futures Association (US)<br />
viii
NGF National Guarantee Fund<br />
NSX National Stock Exchange <strong>of</strong> Australia<br />
SEC Securities Exchange Commission (US)<br />
SIM SIM Venture Securities Exchange Limited<br />
SRO Self regulatory organization (US)<br />
TRS Transaction report<strong>in</strong>g system (Europe)<br />
ix
EXECUTIVE SUMMARY<br />
This consultation paper seeks <strong>in</strong>dustry comment on a proposed market supervision fee model (fee model)<br />
and cost recovery arrangements for the recovery <strong>of</strong> fund<strong>in</strong>g provided to ASIC to conduct market<br />
supervision functions <strong>in</strong> a competitive multi-operator environment. The proposed fee model detailed <strong>in</strong> this<br />
paper applies specifically to the supervision <strong>of</strong> cash equities <strong>markets</strong> (ASX listed securities). The proposed<br />
cost recovery arrangements extend to all market segments over the period — 1 January 2012 to<br />
30 June 2013. Exist<strong>in</strong>g cost recovery arrangements <strong>in</strong> respect <strong>of</strong> small f<strong>in</strong>ancial <strong>markets</strong> and futures <strong>markets</strong><br />
will cont<strong>in</strong>ue to apply.<br />
The paper canvasses a fee model for cash equities <strong>markets</strong> based on both trades and messages. Individual<br />
market operators and participants will pay a proportional charge based on the number <strong>of</strong> trades and<br />
messages reported from them to the ASIC IT surveillance system. Under these arrangements, market<br />
participants will also be charged a quarterly market supervision fee.<br />
The proposed allocation <strong>of</strong> cost recovery fees between market operators and market participants is<br />
approximately 16 per cent and 84 per cent for market operators and market participants respectively.<br />
Alternative fee models based on number <strong>of</strong> trades only and pay<strong>in</strong>g a fixed fee per transaction are also<br />
considered.<br />
The proposed fee model applies the Government’s Cost Recovery Guidel<strong>in</strong>es and pr<strong>in</strong>ciples; aligns the<br />
regulatory cost drivers <strong>in</strong> determ<strong>in</strong><strong>in</strong>g an efficient allocation <strong>of</strong> costs across the market; and has had regard<br />
to the cost recovery <strong>approach</strong>es conducted <strong>in</strong> <strong>other</strong> regulatory jurisdictions. The pr<strong>in</strong>ciples <strong>of</strong> fairness,<br />
transparency and <strong>in</strong>dustry competitiveness were <strong>used</strong> to assess the proposed and alternative fee models.<br />
STRUCTURE OF THE CONSULTATION PAPER<br />
Part A provides an overview <strong>of</strong> the consultation paper and background to the transfer <strong>of</strong> market<br />
supervision and the Government’s policy <strong>of</strong> <strong>in</strong>troduc<strong>in</strong>g competition <strong>in</strong> Australia’s f<strong>in</strong>ancial market (Section<br />
1). Section 2 expla<strong>in</strong>s the Government Cost Recovery Guidel<strong>in</strong>es that have <strong>in</strong>formed the design <strong>of</strong> the<br />
proposed market supervision fee model. An overview <strong>of</strong> the Government’s proposed cost recovery model<br />
and alternative models is provided <strong>in</strong> Section 3. An analysis <strong>of</strong> ASIC’s regulatory activities and cost drivers is<br />
detailed at Section 4.<br />
Part B provides details <strong>of</strong> ASIC expenditure and the proposed cost recovery arrangements for supervision<br />
for cash equities <strong>markets</strong> (for ASX listed securities). It expla<strong>in</strong>s how different categories <strong>of</strong> costs are<br />
proposed to be allocated <strong>in</strong> relation to market operators and participants <strong>of</strong> cash equities <strong>markets</strong><br />
(Section 5). An illustration <strong>of</strong> the cost impact <strong>of</strong> the fee proposals on operators and participants is provided<br />
<strong>in</strong> Section 6 and <strong>in</strong>formation on the estimated impact and implementation considerations <strong>of</strong> the proposed<br />
cost recovery arrangement, based on ASIC analysis, is <strong>in</strong>cluded <strong>in</strong> Section 7.<br />
Part C outl<strong>in</strong>es the cost recovery arrangements for small f<strong>in</strong>ancial <strong>markets</strong> (Section 8) and futures <strong>markets</strong><br />
(Section 9).<br />
Part D provides <strong>in</strong>formation on the next steps (Section 10) and a summary <strong>of</strong> the feedback sought (Section<br />
11). A discussion <strong>of</strong> relevant <strong>in</strong>ternational comparisons is at the Appendix.<br />
x
PART A: OVERVIEW<br />
1 SCOPE AND BACKGROUND<br />
1.1 Scope<br />
This consultation paper seeks <strong>in</strong>dustry comment on:<br />
(i) the proposed cash equities market supervision fee model for the recovery <strong>of</strong> fund<strong>in</strong>g provided to ASIC to<br />
perform its market supervision functions follow<strong>in</strong>g the transfer <strong>of</strong> market supervision to ASIC <strong>in</strong> 2010; and<br />
to enhance ASIC’s capability to supervise a competitive, multi-market operator environment <strong>in</strong> light <strong>of</strong> the<br />
Government's policy to <strong>in</strong>troduce market competition (Sections 1, 2 and 3); and<br />
(ii) the proposed market supervision cost recovery arrangements (Sections 1, 4 to 6) for the period from<br />
1 January 2012 to 30 June 2013, which will enable the Government to recover over the 18 month period:<br />
• approximately 43 per cent <strong>of</strong> the costs associated with the implementation <strong>of</strong> market competition; 1<br />
• the fixed costs ASIC will need to <strong>in</strong>cur to connect new <strong>markets</strong> to its <strong>in</strong>tegrated market surveillance<br />
system (IMSS); and<br />
• ongo<strong>in</strong>g costs <strong>in</strong>curred by ASIC to perform its new market supervision functions follow<strong>in</strong>g the<br />
transfer <strong>of</strong> supervision.<br />
The cost recovery arrangements extend to the follow<strong>in</strong>g domestic licensed f<strong>in</strong>ancial <strong>markets</strong>:<br />
1. Cash equities <strong>markets</strong> (for ASX listed securities):<br />
– The follow<strong>in</strong>g ASX Limited (ASX) electronic order books;<br />
: TradeMatch, the current ASX order book; and<br />
: Purematch, a new cash equities order book <strong>in</strong>tended to be launched late <strong>in</strong> 2011;<br />
– Chi-X Australia Pty Ltd (Chi-X), which is work<strong>in</strong>g to commence operations <strong>of</strong> a cash equities<br />
market from 31 October 2011 (at the earliest).<br />
2. Small f<strong>in</strong>ancial <strong>markets</strong> 2 :<br />
– National Stock Exchange <strong>of</strong> Australia Limited (NSX);<br />
– SIM Venture Securities Exchange Limited (SIM);<br />
1 This equates to $4.6m ($2.1m for regulatory framework and market structure and analysis implementation costs and $2.5m for<br />
IT implementation costs). The rema<strong>in</strong>der <strong>of</strong> these costs will be recovered <strong>in</strong> FY14 and FY15.<br />
2 Under the Corporations (Fees) Regulations 2001, small <strong>markets</strong> are grouped <strong>in</strong>to a specific market segment. There are currently<br />
four <strong>markets</strong> <strong>in</strong> this segment.<br />
1
– IMB Ltd (IMB); and<br />
– Asia Pacific Exchange Limited (APX), which is work<strong>in</strong>g to re-launch <strong>in</strong> October 2011.<br />
3. Futures <strong>markets</strong>:<br />
– Australian Securities Exchange Limited (ASX 24) (formerly Sydney Futures Exchange).<br />
This paper does not <strong>in</strong>clude cost recovery estimates <strong>of</strong> any future fund<strong>in</strong>g that may be needed to enable<br />
ASIC’s regulatory capability to keep pace with <strong>in</strong>dustry <strong>in</strong>novation, market structure changes, market<br />
developments, and advances <strong>in</strong> market surveillance and supervision technology/techniques. These matters<br />
are currently subject to a separate Government f<strong>in</strong>ancial <strong>review</strong> <strong>of</strong> ASIC, as foreshadowed <strong>in</strong> the<br />
2011-12 Budget. However, the paper does propose an <strong>approach</strong> for the recovery <strong>of</strong> these future costs.<br />
1.2 Background<br />
Government's policy to transfer supervision <strong>of</strong> certa<strong>in</strong> domestic licensed f<strong>in</strong>ancial<br />
<strong>markets</strong> to ASIC<br />
On 24 August 2009, the Government announced its decision to transfer the responsibility for supervision <strong>of</strong><br />
certa<strong>in</strong> domestic licensed f<strong>in</strong>ancial <strong>markets</strong> from market operators to ASIC 3 . Responsibility for market<br />
supervision transferred to ASIC on 1 August 2010.<br />
The transfer <strong>of</strong> market supervision from <strong>in</strong>dividual market operators to ASIC represents an important first<br />
step <strong>in</strong> facilitat<strong>in</strong>g competition between Australia’s licensed equity <strong>markets</strong> (market competition). Market<br />
competition is important to ensure that Australia’s f<strong>in</strong>ancial <strong>markets</strong> are <strong>in</strong>novative and efficient, now and<br />
<strong>in</strong>to the future.<br />
Fund<strong>in</strong>g was approved <strong>in</strong> the Mid-year Economic and Fiscal Outlook 2009-10 4 to support this commitment<br />
and expand ASIC's capabilities to undertake its new regulatory role. The Government also announced that<br />
the additional expenditure <strong>in</strong>curred by ASIC would be subject to cost recovery through the imposition <strong>of</strong><br />
fees on <strong>in</strong>dustry.<br />
ASIC’s additional responsibilities follow<strong>in</strong>g the transfer <strong>of</strong> supervision specifically <strong>in</strong>clude:<br />
• undertak<strong>in</strong>g real-time market surveillance and post-trade analysis to detect market misconduct (that<br />
is breaches <strong>of</strong> the market <strong>in</strong>tegrity rules (MIRs));<br />
• monitor<strong>in</strong>g compliance with the MIRs by regulated entities; and<br />
• adm<strong>in</strong>ister<strong>in</strong>g the discipl<strong>in</strong>ary framework for breaches <strong>of</strong> the MIRs (<strong>in</strong>clud<strong>in</strong>g the <strong>markets</strong> discipl<strong>in</strong>ary<br />
panel (MDP), enforceable undertak<strong>in</strong>gs and <strong>in</strong>fr<strong>in</strong>gement notices).<br />
3 The transfer <strong>of</strong> supervision to ASIC did not apply to the follow<strong>in</strong>g <strong>markets</strong> under Regulation 10.14.01 <strong>of</strong> the Corporations<br />
Regulations 2001: BGC Partners (Australia) Pty Limited; Bloomberg Tradebook Australia Pty Ltd; Mercari Pty Ltd; and<br />
Yieldbroker Pty Ltd.<br />
4 Mid-year Economic and Fiscal Outlook 2009-10, Appendix A: Policy decisions taken s<strong>in</strong>ce the 2009-10 Budget,<br />
Commonwealth <strong>of</strong> Australia, November 2009, p.216.<br />
2
Government's policy to <strong>in</strong>troduce competition <strong>in</strong> trad<strong>in</strong>g services<br />
On 31 March 2010, the Government announced its support for competition between <strong>markets</strong> for trad<strong>in</strong>g <strong>in</strong><br />
listed shares <strong>in</strong> Australia 5 .<br />
In order to implement the Government's market competition policy, ASIC’s regulatory <strong>in</strong>frastructure<br />
capabilities have been enhanced through:<br />
• development <strong>of</strong> a regulatory framework to apply on the entry <strong>of</strong> competition;<br />
• upgrade <strong>of</strong> its IMSS capability to enable the real-time surveillance <strong>of</strong> the Chi-X market, and to handle<br />
multi-market and whole-<strong>of</strong>-market surveillance and supervision; and<br />
• <strong>in</strong>crease to the number <strong>of</strong> its market supervision staff <strong>in</strong> order to:<br />
– manage the expected <strong>in</strong>crease <strong>in</strong> market activity and complexity, as well as for the supervision<br />
<strong>of</strong> multiple <strong>markets</strong>;<br />
– identify, <strong>in</strong>vestigate and take enforcement action aga<strong>in</strong>st new forms <strong>of</strong> market misconduct<br />
aris<strong>in</strong>g from the <strong>in</strong>troduction <strong>of</strong> market competition; and<br />
– undertake ongo<strong>in</strong>g <strong>review</strong> and analysis <strong>of</strong> the market micro and macro structure and the<br />
regulatory framework to respond to new issues and market developments.<br />
Fund<strong>in</strong>g was approved <strong>in</strong> the Budget Measures 2011-12 6 to cover the additional costs required by ASIC to<br />
enhance its regulatory <strong>in</strong>frastructure. This fund<strong>in</strong>g was also approved subject to cost recovery from<br />
<strong>in</strong>dustry.<br />
ASIC subsequently published MIRs on 29 April 2011 to support the framework for market competition and<br />
specifically for the Chi-X market. These MIRs will take effect on 31 October 2011.<br />
On 4 May 2011, the Government granted Chi-X an Australian market licence under section 795B(1) <strong>of</strong> the<br />
Corporations Act 2001 (the Corporations Act) on the basis that Chi-X meets certa<strong>in</strong> licence pre-conditions.<br />
Subject to Chi-X meet<strong>in</strong>g its licence pre-conditions and the operator's read<strong>in</strong>ess, the earliest Chi-X can<br />
commence operations is 31 October 2011.<br />
1.3 Summary <strong>of</strong> the <strong>in</strong>terim cost recovery arrangements<br />
Interim cost recovery arrangements (1 August 2010 to 30 June 2011)<br />
Interim cost recovery arrangements were implemented from 1 August 2010 to 30 June 2011 to facilitate<br />
the recovery <strong>of</strong> government fund<strong>in</strong>g to cover ASIC's additional costs for perform<strong>in</strong>g its new regulatory<br />
functions follow<strong>in</strong>g the transfer <strong>of</strong> market supervision.<br />
5 Media Release, Chris Bowen, M<strong>in</strong>ister for F<strong>in</strong>ancial Services, Superannuation and Corporate Law, ‘Government announces<br />
competition <strong>in</strong> f<strong>in</strong>ancial <strong>markets</strong>’, 31 March 2010.<br />
http://mfsscl.treasurer.gov.au/DisplayDocs.aspx?doc=pressreleases/2010/032.htm&pageID=003&m<strong>in</strong>=ceba&Year<br />
=&DocType=0<br />
6 Budget Measures 2011-12, Budget Paper No. 2 – Part 2: Expense Measures, Commonwealth <strong>of</strong> Australia, May 2011, p.319.<br />
3
It was <strong>in</strong>tended that Treasury and ASIC would consult with <strong>in</strong>dustry <strong>in</strong> 2011 to <strong>review</strong> the <strong>in</strong>terim<br />
arrangements and develop a new cost recovery proposal that would be more appropriate for a<br />
multi-market environment.<br />
For the period from 1 August 2010 to 30 June 2011, ASIC’s market supervision costs <strong>of</strong> $7.7 million were<br />
recovered from two sources:<br />
• fixed quarterly fees on each domestic licensed f<strong>in</strong>ancial market under the Corporations (Fees)<br />
Regulations 2001 (the Fees Regulations); and<br />
• total contribution <strong>of</strong> $4.2 million from the excess monies <strong>in</strong> the National Guarantee Fund (NGF) and<br />
the Australian Securities Exchange Fidelity Fund (ASEFF). 7<br />
A cost recovery impact statement (CRIS) reflect<strong>in</strong>g these arrangements was agreed by the Department <strong>of</strong><br />
F<strong>in</strong>ance and Deregulation (DoFD) <strong>in</strong> July 2010.<br />
Extension <strong>of</strong> <strong>in</strong>terim cost recovery arrangements (1 July 2011 to 31 December 2011)<br />
As competition had not begun by 1 July 2011, the <strong>in</strong>terim cost recovery arrangements were extended for a<br />
further six month period to 31 December 2011.<br />
A new CRIS was subsequently published for the period from 1 July 2011 to 31 December 2011 and<br />
amendments were also made to the Fees Regulations to prescribe the fixed quarterly fees that would apply<br />
to the ASX and ASX 24 <strong>markets</strong> dur<strong>in</strong>g the third and fourth quarters <strong>of</strong> the 2011 calendar year, and the<br />
fixed quarterly fee that would apply to Chi-X when it commences operations.<br />
The fund<strong>in</strong>g for ASIC's operat<strong>in</strong>g costs for perform<strong>in</strong>g its new regulatory functions for the period from<br />
1 July 2011 to 31 December 2011 is $4.5 million. These costs will be recovered from two sources:<br />
• fixed quarterly fees on each domestic licensed f<strong>in</strong>ancial market under the Fees Regulations; and<br />
• a total contribution <strong>of</strong> $2.3 million from the excess monies <strong>in</strong> the NGF and the ASEFF.<br />
The new <strong>in</strong>terim fee arrangements are summarised <strong>in</strong> Table 1.1 below.<br />
The proposed cash equities market fee model and cost recovery arrangements will replace the current<br />
<strong>in</strong>terim fee arrangements for the cash equities <strong>markets</strong> on 1 January 2012. The current arrangements for<br />
the small f<strong>in</strong>ancial <strong>markets</strong> and futures <strong>markets</strong> will cont<strong>in</strong>ue to apply for a further 18 month period from<br />
1 January 2012.<br />
1.1 Tim<strong>in</strong>g <strong>of</strong> Implementation<br />
To ensure <strong>in</strong>dustry has sufficient time to consider the proposed arrangements the Government proposes to<br />
implement the new cost recovery arrangements for a multi-market environment from 1 January 2012.<br />
7 The use <strong>of</strong> excess monies from the NGF and ASEFF was an <strong>in</strong>terim measure for transfer <strong>of</strong> supervision costs <strong>in</strong>curred prior to<br />
the commencement <strong>of</strong> competition as referred to <strong>in</strong> the related cost recovery impact statements:<br />
http://www.asic.gov.au/asic/ASIC.NSF/byHeadl<strong>in</strong>e/Market%20supervision%20and%20surveillance#cris<br />
4
Table 1.1: Fee structure under the <strong>in</strong>terim cost recovery arrangements (1 July 2011 to 31 December 2011)<br />
Previous fee New fee<br />
1-Aug-10 to 1-Jul-11 to<br />
Market Fee type 30-Jun-11 31-Dec-11<br />
Small f<strong>in</strong>ancial <strong>markets</strong> Supervision fee $9,375 per qtr $9,375 per qtr<br />
ASX 24 Supervision fee $138,750 per qtr 217,000 per qtr<br />
Note: the $337,500 contribution from the ASEFF was<br />
applied as an <strong>of</strong>fset to the total cost <strong>of</strong> supervis<strong>in</strong>g the<br />
ASX 24 market.<br />
ASX Supervision fee $786,250 per qtr $860,000 per qtr<br />
Note: the $1.91m contribution from the NGF was<br />
applied as an <strong>of</strong>fset to the cost <strong>of</strong> supervis<strong>in</strong>g the<br />
ASX market.<br />
Chi-X Supervision fee n/a $46,000 per qtr<br />
Note: Chi-X is assumed to commence operations from<br />
31 October 2011 (at the earliest, subject to M<strong>in</strong>ister's<br />
approval and the operator's read<strong>in</strong>ess). ASIC's<br />
estimated supervisory effort for the Chi-X market is<br />
calculated based on Chi-X achiev<strong>in</strong>g 2.5% market<br />
share <strong>in</strong> the overall trad<strong>in</strong>g <strong>of</strong> ASX listed securities <strong>in</strong><br />
November and December 2011. This is a simple<br />
estimate for the purposes <strong>of</strong> extend<strong>in</strong>g the current<br />
<strong>in</strong>terim cost recovery arrangements.<br />
5
2 AUSTRALIAN GOVERNMENT COST RECOVERY POLICY<br />
2.1 Fund<strong>in</strong>g and cost recovery for transfer <strong>of</strong> supervision and the<br />
<strong>in</strong>troduction <strong>of</strong> competition<br />
Figure 2.1: The cost recovery process for transfer <strong>of</strong> supervision and competition<br />
The cost recovery process for the Australian f<strong>in</strong>ancial market differs from that <strong>used</strong> <strong>in</strong> <strong>other</strong> jurisdictions<br />
where market supervision is performed by <strong>in</strong>dustry or self-regulatory organisations. The unique features <strong>of</strong><br />
the Australian cost recovery arrangements are:<br />
• The amount <strong>of</strong> fees collected is limited to the amount that has been funded by Government for<br />
transfer <strong>of</strong> supervision and competition.<br />
• Further fund<strong>in</strong>g where required, for example for ASIC to deal with major new market technology<br />
developments, must be approved through the budget process, as a prerequisite to fund<strong>in</strong>g be<strong>in</strong>g<br />
appropriated subject to cost recovery.<br />
• The funds proposed for recovery through fee arrangements are returned to Government and are<br />
<strong>in</strong>tended to fully <strong>of</strong>fset fund<strong>in</strong>g by Government to meet the costs required to be <strong>in</strong>curred for transfer<br />
<strong>of</strong> supervision and competition (see Figure 2.1).<br />
• The Government’s Cost Recovery Guidel<strong>in</strong>es and pr<strong>in</strong>ciples form a frame <strong>of</strong> reference from which to<br />
evaluate potential cost recovery models.<br />
2.2 The Cost Recovery Guidel<strong>in</strong>es<br />
The Australian Government adopted a formal cost recovery policy <strong>in</strong> December 2002 to improve the<br />
consistency, transparency and accountability <strong>of</strong> its cost recovery arrangements and promote the efficient<br />
allocation <strong>of</strong> resources. The policy applies to all F<strong>in</strong>ancial Management and Accountability Act 1997<br />
agencies and to relevant Commonwealth Authorities and Companies Act 1997 bodies.<br />
The Government’s Cost Recovery policy 8 outl<strong>in</strong>ed <strong>in</strong> the Australian Government Cost Recovery Guidel<strong>in</strong>es<br />
(the Cost Recovery Guidel<strong>in</strong>es) require that cost recovery arrangements must be compliant with the Cost<br />
Recovery Guidel<strong>in</strong>es and all significant cost recovery arrangements be subject to a CRIS.<br />
8 The policy is adm<strong>in</strong>istered by the Department <strong>of</strong> F<strong>in</strong>ance and Deregulation (DoFD) and outl<strong>in</strong>ed <strong>in</strong> the Australian Government<br />
Cost Recovery Guidel<strong>in</strong>es (the Cost Recovery Guidel<strong>in</strong>es).<br />
6
2.3 Cost recovery guid<strong>in</strong>g pr<strong>in</strong>ciples<br />
A core pr<strong>in</strong>ciple <strong>of</strong> the Cost Recovery Guidel<strong>in</strong>es is that entities should set charges to recover all <strong>in</strong>tegral<br />
costs <strong>of</strong> products or services where it is efficient and effective to do so, where the beneficiaries are a<br />
narrow and identifiable group and where it would not be <strong>in</strong>consistent with Australian Government policy<br />
objectives, while undertak<strong>in</strong>g an appropriate level <strong>of</strong> consultation with stakeholders. In the case <strong>of</strong><br />
regulatory activities, the Cost Recovery Guidel<strong>in</strong>es require that the <strong>in</strong>dividuals or groups that have created<br />
the need for regulation should bear the cost <strong>of</strong> that regulation.<br />
Cost recovery arrangements should seek to recover the costs <strong>in</strong>curred by regulatory agencies (<strong>in</strong><br />
undertak<strong>in</strong>g their regulatory activities) from the entities that they regulate. An alternative <strong>approach</strong> that<br />
can be taken is to allocate the costs based on the <strong>in</strong>dividuals or groups that would benefit from the<br />
provision <strong>of</strong> the regulatory service. In l<strong>in</strong>e with these pr<strong>in</strong>ciples, the Government will seek to recover ASIC's<br />
costs for market supervision across market operators and market participants.<br />
Cost recovery charg<strong>in</strong>g seeks to reflect the cost driver/s <strong>of</strong> undertak<strong>in</strong>g an <strong>in</strong>dividual activity. As entities<br />
may not have sufficient <strong>in</strong>formation to formulate a model that would enable them to precisely calculate the<br />
costs associated with regulat<strong>in</strong>g each entity, entities may use a proxy to attribute costs to a particular<br />
regulated entity.<br />
For the purposes <strong>of</strong> the policy, costs may be recovered by way <strong>of</strong> a fee for the product or service, or a levy,<br />
whichever is the more efficient. The Government proposes to recover ASIC's market supervision costs<br />
through the imposition <strong>of</strong> fees on the basis <strong>of</strong> efficiency, as fees are more closely l<strong>in</strong>ked to the cost <strong>of</strong><br />
<strong>in</strong>dividual activities than the application <strong>of</strong> a broad levy on market operators and market participants.<br />
Cost recovery is different from general taxation <strong>in</strong> that there must be a direct l<strong>in</strong>k between an agency’s<br />
costs and the revenue it receives from its charg<strong>in</strong>g arrangements. Importantly, cost recovery should not<br />
give rise to an over or under collection dur<strong>in</strong>g the life <strong>of</strong> the cost recovery arrangement. By contrast,<br />
general taxation represents a compulsory exaction <strong>of</strong> money that need not bear any correlation to the<br />
costs for provision <strong>of</strong> those services.<br />
The table below sets out the <strong>key</strong> pr<strong>in</strong>ciples <strong>of</strong> cost recovery 9 and how the Government’s proposed market<br />
supervision cost recovery arrangements reflect these pr<strong>in</strong>ciples.<br />
Table 2.1: Cost recovery guid<strong>in</strong>g pr<strong>in</strong>ciples<br />
Key pr<strong>in</strong>ciples <strong>of</strong> cost recovery Proposed ASIC market supervision cost recovery arrangements<br />
Agencies should set charges to recover all the costs for<br />
products or services where it is efficient to do so, with<br />
partial cost recovery to apply only where new<br />
arrangements are phased <strong>in</strong>, where there are<br />
government endorsed community obligations, or for<br />
explicit government policy purposes.<br />
Cost recovery should not be applied where it is not cost<br />
effective, where it is <strong>in</strong>consistent with government<br />
policy objectives or where it would unduly stifle<br />
competition or <strong>in</strong>dustry <strong>in</strong>novation.<br />
The total amount ASIC will collect through the fees proposed is equal to the costs<br />
ASIC will expend on market supervision and competition for market services. The<br />
proposed arrangements do not <strong>in</strong>clude the costs <strong>of</strong> perform<strong>in</strong>g ASIC’s core functions<br />
(that is functions already undertaken by ASIC prior to the transfer <strong>of</strong> supervision).<br />
The proposed cost recovery arrangements are cost effective, consistent with<br />
government policy, and are not <strong>in</strong>tended to stifle the competitiveness <strong>of</strong> Australia’s<br />
f<strong>in</strong>ancial <strong>markets</strong>.<br />
9 The <strong>key</strong> pr<strong>in</strong>ciples have been reproduced from page 2 <strong>of</strong> the Australian Government Cost Recovery Guidel<strong>in</strong>es, DoFD, July 2005,<br />
F<strong>in</strong>ancial Management Guidance No. 4,Canberra 2005. Some pr<strong>in</strong>ciples have been paraphrased and those relat<strong>in</strong>g to purely<br />
adm<strong>in</strong>istrative matters have been omitted.<br />
7
Table 2.1: Cost recovery guid<strong>in</strong>g pr<strong>in</strong>ciples (cont<strong>in</strong>ued)<br />
Key pr<strong>in</strong>ciples <strong>of</strong> cost recovery Proposed ASIC market supervision cost recovery arrangements<br />
Any charges should reflect the costs <strong>of</strong> provid<strong>in</strong>g the<br />
product or service and should generally be imposed on<br />
a fee-for-service basis or, where efficient, as a levy.<br />
Cost recovery arrangements should have clear legal<br />
authority for the imposition <strong>of</strong> charges.<br />
Costs that are not directly related or <strong>in</strong>tegral to the<br />
provision <strong>of</strong> products or services (for example some<br />
policy and parliamentary servic<strong>in</strong>g functions) should not<br />
be recovered. Agencies that undertake regulatory<br />
activities should generally <strong>in</strong>clude adm<strong>in</strong>istration costs<br />
when determ<strong>in</strong><strong>in</strong>g appropriate charges.<br />
Where possible, cost recovery should be undertaken on<br />
an activity (or activity group) basis rather than across<br />
the agency as a whole. Cost recovery targets on an<br />
agency-wide basis are to be discont<strong>in</strong>ued.<br />
Agencies should not cost recover for products and<br />
services funded through the budget process that form<br />
an agency’s ‘basic <strong>in</strong>formation product set’, but may<br />
cost recover, where appropriate, for commercial,<br />
additional and <strong>in</strong>cremental products and services that<br />
are not funded through the budget process.<br />
Portfolio M<strong>in</strong>isters should determ<strong>in</strong>e the most<br />
appropriate consultative mechanisms for their<br />
agencies’ cost recovery arrangements, where relevant.<br />
Cost recovery arrangements will be considered<br />
‘significant’ depend<strong>in</strong>g on both the amount <strong>of</strong> revenue<br />
and the impact on stakeholders and where m<strong>in</strong>isters<br />
have determ<strong>in</strong>ed the activity to be significant on a<br />
case-by-case basis.<br />
Agencies with significant cost recovery arrangements<br />
should ensure that they undertake appropriate<br />
stakeholder consultations, <strong>in</strong>clud<strong>in</strong>g with relevant<br />
departments.<br />
The proposed fees reflect the costs <strong>of</strong> the market supervision functions ASIC<br />
undertakes <strong>in</strong> relation to the market operators and market participants it is<br />
responsible for regulat<strong>in</strong>g.<br />
The proposed cost recovery arrangements will be established under the Fees Act and<br />
Fees Regulations.<br />
The costs <strong>of</strong> perform<strong>in</strong>g ASIC’s core functions (that is functions already be<strong>in</strong>g<br />
undertaken by ASIC prior to the transfer <strong>of</strong> supervision) are not <strong>in</strong>cluded <strong>in</strong> the total<br />
cost to be recovered under the proposed cost recovery arrangements.<br />
The proposed cost recovery arrangements are sensitive to the different supervisory<br />
effort required by ASIC to regulate the cash equities <strong>markets</strong>, small f<strong>in</strong>ancial <strong>markets</strong><br />
and futures <strong>markets</strong>. For the cash equities <strong>markets</strong>, ASIC's costs are proposed to be<br />
allocated between market operators and market participants by reference to<br />
categories <strong>of</strong> ASIC's market supervision functions. In relation to the small f<strong>in</strong>ancial<br />
<strong>markets</strong> and the futures <strong>markets</strong>, the costs that are proposed to be recovered reflect<br />
the number <strong>of</strong> FTE employees required for supervis<strong>in</strong>g those <strong>markets</strong>.<br />
Costs that are be<strong>in</strong>g funded to support ASIC’s regulatory functions prior to the<br />
transfer <strong>of</strong> market supervision <strong>in</strong> 2010 are not <strong>in</strong>cluded <strong>in</strong> the total cost to be<br />
recovered under the proposed cost recovery arrangements.<br />
Consultation will consist <strong>of</strong> the release <strong>of</strong> this consultation paper, which seeks<br />
<strong>in</strong>dustry feedback on the proposed cost recovery arrangements, meet<strong>in</strong>gs with<br />
stakeholders, and the release <strong>of</strong> the exposure draft amendments to the Fees<br />
Regulations.<br />
Industry will be consulted aga<strong>in</strong> dur<strong>in</strong>g the <strong>review</strong> <strong>of</strong> these arrangements (planned to<br />
be undertaken with<strong>in</strong> 18 months <strong>of</strong> implementation).<br />
The market supervision cost recovery arrangements are considered significant.<br />
Treasury and ASIC have consulted with DoFD <strong>in</strong> the development <strong>of</strong> the proposed<br />
cost recovery arrangements and this consultation paper. Consultation with <strong>in</strong>dustry<br />
will take place through this consultation paper, meet<strong>in</strong>gs with <strong>in</strong>dustry, and the<br />
release <strong>of</strong> the exposure draft amendments to the Fees Regulations<br />
8
Table 2.1: Cost recovery guid<strong>in</strong>g pr<strong>in</strong>ciples (cont<strong>in</strong>ued)<br />
Key pr<strong>in</strong>ciples <strong>of</strong> cost recovery Proposed ASIC market supervision cost recovery arrangements<br />
Agencies with significant cost recovery arrangements<br />
will need to prepare a CRIS. Responsible M<strong>in</strong>isters must<br />
agree all CRISs. The Expenditure Review Committee will<br />
<strong>review</strong> all major cost recovery arrangements with<br />
receipts <strong>in</strong> excess <strong>of</strong> $10 million. Entities must publish<br />
all CRISs on their websites.<br />
Agencies are to <strong>review</strong> all significant cost recovery<br />
arrangements periodically, but no less frequently than<br />
every five years.<br />
2.4 Industry considerations<br />
A CRIS will be developed <strong>in</strong> consultation with the DoFD and Treasury.<br />
The CRIS will be published on ASIC’s website prior to the implementation <strong>of</strong> the f<strong>in</strong>al<br />
cost recovery arrangements.<br />
The f<strong>in</strong>al cost recovery arrangements will be formally <strong>review</strong>ed with<strong>in</strong> 18 months <strong>of</strong><br />
implementation so that any necessary adjustments to the arrangements can be<br />
effected via amendments to the Fees Regulations from 1 July 2013.<br />
ASIC will be monitor<strong>in</strong>g the effectiveness <strong>of</strong> the cost recovery arrangements on an<br />
ongo<strong>in</strong>g basis from the date <strong>of</strong> commencement.<br />
Industry will be consulted on any proposed adjustments prior to implementation.<br />
Consistent with the cost recovery guid<strong>in</strong>g pr<strong>in</strong>ciples, <strong>in</strong>formal <strong>in</strong>dustry consultations on the proposed cost<br />
recovery arrangements have identified some <strong>key</strong> themes (summarised <strong>in</strong> the table below) as important<br />
reference po<strong>in</strong>ts for the design and assessment <strong>of</strong> an appropriate supervision fee model for cash equities<br />
<strong>markets</strong>.<br />
Table 2.2: Key pr<strong>in</strong>ciples and <strong>in</strong>dustry considerations<br />
Pr<strong>in</strong>ciple Description<br />
Fairness The fees should reflect the level <strong>of</strong> trad<strong>in</strong>g activity undertaken and the supervisory effort required, and should be<br />
applied <strong>in</strong> a non-discrim<strong>in</strong>atory way. The Cost Recovery Guidel<strong>in</strong>es state that cross-subsidisation <strong>of</strong> costs is not<br />
appropriate.<br />
Transparency The method <strong>of</strong> charg<strong>in</strong>g fees should be transparent and consistently applied to all market operators and market<br />
participants.<br />
Review The cost recovery arrangements must be subject to ongo<strong>in</strong>g <strong>review</strong> and robust corporate governance processes.<br />
Market neutrality Fees structure should be designed to be as neutral as possible so that one marketplace is not favoured over an<strong>other</strong>.<br />
Industry<br />
competitiveness<br />
International<br />
competitiveness<br />
Fees should not create a barrier to entry for new market entrants or a barrier to market participants connect<strong>in</strong>g to<br />
new market entrants.<br />
Fees should not discrim<strong>in</strong>ate between different types <strong>of</strong> market participants or market operators.<br />
Fees should not create a dis<strong>in</strong>centive to trade on Australia’s f<strong>in</strong>ancial <strong>markets</strong>.<br />
The cost recovery burden should not be disproportionate to the amounts cost recovered <strong>in</strong> comparable <strong>in</strong>ternational<br />
jurisdictions.<br />
Certa<strong>in</strong>ty The cost recovery arrangements need to provide certa<strong>in</strong>ty to <strong>in</strong>dustry as to how much will be charged each quarter.<br />
Market participants and market operators should be able to calculate their fees <strong>in</strong>dependently.<br />
The cost recovery arrangements need to provide certa<strong>in</strong>ty to government that the correct amount will be recovered,<br />
and that there will not be over-recovery or under-recovery.<br />
9
Key Po<strong>in</strong>ts<br />
3 AN OVERVIEW OF THE GOVERNMENT’S PROPOSED MARKET SUPERVISION FEE MODEL<br />
• This section provides an overview <strong>of</strong> the proposed cash equities market supervision fee model and<br />
the proposed cost recovery arrangements to support ASIC’s market supervision functions <strong>in</strong> a<br />
competitive multi-operator market environment.<br />
• The proposed cash equities market supervision fee model is based on a proportional fee calculated<br />
by reference to trade count (for non-IT costs) and message count (for IT costs). An alternative<br />
<strong>approach</strong> based on trade count only is also considered, as well as the alternative <strong>of</strong> charg<strong>in</strong>g a flat<br />
fee per trade and/or message.<br />
• The Government seeks feedback on this model and the proposed alternatives.<br />
The table below summarises the proposed cost recovery arrangements for the three market segments:<br />
equities <strong>markets</strong> (ASX listed securities), small f<strong>in</strong>ancial <strong>markets</strong> and the futures <strong>markets</strong>; and the costs to be<br />
recovered from each segment from 1 January 2012 to 30 June 2013.<br />
Table 3.1: Proposed cost recovery arrangements for different market segments<br />
Market Type <strong>of</strong> cost<br />
Equities <strong>markets</strong> (for ASX<br />
listed securities) that is<br />
ASX and Chi-X<br />
(Sections 4 and 5)<br />
Market supervision costs $26.6 million — to be<br />
Fixed costs relat<strong>in</strong>g to the<br />
configuration <strong>of</strong> the ASIC<br />
IMSS to set-up real-time<br />
surveillance for certa<strong>in</strong><br />
<strong>markets</strong><br />
Total estimated costs to be<br />
recovered ( 1 January 2012<br />
to 30 June 2013) ($) Proposed cost recovery arrangements<br />
recovered from market<br />
operators and market<br />
participants.<br />
Chi-X $0.286 million; ASX<br />
PureMatch $0.182 million<br />
plus Chi-X’s and ASX’s IMSS<br />
connection costs <strong>of</strong><br />
approximately $0.1 million.<br />
10<br />
Allocation <strong>of</strong> costs between operators and<br />
participants: to be allocated by reference to<br />
categories <strong>of</strong> ASIC's market supervision functions.<br />
This results <strong>in</strong> an allocation <strong>of</strong> approximately<br />
84 per cent <strong>of</strong> the costs to market participants and<br />
16 per cent to market operators.<br />
Allocation <strong>of</strong> costs to each operator and<br />
participant: non-IT costs allocated by trade count,<br />
and IT costs to be allocated by message count<br />
(which <strong>in</strong>cludes both trades and orders).<br />
Collection<br />
Fees to be charged quarterly <strong>in</strong> arrears based on<br />
each entity’s share <strong>of</strong> the overall trade and<br />
message count <strong>in</strong> ASX listed securities over the<br />
quarter.<br />
ASIC's IMSS configuration costs for Chi-X and ASX<br />
PureMatch are proposed to be recovered directly<br />
from each operator over the period from<br />
1 January 2012 to 30 June 2013.<br />
Separately, a monthly network connection charge<br />
<strong>of</strong> between $5,000 and $10,000 is proposed for all<br />
market operators.
Table 3.1: Proposed cost recovery arrangements for different market segments (cont<strong>in</strong>ued)<br />
Market Type <strong>of</strong> cost<br />
Small f<strong>in</strong>ancial <strong>markets</strong><br />
(NSX, SIM Venture, IMB<br />
Ltd, and APX<br />
(Section 8)<br />
Futures <strong>markets</strong> — ASX 24<br />
(Section 9)<br />
Total estimated costs to be<br />
recovered ( 1 January 2012<br />
to 30 June 2013) ($) Proposed cost recovery arrangements<br />
Market supervision costs $0.2 million Current fixed quarterly fee <strong>of</strong> $9,375 per market<br />
11<br />
will cont<strong>in</strong>ue to apply.<br />
Market supervision costs $2.3 million The exist<strong>in</strong>g <strong>approach</strong>, <strong>in</strong>volv<strong>in</strong>g the imposition <strong>of</strong><br />
Total $29.8 million<br />
a fixed quarterly fee on the operator only, will be<br />
extended for a further 18 months. The fee<br />
proposed is $386,000 per quarter.<br />
New cost recovery arrangements for futures<br />
<strong>markets</strong> are proposed to be implemented from<br />
1 July 2013.<br />
3.1 Overview <strong>of</strong> the market supervision fee model and cost recovery<br />
arrangements for the cash equities <strong>markets</strong> (for ASX listed securities)<br />
Allocation <strong>of</strong> costs between market operators and market participants<br />
To ensure that the burden <strong>of</strong> cost recovery is borne equitably across the <strong>in</strong>dustry the Government proposes<br />
to allocate ASIC’s costs between market operators and market participants. This allows the costs to be<br />
allocated <strong>in</strong> l<strong>in</strong>e with the cost recovery pr<strong>in</strong>ciple that <strong>in</strong>dividuals or groups that have created the need for<br />
regulation should bear the cost <strong>of</strong> that regulation. In do<strong>in</strong>g so, the proposed <strong>approach</strong> will ensure the costs<br />
assigned are both fair and transparent and that regulated entities have an understand<strong>in</strong>g <strong>of</strong> the costs that<br />
ASIC <strong>in</strong>curs for the supervision <strong>of</strong> their activities and the basis for their liability.<br />
ASIC’s costs will be allocated between market operators and market participants by reference to the<br />
categories <strong>of</strong> ASIC’s market supervision functions:<br />
• Costs that are identified as relat<strong>in</strong>g to the regulation <strong>of</strong> market participant activities are allocated to<br />
market participants only.<br />
• Costs that are identified as relat<strong>in</strong>g to the regulation <strong>of</strong> activities <strong>of</strong> both market operators and<br />
market participants will be allocated to both groups (to be allocated based on an <strong>in</strong>dustry revenue<br />
proxy, as described <strong>in</strong> Table 5.1).<br />
• Costs associated with implement<strong>in</strong>g market competition will be allocated between market operators<br />
and market participants <strong>in</strong> equal proportion. This recognises the need for supervision <strong>of</strong> compet<strong>in</strong>g<br />
<strong>markets</strong> given that market participants can be expected to access more than one market provid<strong>in</strong>g<br />
trad<strong>in</strong>g <strong>in</strong> ASX listed securities.<br />
The result <strong>of</strong> this proposed cost allocation <strong>approach</strong> is a split <strong>of</strong> approximately 84 per cent for market<br />
participants and 16 per cent for market operators.<br />
Section 4 sets out ASIC’s regulatory costs and cost drivers for the cash equities <strong>markets</strong> (ASX listed<br />
securities) <strong>in</strong> detail.
Allocation <strong>of</strong> costs to each market operator and participant<br />
Proposed <strong>approach</strong>: Proportional fee based on trade count and message count<br />
The Government proposes a cost recovery arrangement that is based on trade count (for non-IT costs) and<br />
message count (for IT costs). An arrangement based on both trades and messages would fully reflect the<br />
<strong>key</strong> drivers <strong>of</strong> ASIC’s costs.<br />
The proposed <strong>approach</strong> is <strong>in</strong>tended to provide a l<strong>in</strong>k between market operator and market participant fees<br />
and the resources ASIC expends to supervise their activities. The more active a participant is on a market,<br />
the more time and resources will be required by ASIC to monitor its activities. Similarly for market<br />
operators, the more activity occurr<strong>in</strong>g on its market, the more time and resources will be required by ASIC<br />
to monitor its market.<br />
(i) Trade count <strong>used</strong> to apportion non-IT costs<br />
The Government proposes to apportion ASIC's non-IT market supervision costs among market operators<br />
and market participants based on the number <strong>of</strong> trades that are reported to ASIC's IMSS each quarter.<br />
As trad<strong>in</strong>g activity is a <strong>key</strong> driver <strong>of</strong> ASIC's non-IT costs, trade count is considered to be the most suitable<br />
basis for determ<strong>in</strong><strong>in</strong>g the portion <strong>of</strong> ASIC's non-IT costs that should be borne by each market operator and<br />
participant. This <strong>approach</strong> is <strong>in</strong> l<strong>in</strong>e with the cost recovery <strong>approach</strong> <strong>in</strong>troduced <strong>in</strong> <strong>in</strong>ternational jurisdictions<br />
(see Appendix).<br />
(ii) Message count <strong>used</strong> to apportion IT costs<br />
It is proposed to apportion ASIC's market supervision IT costs among market operators and market<br />
participants based on the number <strong>of</strong> messages received by the ASIC IMSS each quarter.<br />
As the Government considers the number <strong>of</strong> messages 10 to be the <strong>key</strong> driver <strong>of</strong> ASIC's IT costs, message<br />
count is the most suitable basis for determ<strong>in</strong><strong>in</strong>g the portion <strong>of</strong> ASIC's IT costs that should be borne by each<br />
market operator and participant.<br />
Although revenue may not necessarily flow from a high market share <strong>of</strong> message count, recover<strong>in</strong>g ASIC's<br />
IT costs based on the number <strong>of</strong> messages should encourage market participants to more carefully consider<br />
how they are consum<strong>in</strong>g ASIC's IMSS capacity, and <strong>in</strong> turn the capacity-related costs their message traffic<br />
may impose on the entire <strong>in</strong>dustry.<br />
An added benefit to the wider <strong>in</strong>dustry is that this cost recovery <strong>approach</strong> is neutral between participants.<br />
Participants with low message <strong>in</strong>tensity will pay lower fees compared to participants with high message<br />
<strong>in</strong>tensity. In addition, the costs associated with ma<strong>in</strong>ta<strong>in</strong><strong>in</strong>g capacity to cater for high message <strong>in</strong>tensity will<br />
be borne predom<strong>in</strong>antly by the most message-<strong>in</strong>tensive participants and <strong>markets</strong>.<br />
The Government understands that Canada's Investment Industry Regulatory Organisation (IIROC), which<br />
performs analogous market surveillance functions to ASIC, is close to complet<strong>in</strong>g consultation on a new fee<br />
model that is based on both trades as well as messages. Responses to the Canadian consultation were<br />
generally supportive <strong>of</strong> the proposed fee model. 11<br />
10 'Messages' are the total <strong>of</strong> trades, order entry messages, order amend messages (price and / or volume) and order deletion /<br />
cancellation messages.<br />
11 IIROC, New Market Regulation Fee Model, IIROC Adm<strong>in</strong>istrative Notice 10-0316, November 30, 2010.<br />
12
The International Organization <strong>of</strong> Securities Commissions (IOSCO) recently issued a consultation report,<br />
titled Regulatory Issues Raised by the Impact <strong>of</strong> Technological Changes on Market Integrity and Efficiency.<br />
In its consultation report IOSCO states that the broad issues <strong>of</strong> market structure and market surveillance<br />
capacity, <strong>in</strong>clud<strong>in</strong>g the costs <strong>of</strong> the additional surveillance capacity needed to adequately deal with these<br />
changes, requires particular consideration. One <strong>of</strong> the questions IOSCO has posed <strong>in</strong> its consultation report<br />
is whether charges or fees should be on messages, cancellations or high order-to-trade ratios, and if so,<br />
how those fees or charges should be determ<strong>in</strong>ed and on what basis. 12<br />
A proportional fee based on trade count (for non-IT costs) and message count (for IT costs) provides the<br />
most accurate reflection <strong>of</strong> ASIC’s cost drivers, and therefore is considered to be the most suitable proxy<br />
hav<strong>in</strong>g regard to the cost recovery pr<strong>in</strong>ciples.<br />
‘Proportional fee’ charg<strong>in</strong>g method<br />
The proportional model charges each market operator (or market participant) a fee based on the<br />
operator’s (or participant’s) share <strong>of</strong> the total number <strong>of</strong> trades and/or messages occurr<strong>in</strong>g across the<br />
market. Charges are determ<strong>in</strong>ed based on volume <strong>in</strong> each period and payments are made <strong>in</strong> arrears. Fees<br />
are calculated at the end <strong>of</strong> each quarter based on market activity <strong>in</strong> the previous quarter. 13<br />
The ma<strong>in</strong> advantage <strong>of</strong> charg<strong>in</strong>g a proportional fee <strong>in</strong> this way is that it will not result <strong>in</strong> the over- or underrecovery<br />
<strong>of</strong> ASIC's costs. The costs <strong>of</strong> supervision will be collected regardless <strong>of</strong> whether the market shr<strong>in</strong>ks<br />
or grows. Canada's IIROC has been charg<strong>in</strong>g its <strong>markets</strong> regulated entities a proportional fee for several<br />
years. A disadvantage <strong>of</strong> this <strong>approach</strong> is that the unit price per trade and per message will not be known<br />
until the end <strong>of</strong> each quarter.<br />
The proposed <strong>approach</strong> is different from the f<strong>in</strong>ancial transaction tax proposals sometimes discussed <strong>in</strong><br />
popular media. The proposed <strong>approach</strong> is <strong>in</strong>tended to recover the costs <strong>in</strong>curred by ASIC for perform<strong>in</strong>g its<br />
new supervisory functions follow<strong>in</strong>g the transfer <strong>of</strong> supervision and the costs necessary to support the<br />
<strong>in</strong>troduction <strong>of</strong> market competition. In l<strong>in</strong>e with the Cost Recovery Guidel<strong>in</strong>es, those costs should be borne<br />
directly by both market operators and participants given that the activities <strong>of</strong> both groups are the drivers<br />
for costs associated with ASIC's regulatory activities and the <strong>in</strong>troduction <strong>of</strong> market competition.<br />
12 IOSCO, Regulatory issues Raised by the Impact <strong>of</strong> Technological Changes on Market Integrity and Efficiency, IOSCO, July 2011,<br />
p.12. In its report IOSCO stated that: ‘The <strong>in</strong>creased messag<strong>in</strong>g that has come with extensive use <strong>of</strong> algorithms raises costs for<br />
many participants, <strong>in</strong>clud<strong>in</strong>g marketplaces, vendors and competent authorities. This is especially true with respect to HFT. In<br />
addition, algorithmic trad<strong>in</strong>g, like all electronic trad<strong>in</strong>g, results <strong>in</strong> the need for changes to the way competent authorities<br />
monitor trad<strong>in</strong>g. Increased algorithmic trad<strong>in</strong>g has <strong>in</strong>creased the complexity <strong>of</strong> surveillance for competent authorities. Hav<strong>in</strong>g<br />
sophisticated systems or algorithms that monitor trad<strong>in</strong>g and detect patterns is a necessity <strong>in</strong> this environment <strong>of</strong> high speed<br />
and complex trad<strong>in</strong>g <strong>in</strong> order to ma<strong>in</strong>ta<strong>in</strong> market <strong>in</strong>tegrity and confidence.’<br />
13 The method <strong>of</strong> calculation for the proportional fee can be described as follows:<br />
Participant A’s = Component 1 (Non-IT costs) = ASIC non-IT costs × No. <strong>of</strong> trades reported/executed by Participant A<br />
fee<br />
+<br />
total no. <strong>of</strong> trades reported/executed by all participants<br />
Component 2 (IT costs) = ASIC IT costs × No. <strong>of</strong> Participant A's messages received by IMSS<br />
total no. <strong>of</strong> messages received by IMSS from all participants<br />
For example, if a participant executed 10 per cent <strong>of</strong> the total trades executed by all participants <strong>in</strong> a quarter, then the first<br />
component <strong>of</strong> the participant’s fee would be 10 per cent <strong>of</strong> ASIC’s non-IT costs for that quarter. If the participant generated<br />
20 per cent <strong>of</strong> all messages IMSS received for that quarter, then the second component <strong>of</strong> the fee would be 20 per cent <strong>of</strong><br />
ASIC’s IT costs <strong>in</strong> that quarter.<br />
13
Alternatives considered<br />
A number <strong>of</strong> alternative cost recovery arrangements were also explored dur<strong>in</strong>g the development <strong>of</strong> the<br />
proposed cost recovery arrangements detailed above.<br />
First alternative considered: Proportional fee based on trade count only<br />
Under this alternative, ASIC's total market supervision costs would be recovered from each market<br />
operator and each market participant based on their share <strong>of</strong> the overall trade count <strong>in</strong> ASX listed securities<br />
dur<strong>in</strong>g each quarter.<br />
This <strong>approach</strong> may be adm<strong>in</strong>istratively simpler as calculations will be based on trades only; therefore there<br />
may be fewer considerations for participants. While Canada is currently consider<strong>in</strong>g extend<strong>in</strong>g its fee model<br />
to <strong>in</strong>clude charg<strong>in</strong>g based on messages, there are no jurisdictions that are presently charg<strong>in</strong>g market<br />
regulation fees based on trades as well as messages.<br />
Currently trades that are conducted <strong>of</strong>f market are reported to the ASIC IMSS while messages are not. This<br />
means that <strong>of</strong>f-market trades will be subject to cost recovery under the proposed <strong>approach</strong> while messages<br />
will not. On this basis, the <strong>in</strong>clusion <strong>of</strong> messages (that is, under the proposed cost recovery <strong>approach</strong>) may<br />
be less neutral between dark and lit venues. However, messages reported to the IMSS are the <strong>key</strong> cost<br />
driver for ASIC’s IT costs.<br />
Cost recovery based on trades only may have a lower cost recovery burden on market operators and<br />
market participants that rely on high numbers <strong>of</strong> messages as part <strong>of</strong> their bus<strong>in</strong>ess model. However as<br />
there is a fixed amount that is to be recovered, the burden on <strong>in</strong>dustry <strong>in</strong> total will be the same <strong>in</strong> either<br />
model.<br />
This alternative <strong>approach</strong> may, however, result <strong>in</strong> higher cost recovery for ASIC's IT costs from less message<br />
<strong>in</strong>tensive participants rather than those who cause ASIC to <strong>in</strong>cur these costs (that is, high message <strong>in</strong>tensity<br />
participants/<strong>markets</strong>).<br />
Section 6 provides an illustration <strong>of</strong> the approximate fees payable under a proportional fee based on trades<br />
and message count and based on trade count only. This will assist market operators and market<br />
participants <strong>in</strong> compar<strong>in</strong>g the impact <strong>of</strong> the two <strong>approach</strong>es for activity-based charg<strong>in</strong>g. The illustrations<br />
show that for most participants the difference <strong>in</strong> fees payable between the two fee models is marg<strong>in</strong>al.<br />
Exclud<strong>in</strong>g messag<strong>in</strong>g from fee calculations under the alternative proposal would mean that most<br />
participants and exist<strong>in</strong>g market operators would pay slightly more, but HFTs and new market operators<br />
with message <strong>in</strong>tensive bus<strong>in</strong>ess models would pay slightly less.<br />
Second alternative considered: Fixed fee per trade and/or message count<br />
Under this alternative, market participants and market operators will be charged a fixed fee per trade<br />
and/or message. 14<br />
This option would require the Government to set a fee at a level that would enable it to conservatively<br />
achieve sufficient cost recovery. Sett<strong>in</strong>g the fee per trade and message precisely so that the correct amount<br />
14 The method <strong>of</strong> calculation for the fixed fee per trade model can be described as follows:<br />
Participant A’s fee = Fee per trade × No. <strong>of</strong> trades reported/executed by Participant A<br />
Examples <strong>of</strong> the potential fees are provided <strong>in</strong> Section 6.<br />
14
is cost recovered each quarter poses a challenge. Where activity on the market grows there will be the risk<br />
<strong>of</strong> over-recovery unless the fees are cont<strong>in</strong>uously revised down. Equally, if there is an unexpected decrease<br />
<strong>in</strong> activity on the market the fixed fee will result <strong>in</strong> under-recovery <strong>of</strong> costs.<br />
Under the proposed proportional method, if a participant or market operator ma<strong>in</strong>ta<strong>in</strong>s a relatively stable<br />
proportion <strong>of</strong> activity on the market, its fees will also be relatively stable. In contrast, with a fixed fee<br />
model, periods <strong>of</strong> unexpected volatility could lead to substantially higher charges for a participant or<br />
operator even where it ma<strong>in</strong>ta<strong>in</strong>s a stable share <strong>of</strong> activity on the market.<br />
To deal with the problem <strong>of</strong> over-recovery and under-recovery <strong>of</strong> costs, the fixed fees for trades and/or<br />
messages would require regular adjustment.<br />
The trend for some years has been that trade count has been <strong>in</strong>creas<strong>in</strong>g even if total turnover has not been<br />
<strong>in</strong>creas<strong>in</strong>g at the same rate, result<strong>in</strong>g <strong>in</strong> a reduction <strong>in</strong> the average trade size. Chart 3.1 below shows the<br />
<strong>in</strong>herent volatility <strong>in</strong> trade and order count with just one market operator, ASX. It is likely that, over the 18<br />
month duration <strong>of</strong> the next cost recovery arrangements (1 January 2012 to 30 June 2013), the Government<br />
would over-recover its costs unless the fees were regularly revised.<br />
1200<br />
1000<br />
800<br />
600<br />
Chart 3.1: Trade Count and Traded Value on ASX (Common base = 100)<br />
Percentage po<strong>in</strong>ts<br />
400<br />
200<br />
0<br />
124<br />
110<br />
128<br />
108<br />
150<br />
135<br />
193<br />
172<br />
243<br />
242<br />
377<br />
325<br />
397<br />
277<br />
340 336 400<br />
200<br />
0<br />
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11<br />
Trade count<br />
(base 100 @ FY01)<br />
15<br />
709<br />
Trade value<br />
(base 100 @ FY01)<br />
832<br />
Percentage po<strong>in</strong>ts<br />
Sources: IRESS (Trade type Equity only: pre-FY10 with slight adjustments to reconcile better with aggregate ASX statistics; FY10 &<br />
FY11 no adjustments), Government analysis.<br />
Feedback sought<br />
1. Do you prefer the proposed proportional fee <strong>approach</strong> (based on trades and messages) or the first<br />
alternative (proportional fee based on trades only)?<br />
2. Do you prefer the proposed <strong>approach</strong> <strong>of</strong> charg<strong>in</strong>g proportionally <strong>in</strong> arrears to the alternative fixed<br />
fee per trade <strong>approach</strong>?<br />
3. Are there any <strong>other</strong> <strong>approach</strong>es you would propose <strong>in</strong> respect <strong>of</strong> charg<strong>in</strong>g for supervis<strong>in</strong>g cash<br />
equity market trad<strong>in</strong>g activity <strong>in</strong> an efficient and effective way?<br />
1013<br />
1107<br />
1200<br />
1000<br />
800<br />
600
Review process<br />
Initial <strong>review</strong> 18 months after the commencement <strong>of</strong> the proposed supervision fee model and<br />
cost recovery arrangements<br />
The Government <strong>in</strong>tends to <strong>review</strong> the proposed cost recovery arrangements with<strong>in</strong> 18 months <strong>of</strong><br />
implementation. The <strong>review</strong> will assess the impacts <strong>of</strong> the cost recovery arrangements on <strong>in</strong>dustry and<br />
Australia’s f<strong>in</strong>ancial <strong>markets</strong> more generally, and determ<strong>in</strong>e whether any changes or adjustments need to<br />
be made to the <strong>approach</strong>. Where adjustments are required follow<strong>in</strong>g the <strong>review</strong>, a new CRIS that will<br />
commence from 1 July 2013 will be developed with <strong>in</strong>put from <strong>in</strong>dustry.<br />
Separately to the proposed cost recovery arrangements, a more general <strong>review</strong> <strong>of</strong> ASIC’s overall fund<strong>in</strong>g<br />
structure for its activities is be<strong>in</strong>g conducted, which may have some impact on the proposed cost recovery<br />
regime, as well as ASIC’s fund<strong>in</strong>g arrangements <strong>in</strong> the future. Should the <strong>review</strong> result <strong>in</strong> material changes<br />
to the proposed cost recovery arrangements, an addendum or a new CRIS may be prepared prior to those<br />
changes be<strong>in</strong>g <strong>in</strong>troduced.<br />
Regular <strong>review</strong> framework<br />
The Government also <strong>in</strong>tends to implement a process <strong>of</strong> regular <strong>review</strong>s beyond 2013 to maximise<br />
transparency and accountability around the cost recovery arrangements <strong>in</strong>to the future. It is proposed that<br />
the <strong>review</strong>s will be conducted with <strong>in</strong>dustry <strong>in</strong>put and participation as appropriate.<br />
Feedback sought<br />
4. What measures do you th<strong>in</strong>k need to be <strong>in</strong> place to ensure a strong framework <strong>of</strong> accountability<br />
and transparency?<br />
5. Do you th<strong>in</strong>k an ongo<strong>in</strong>g framework for <strong>review</strong><strong>in</strong>g the market supervision cost recovery<br />
arrangements is desirable?<br />
6. Do you th<strong>in</strong>k an <strong>in</strong>dustry stakeholder committee could usefully form part <strong>of</strong> the <strong>review</strong> process?<br />
16
4 ANALYSIS OF ASIC’S REGULATORY ACTIVITIES AND COSTS<br />
4.1 Establish<strong>in</strong>g ASIC's regulatory costs<br />
Costs to be recovered from <strong>in</strong>dustry under the proposed cost recovery arrangement<br />
From 1 January 2012 to 30 June 2015, the total estimated cost for ASIC’s market supervision functions and<br />
the implementation <strong>of</strong> competition is approximately $62.6 million. This is comprised <strong>of</strong> $28.2 million for<br />
competition and approximately $34.4 million for transfer <strong>of</strong> supervision (see Table 4.1 below).<br />
For the duration <strong>of</strong> the cost recovery arrangement that applies from 1 January 2012 to 30 June 2013, the<br />
total cost to be recovered is approximately $29.8 million (see Table 4.2 below). This represents costs to be<br />
recovered <strong>of</strong> $10.9 million <strong>in</strong> the second half <strong>of</strong> FY12 and $18.9 million <strong>in</strong> FY13.<br />
Table 4.1: Total estimated cost for ASIC’s market supervision functions and the implementation <strong>of</strong><br />
competition from 1 January 2012 to 30 June 2015<br />
$million 2nd half FY12 FY13 FY14 FY15 Total<br />
Transfer <strong>of</strong> supervision 4.74 9.90 9.90 9.90 34.44<br />
Competition 6.16 8.97 6.72 6.31 28.16<br />
Total 10.90 18.87 16.62 16.21 62.60<br />
Note: ASIC's market competition expenditure is expected to be higher dur<strong>in</strong>g 2 nd half FY12 and FY13 due to the higher IT and regulatory<br />
framework development costs associated with implement<strong>in</strong>g the project.<br />
ASIC's expected costs by function and type <strong>of</strong> cost (for the period from 1 January 2012 to<br />
30 June 2013)<br />
Table 4.2 outl<strong>in</strong>es ASIC's new regulatory functions and the costs associated with carry<strong>in</strong>g out these market<br />
supervision regulatory activities.<br />
17
Table 4.2: Estimated costs for ASIC’s market supervision functions and the implementation <strong>of</strong><br />
competition by function (1 January 2012 to 30 June 2013)<br />
1 January 2012 1 January 2012 Annualised<br />
to 30 June 2013 to 30 June 2013 cost<br />
Core function Key activities $million per cent $million<br />
Market supervision • Supervision <strong>of</strong> trad<strong>in</strong>g activities on domestic 6.11 20.5 4.08<br />
(<strong>in</strong>clud<strong>in</strong>g real-time licensed f<strong>in</strong>ancial <strong>markets</strong><br />
market surveillance) • Undertak<strong>in</strong>g real-time market surveillance and<br />
post-trade analysis to detect market misconduct<br />
(<strong>in</strong>clud<strong>in</strong>g breaches <strong>of</strong> MIRs on domestic<br />
licensed f<strong>in</strong>ancial <strong>markets</strong>)<br />
• Undertak<strong>in</strong>g whole-<strong>of</strong>-market monitor<strong>in</strong>g<br />
(<strong>in</strong>clud<strong>in</strong>g cross-market alerts and reports)<br />
• Manag<strong>in</strong>g the <strong>in</strong>crease <strong>in</strong> market activity and<br />
complexity aris<strong>in</strong>g from the entry <strong>of</strong> Chi-X<br />
and the move to a multi-market environment<br />
Participant • Build<strong>in</strong>g effective regulatory relationships with 3.87 13.0 2.58<br />
supervision market participants, <strong>in</strong>clud<strong>in</strong>g understand<strong>in</strong>g<br />
participant bus<strong>in</strong>ess models<br />
• Undertak<strong>in</strong>g surveillances and targeted themed<br />
compliance <strong>review</strong>s on market participants,<br />
<strong>in</strong>clud<strong>in</strong>g referrals from ASIC case management<br />
• Implement<strong>in</strong>g and monitor<strong>in</strong>g required remediation<br />
for participants and their representatives<br />
• Assess<strong>in</strong>g, record<strong>in</strong>g and manag<strong>in</strong>g the expiry<br />
<strong>of</strong> waivers, accreditations and certifications<br />
issued to market participants and their<br />
representatives<br />
• Monitor<strong>in</strong>g compliance with MIRs (for example<br />
best execution)<br />
• Monitor<strong>in</strong>g possible new forms <strong>of</strong> market<br />
misconduct aris<strong>in</strong>g from the <strong>in</strong>troduction <strong>of</strong><br />
competition<br />
• Monitor<strong>in</strong>g participant compliance with ongo<strong>in</strong>g<br />
capital requirements<br />
Regulatory Framework • Develop<strong>in</strong>g and implement<strong>in</strong>g ASIC's MIRs, 5.13 17.2 3.42<br />
framework (MIRs) & <strong>in</strong>clud<strong>in</strong>g a regulatory framework to apply<br />
market structure on the entry <strong>of</strong> Chi-X<br />
analysis<br />
• Harmoniz<strong>in</strong>g MIRs across <strong>markets</strong><br />
• Undertak<strong>in</strong>g ongo<strong>in</strong>g <strong>review</strong> and analysis <strong>of</strong> the<br />
(<strong>in</strong>cludes project market micro and macro structure and the<br />
management and regulatory framework to respond to new issues<br />
governance) and market developments<br />
Investigations and • Conduct<strong>in</strong>g advanced surveillances, 3.74 12.6 2.49<br />
enforcement <strong>in</strong>vestigation and enforcement based on<br />
referrals relat<strong>in</strong>g to breaches <strong>of</strong> MIRs and the<br />
Corporations Act from the market supervision<br />
team, <strong>in</strong>clud<strong>in</strong>g:<br />
– prepar<strong>in</strong>g and serv<strong>in</strong>g draft and f<strong>in</strong>al<br />
statement <strong>of</strong> reasons to market participants<br />
– negotiat<strong>in</strong>g appropriate outcomes with market<br />
participants for prompt settlement <strong>of</strong> matters,<br />
<strong>in</strong>clud<strong>in</strong>g <strong>in</strong>fr<strong>in</strong>gement notices and/or<br />
enforceable undertak<strong>in</strong>gs<br />
– appear<strong>in</strong>g, where necessary, before the MDP<br />
• Investigat<strong>in</strong>g and tak<strong>in</strong>g enforcement actions<br />
aga<strong>in</strong>st new forms <strong>of</strong> market misconduct<br />
18
Table 4.2: Estimated costs for ASIC’s market supervision functions and the implementation <strong>of</strong><br />
competition by function (1 January 2012 to 30 June 2013) (cont<strong>in</strong>ued)<br />
1 January 2012 1 January 2012 Annualised<br />
19<br />
to 30 June 2013 to 30 June 2013 cost<br />
Core function Key activities $million per cent $million<br />
Markets Discipl<strong>in</strong>ary • The MDP functions as an <strong>in</strong>dependent peer 1.64 5.5 1.10<br />
Panel (MDP) <strong>review</strong> body. Its members largely comprise<br />
people who currently hold senior roles <strong>in</strong> the<br />
<strong>markets</strong><br />
• The MDP is responsible for:<br />
– hear<strong>in</strong>g and determ<strong>in</strong><strong>in</strong>g alleged breaches <strong>of</strong><br />
the ASIC MIRs<br />
– exercis<strong>in</strong>g ASIC's powers to issue<br />
<strong>in</strong>fr<strong>in</strong>gement notices and accept enforceable<br />
undertak<strong>in</strong>gs relat<strong>in</strong>g to breaches <strong>of</strong> the MIRs<br />
– mak<strong>in</strong>g its decisions, as far as practicable,<br />
<strong>in</strong>dependently <strong>of</strong> ASIC<br />
IT • Upgrad<strong>in</strong>g the capability <strong>of</strong> ASIC's IMSS to 7.10 23.9 4.74<br />
handle multi-market and whole-<strong>of</strong>-market<br />
surveillance and supervision<br />
• Connect<strong>in</strong>g the Chi-X market to ASIC's IMSS<br />
• Project management and governance to deliver<br />
IT projects relat<strong>in</strong>g to market competition 100.0 19.85<br />
ASIC shared services • Indirect costs 2.17 7.3 1.44<br />
Total 29.77 100.0 19.85<br />
Table 4.3: Cost components <strong>of</strong> ASIC's market supervision functions<br />
1 January 2012 1 January 2012<br />
Allocation 30 June 2013 30 June 2013 Annualised cost<br />
Core function Cost allocation per cent (a) $million per cent (a) $million<br />
Market supervision Employees 43.3 2.64 8.9 1.76<br />
(<strong>in</strong>cl. real-time Goods & Suppliers 9.2 0.56 1.9 0.37<br />
market surveillance) IT costs 47.5 2.91 9.8 1.94<br />
Total 100.0 6.11 20.5 4.08<br />
Participant supervision Employees 94.4 3.65 12.3 2.43<br />
Goods & Suppliers 5.6 0.22 0.7 0.15<br />
Total 100.0 3.87 13.0 2.58<br />
Regulatory framework Employees 33.0 1.69 5.7 1.13<br />
(MIRs) & market Goods & Suppliers 26.8 1.38 4.6 0.92<br />
structure analysis Deferred project<br />
implementation costs 40.2 2.06 6.9 1.38<br />
Total 100.0 5.13 17.2 3.42<br />
Investigations and Employees 76.9 2.87 9.7 1.92<br />
enforcement Goods & Suppliers 23.1 0.86 2.9 0.58<br />
Total 100.0 3.74 12.6 2.49<br />
Markets discipl<strong>in</strong>ary Employees 32.2 0.53 1.8 0.35<br />
panel (MDP) Goods & Suppliers 67.8 1.11 3.7 0.74<br />
Total 100.0 1.64 5.5 1.10<br />
IT Employees 2.5 0.18 0.6 0.12<br />
IT costs 62.4 4.43 14.9 2.95<br />
Deferred project<br />
implementation costs 35.1 2.49 8.4 1.66<br />
Total 100.0 7.10 23.9 4.74<br />
ASIC shared services Indirect costs 100.0 2.17 7.3 1.44<br />
Total 100.0 2.17 7.3 1.44<br />
Total 29.77 100.0 19.85<br />
(a) Note that the allocation percentages refer to percentage <strong>of</strong> each core function and then percentage <strong>of</strong> the total.
4.2 Market supervision costs relat<strong>in</strong>g to specific market segments<br />
A. Cash equities <strong>markets</strong> (for ASX listed securities)<br />
ASX and Chi-X are the only two <strong>markets</strong> that are currently expected to be <strong>in</strong> operation with<strong>in</strong> this segment.<br />
Chi-X is work<strong>in</strong>g to commence operations <strong>in</strong> late 2011 (subject to Chi-X meet<strong>in</strong>g its licence pre-conditions<br />
and the operator's read<strong>in</strong>ess, the earliest Chi-X can commence operations is 31 October 2011).<br />
For the period from 1 January 2012 to 30 June 2013, ASIC's total supervisory cost for the cash equities<br />
<strong>markets</strong> (for ASX listed securities), <strong>in</strong>clud<strong>in</strong>g the cost <strong>of</strong> implement<strong>in</strong>g the Government's policy to <strong>in</strong>troduce<br />
competition <strong>in</strong> trad<strong>in</strong>g services, is $26.6 million.<br />
Fixed costs relat<strong>in</strong>g to specific market operators<br />
As outl<strong>in</strong>ed <strong>in</strong> the CRIS for 1 July 2011 to 31 December 2011, ASIC will <strong>in</strong>cur costs to connect <strong>markets</strong> that<br />
require real-time surveillance and supervision to its IMSS. Currently, ASX is the only market that is<br />
connected to ASIC's IMSS.<br />
Chi-X<br />
ASIC will <strong>in</strong>cur specific costs for sett<strong>in</strong>g up real-time surveillance <strong>of</strong> the Chi-X market, <strong>in</strong>clud<strong>in</strong>g:<br />
• FIX 15 environment s<strong>of</strong>tware configuration for Chi-X;<br />
• the <strong>in</strong>tegration <strong>of</strong> Chi-X to ASIC's IMSS to ensure the IMSS has a feed <strong>of</strong> trad<strong>in</strong>g data, the data is<br />
properly sequenced with the data from the <strong>other</strong> <strong>markets</strong>, and data from Chi-X is utilised as<br />
appropriate <strong>in</strong> trade alerts and reports; and<br />
• consequential changes to ASIC's <strong>other</strong> systems (for example, data warehouse changes).<br />
The total cost for undertak<strong>in</strong>g the activities above for Chi-X is estimated at approximately $286,000. It is<br />
noted that larger or more complex <strong>markets</strong> may <strong>in</strong>cur a higher IMSS configuration fee to reflect their size or<br />
complexity. ASIC’s surveillance system supplier advises us that the monthly network connection charge for<br />
Chi-X will be between $5,000 and $10,000. This covers fully redundant l<strong>in</strong>es to the IMSS primary site and to<br />
the secondary site and is a cost passed on to ASIC by its IMSS system provider. This cost will vary depend<strong>in</strong>g<br />
on a market's expected number <strong>of</strong> messages per day.<br />
ASX<br />
ASIC will also <strong>in</strong>cur specific costs for sett<strong>in</strong>g up real-time surveillance for ASX PureMatch. The total cost for<br />
connect<strong>in</strong>g ASX PureMatch is estimated at approximately $182,000. The cost for connect<strong>in</strong>g ASIC's IMSS to<br />
ASX PureMatch is lower compared to the cost for the Chi-X market as ASIC's systems already have<br />
connections to ASX's <strong>other</strong> <strong>markets</strong> <strong>in</strong> place s<strong>in</strong>ce the <strong>in</strong>itial transfer <strong>of</strong> market supervision on<br />
1 August 2010. The monthly network connection charge for ASX is estimated to be between $5,000 and<br />
$10,000. 16<br />
Key drivers <strong>of</strong> ASIC’s cash equities market supervision costs<br />
A <strong>review</strong> <strong>of</strong> ASIC’s core market supervision regulatory functions and activities to determ<strong>in</strong>e their cost<br />
drivers <strong>in</strong>dicate that:<br />
15 The F<strong>in</strong>ancial Information eXchange (‘FIX’) Protocol is a series <strong>of</strong> messag<strong>in</strong>g specifications for the electronic communication <strong>of</strong><br />
trade-related messages.<br />
16 This is based on ASIC’s surveillance system supplier estimate.<br />
20
• the number <strong>of</strong> trades is the primary driver <strong>of</strong> ASIC's costs — with the exception <strong>of</strong> its IT costs — as<br />
the resources required to perform its market supervision activities are ma<strong>in</strong>ly driven (either directly<br />
or <strong>in</strong>directly) by the number <strong>of</strong> trades undertaken on the market; and<br />
• the number <strong>of</strong> messages is the primary driver <strong>of</strong> ASIC's IT costs. 17 Based on the experience <strong>of</strong> <strong>other</strong><br />
<strong>markets</strong>, significant evolution <strong>in</strong> trad<strong>in</strong>g activity is expected follow<strong>in</strong>g the <strong>in</strong>troduction <strong>of</strong> market<br />
competition <strong>in</strong> Australia that will result <strong>in</strong> a significant <strong>in</strong>crease <strong>in</strong> the message to trade ratio.<br />
Table 4.4: Key drivers <strong>of</strong> ASIC’s cash equities market supervision costs<br />
Core function Cost drivers<br />
Market supervision (<strong>in</strong>cl. real-time market surveillance) Non-IT costs: Number <strong>of</strong> trades<br />
IT costs: number <strong>of</strong> messages (<strong>in</strong>cl. trades and messages)<br />
Participant supervision Resources expended impacted by number <strong>of</strong> trades<br />
Investigations and enforcements Number <strong>of</strong> cases <strong>review</strong>ed (triggered by trades, <strong>in</strong>fluenced by messages)<br />
Markets Discipl<strong>in</strong>ary Panel Number <strong>of</strong> cases <strong>review</strong>ed (triggered by trades, <strong>in</strong>fluenced by messages)<br />
Other To be allocated based on number <strong>of</strong> trades<br />
ASIC has made significant <strong>in</strong>vestments <strong>in</strong> its real-time market surveillance IT <strong>in</strong>frastructure and capacity.<br />
One <strong>of</strong> the <strong>key</strong> considerations for ASIC's surveillance IT <strong>in</strong>frastructure is the flexibility and scalability <strong>of</strong> the<br />
IMSS to handle additional volumes, new reports and additional users.<br />
Experience <strong>in</strong> overseas <strong>markets</strong> has shown that follow<strong>in</strong>g the <strong>in</strong>troduction <strong>of</strong> competition the ratio <strong>of</strong><br />
messages to trades <strong>in</strong>creases substantially. Chart 4.1 shows the scale <strong>of</strong> change that might reasonably be<br />
expected to occur <strong>in</strong> our market. It shows an over four-fold <strong>in</strong>crease <strong>in</strong> ASX's order to trade ratio can be<br />
expected if it were to exhibit similar characteristics as the Toronto Stock Exchange (TSX) <strong>in</strong> Canada (an<br />
<strong>in</strong>crease from 7:1 to 28:1), and the likely order to trade ratio for the new market entrant, Chi-X (that is, it<br />
may experience over 100 messages to every executed trade).<br />
17 On 30 November 2010, IIROC published for public comment a proposed market regulation fee model (IIROC Notice 10-0316)<br />
and recommended a market regulation fee model that is based on both the number <strong>of</strong> messages and number <strong>of</strong> trades. IIROC<br />
noted that the total number <strong>of</strong> messages processed by its surveillance system is the <strong>key</strong> driver <strong>of</strong> the costs <strong>of</strong> the surveillance IT<br />
system.<br />
21
Chart 4.1: Comparative Message Rates (per trade per dest<strong>in</strong>ation) — Canada v Australia, February to<br />
April 2011 18<br />
160<br />
140<br />
120<br />
100<br />
80<br />
60<br />
40<br />
20<br />
0<br />
Canada - TSX Canada - Chi-X Canada - Alpha Canada - Pure Australia - ASX<br />
21 April 2011<br />
As a comparison, the Canadian <strong>markets</strong> had an <strong>in</strong>crease <strong>in</strong> messages from an average <strong>of</strong> 10 million per day<br />
<strong>in</strong> 2006 to an average <strong>of</strong> more than 180 million per day <strong>in</strong> 2010, with an <strong>in</strong>traday peak <strong>of</strong> more than<br />
330 million. With projections <strong>of</strong> potential peak daily volumes <strong>of</strong> 725 million <strong>in</strong> 2011, IIROC is currently<br />
plann<strong>in</strong>g an upgrade to its market surveillance system to handle up to 1 billion messages per day. 19<br />
Even with current market conditions be<strong>in</strong>g more subdued than those <strong>of</strong> 2010, recent Canadian experience<br />
nonetheless illustrates that manag<strong>in</strong>g trad<strong>in</strong>g and trade surveillance systems' capacity will be a <strong>key</strong><br />
challenge for the <strong>in</strong>dustry <strong>in</strong> the future. This is especially the case <strong>in</strong> periods <strong>of</strong> high volatility such as has<br />
been seen most recently <strong>in</strong> early August 2011.<br />
B. Small f<strong>in</strong>ancial <strong>markets</strong> and futures <strong>markets</strong><br />
At this stage, it is proposed to charge these <strong>markets</strong> on a fixed quarterly fee basis at the market operator<br />
level. As such, these <strong>markets</strong> will not be <strong>in</strong>cluded <strong>in</strong> the activity-based <strong>approach</strong> proposed for cash equities<br />
<strong>markets</strong> (for ASX listed securities). For relevant details, refer to Section 8 for small f<strong>in</strong>ancial <strong>markets</strong> and<br />
Section 9 for futures market.<br />
C. Potential future scenarios that may impact ASIC's market supervision costs<br />
As noted <strong>in</strong> Section 1, where further enhancements to ASIC’s supervisory capabilities are considered<br />
necessary to meet market and technology developments and these enhancements cannot be met with<strong>in</strong><br />
the exist<strong>in</strong>g market supervision fund<strong>in</strong>g appropriations outl<strong>in</strong>ed <strong>in</strong> this paper, application for additional<br />
Government fund<strong>in</strong>g through the discipl<strong>in</strong>e <strong>of</strong> the budget process will be required.<br />
18 Note: Research by ASIC shows that the alternative operators <strong>in</strong> Canada have been <strong>in</strong> operation on average less than three<br />
years. Pure Trad<strong>in</strong>g launched <strong>in</strong> September 2007, followed by Chi-X Canada <strong>in</strong> February 2008 and Alpha Trad<strong>in</strong>g <strong>in</strong> November<br />
2008. Chart 4.1 was developed based on <strong>in</strong>formation from the IRESS full year results presentation (dated 24 February 2011).<br />
The presentation is available from the follow<strong>in</strong>g address: http://www.iress.com.au/news_category.aspx?view=48<br />
19 ‘IIROC's Regulatory Agenda for Canadian Equity Marketplaces’, speech by Susan Wolburgh Jenah, Trade Tech Canada<br />
Conference, December 7, 2010.<br />
22<br />
160<br />
140<br />
120<br />
100<br />
80<br />
60<br />
40<br />
20<br />
0
Examples <strong>of</strong> costs that are not currently contemplated by ASIC's transfer <strong>of</strong> supervision and market<br />
competition fund<strong>in</strong>g appropriations may <strong>in</strong>clude:<br />
• Extended trad<strong>in</strong>g hours.<br />
– ASIC may <strong>in</strong>cur additional IT and non-IT costs to accommodate the <strong>in</strong>crease <strong>in</strong> trad<strong>in</strong>g volumes,<br />
as well as to ensure that sufficient IT and non-IT staff are available dur<strong>in</strong>g the extended trad<strong>in</strong>g<br />
hours.<br />
• New platforms, products or order types (<strong>in</strong>troduced by exist<strong>in</strong>g market operators, <strong>in</strong>clud<strong>in</strong>g Chi-X).<br />
– ASIC may need to <strong>in</strong>cur costs for: the connection to a new platform (an example <strong>of</strong> such a<br />
platform is ASX PureMatch); additional IMSS capacity for the expected <strong>in</strong>crease <strong>in</strong> the number<br />
<strong>of</strong> trades and messages; new IMSS alerts and reports; changes to processes; and additional<br />
staff to manage the expected <strong>in</strong>crease <strong>in</strong> the number <strong>of</strong> trades and messages.<br />
• New product or order types — changes to operat<strong>in</strong>g rules.<br />
– Additional resources may be required to provide advice on the potential supervisory<br />
implications associated with the <strong>in</strong>troduction <strong>of</strong> a new product or order type <strong>in</strong>to the<br />
Australian market place. Prior to the transfer <strong>of</strong> supervision the work was carried out by ASX's<br />
supervision unit.<br />
• Enhancements to ASIC's surveillance capacity and supervision capabilities to respond to market and<br />
technology developments.<br />
– ASIC may need to <strong>in</strong>cur additional supervisory costs to enhance its market surveillance and<br />
supervision capacity and technology to respond to the evolution <strong>in</strong> trad<strong>in</strong>g activity and to keep<br />
pace with technological developments. It is noted that some <strong>of</strong> the securities regulators <strong>of</strong><br />
<strong>other</strong> sophisticated <strong>markets</strong> (for example US, Germany and Canada) are currently <strong>in</strong> the<br />
process <strong>of</strong> implement<strong>in</strong>g <strong>in</strong>itiatives such as cross-product monitor<strong>in</strong>g and post-trade analysis<br />
(for example pattern recognition) to detect market abuse. 20<br />
The proposed <strong>approach</strong> for the recovery <strong>of</strong> the future costs above is outl<strong>in</strong>ed <strong>in</strong> Section 5.<br />
20 IOSCO's consultation report, titled Regulatory issues Raised by the Impact <strong>of</strong> Technological Changes on Market Integrity and<br />
Efficiency, (IOSCO, July 2011, p.28) stated that: ‘The submission <strong>of</strong> large numbers <strong>of</strong> orders and trades across multiple venues<br />
poses significant challenges to market authorities. Many trad<strong>in</strong>g strategies <strong>used</strong> by HFT participants are so sophisticated that<br />
they raise an issue as to whether market authorities have the necessary resources to conduct effective market surveillance. It is<br />
necessary that market authorities’ market surveillance capabilities keep pace with HFT, <strong>in</strong> terms <strong>of</strong> both technological<br />
<strong>in</strong>frastructure and market knowledge, <strong>in</strong> order to ma<strong>in</strong>ta<strong>in</strong> a high degree <strong>of</strong> <strong>in</strong>vestor protection <strong>in</strong> a speed and fragmented<br />
trad<strong>in</strong>g environment.’<br />
23
PART B: COST RECOVERY FOR SUPERVISION OF CASH EQUITIES MARKETS (ASX<br />
LISTED SECURITIES)<br />
5 THE PROPOSED APPROACH FOR CALCULATING THE PROPORTIONAL FEES APPLYING TO<br />
MARKET OPERATORS AND MARKET PARTICIPANTS<br />
This section outl<strong>in</strong>es the proposed <strong>approach</strong> for calculat<strong>in</strong>g the proportional fees apply<strong>in</strong>g to market<br />
operators and market participants trad<strong>in</strong>g <strong>in</strong> ASX-listed securities. Work<strong>in</strong>g illustrations <strong>of</strong> the proposed<br />
<strong>approach</strong> are provided <strong>in</strong> Section 6: Illustration <strong>of</strong> fee proposals on operators and participants (cash<br />
equities <strong>markets</strong>)<br />
5.1 Allocation <strong>of</strong> costs between market operators and market participants<br />
It is proposed that market supervision costs be allocated between market operators and market<br />
participants by reference to categories <strong>of</strong> ASIC's market supervision functions as follows:<br />
A. Costs relat<strong>in</strong>g to market participants only<br />
Costs relat<strong>in</strong>g to the follow<strong>in</strong>g functions:<br />
• Participant supervision;<br />
• Investigations and enforcement; and<br />
• Markets discipl<strong>in</strong>ary panel<br />
24<br />
will be recovered from market<br />
participants only as the functions relate to<br />
the regulation <strong>of</strong> market participants'<br />
activities.<br />
B. Allocation <strong>of</strong> ‘shared’ costs between market operators and market participants<br />
Costs relat<strong>in</strong>g to the follow<strong>in</strong>g functions:<br />
• Market supervision;<br />
• Regulatory framework; and<br />
• Market structure and analysis<br />
will be recovered from both market<br />
operators and market participants as the<br />
functions relate to the regulation <strong>of</strong><br />
activities undertaken by both groups.<br />
It is proposed to allocate these costs us<strong>in</strong>g<br />
an <strong>in</strong>dustry revenue proxy, as summarised<br />
<strong>in</strong> Table 5.1.
Similarly, cost relat<strong>in</strong>g to the implementation <strong>of</strong> market competition:<br />
• IT implementation costs; and<br />
• Regulatory framework implementation<br />
costs<br />
25<br />
will also be recovered from market<br />
operators and market participants.<br />
It is proposed to allocate these costs <strong>in</strong><br />
equal proportion (that is 50:50) given that<br />
the activities <strong>of</strong> both groups drive the<br />
costs for the supervision <strong>of</strong> compet<strong>in</strong>g<br />
<strong>markets</strong>.<br />
(a), (b)<br />
Table 5.1: Cash equity market revenue — Market operators relative to market participants<br />
Cash Market Revenue<br />
(based on CY2010 data) $m % Comment<br />
Market operators 368.2 15 This <strong>in</strong>cludes cash market revenue, list<strong>in</strong>gs revenue, a proportion <strong>of</strong> <strong>in</strong>formation<br />
services revenue, and market connectivity revenue.<br />
List<strong>in</strong>gs revenue and <strong>other</strong> cash market related revenue have<br />
been <strong>in</strong>cluded <strong>in</strong> the calculation <strong>of</strong> market operators' total revenue<br />
to ensure that it is an appropriate comparable to the revenue<br />
figure be<strong>in</strong>g <strong>used</strong> for market participants (i.e. it <strong>in</strong>cludes <strong>other</strong> revenue<br />
streams <strong>in</strong> addition to trade execution fees).<br />
Market participants 2,093.8 85 This figure <strong>in</strong>cludes brokerage for cash market products only -<br />
cash equities, debt and warrants<br />
Total 2,462.0 100<br />
(a) ASX's 2011 Half Year Report (period end<strong>in</strong>g 31 Dec 2010): page 16 states: ‘In the first half <strong>of</strong> 2011, approximately 84 per cent <strong>of</strong><br />
<strong>in</strong>formation services revenue related to cash market and equity option data’.<br />
(b) 84 per cent <strong>of</strong> ASX's market connectivity revenue was applied to the cash market — this is consistent with consistent with the<br />
proportional split applied to the <strong>in</strong>formation services revenue.<br />
The cost allocation method proposed above is an <strong>in</strong>dication <strong>of</strong> the <strong>approach</strong> the Government may take. A<br />
f<strong>in</strong>al policy on this will take <strong>in</strong>to account feedback on the proposed <strong>approach</strong> for the allocation <strong>of</strong> costs<br />
between market operators and market participants.<br />
C. Overall impact on market operators and market participants after cost allocations by<br />
function<br />
Tables 5.2 and 5.3 below illustrate the overall impact <strong>of</strong> the functional cost allocations and proposed<br />
allocation <strong>of</strong> ‘shared’ costs on market operators and market participants as discussed above.<br />
Table 5.2: Allocation <strong>of</strong> costs between market operators and market participants — summary<br />
(1 January 2012 to 30 June 2013)<br />
Group 1 January 2012 to 1 January 2012 to<br />
30 June 2013 30 June 2013 Annualised cost<br />
$million per cent $million<br />
Market operators 4.33 16.3 2.89<br />
Market participants 22.27 83.7 14.85<br />
Total 26.60 100.0 17.73<br />
Note: The total cost reflected <strong>in</strong> this table is net <strong>of</strong> the estimated cost <strong>of</strong> supervis<strong>in</strong>g the small f<strong>in</strong>ancial <strong>markets</strong>, the ASX 24 market and<br />
the IMSS configuration fees for Chi-X and ASX PureMatch (that is $3.2 million).
Table 5.3: Allocation <strong>of</strong> costs between market operators and participants by<br />
function<br />
Table 5.3: Cost components <strong>of</strong> ASIC's market supervision functions<br />
1 January 2012 1 January 2012 Annualised<br />
Allocation 30 June 2013 30 June 2013 cost<br />
Core function Cost allocation per cent $million per cent $million<br />
Market supervision(a) Market operators 15.0 0.77 2.9 0.51<br />
(<strong>in</strong>cl. real-time Market participants 85.0 4.36 16.4 2.91<br />
market surveillance) Total 100.0 5.13 19.3 3.42<br />
Participant supervision Market operators 0.0 0.00 0.0 0.00<br />
Market participants 100.0 3.30 12.4 2.20<br />
Total 100.0 3.30 12.4 2.20<br />
Regulatory framework Market operators 29.2 1.42 5.4 0.95<br />
(MIRs) & market Market participants 70.8 3.45 13.0 2.30<br />
structure analysis Total 100.0 4.87 18.3 3.25<br />
Investigations and Market operators 0.0 0.00 0.0 0.00<br />
enforcement Market participants 100.0 3.15 11.8 2.10<br />
Total 100.0 3.15 11.8 2.10<br />
Markets discipl<strong>in</strong>ary Market operators 0.0 0.00 0.0 0.00<br />
panel (MDP) Market participants 100.0 1.47 5.5 0.98<br />
Total 100.0 1.47 5.5 0.98<br />
IT costs (<strong>in</strong>cl. deferred IT Market operators 27.3 1.86 7.0 1.24<br />
implementation costs and Market participants 72.7 4.95 18.6 3.30<br />
ongo<strong>in</strong>g IT management costs) Total 100.0 6.81 25.6 4.54<br />
ASIC shared services Market operators 15.0 0.28 1.1 0.19<br />
Market participants 85.0 1.60 6.0 1.06<br />
Total 100.0 1.88 7.1 1.25<br />
Total Market operators 16.3 4.33 16.3 2.89<br />
Total Market participants 83.7 22.27 83.7 14.85<br />
Total All 100.0 26.60 100.0 17.73<br />
(a) This <strong>in</strong>cludes the ongo<strong>in</strong>g costs <strong>of</strong> the ASIC IMSS.<br />
Note: The total cost reflected <strong>in</strong> this table is net <strong>of</strong> the estimated cost <strong>of</strong> supervis<strong>in</strong>g the small f<strong>in</strong>ancial <strong>markets</strong>, the ASX 24 market and<br />
the IMSS configuration fees for Chi-X and ASX PureMatch (that is $3.2 million).<br />
Feedback sought<br />
7. Do you agree with the proposed <strong>approach</strong> for the allocation <strong>of</strong> costs between market operators<br />
and market participants? If not, please specify and expla<strong>in</strong> an alternative <strong>approach</strong> for the<br />
allocation <strong>of</strong> costs between market operators and market participants.<br />
8. Do you agree with the proposed revenue based proxy for allocat<strong>in</strong>g some <strong>of</strong> the shared costs<br />
between market operators and market participants? Do you agree with the <strong>in</strong>clusion <strong>of</strong> list<strong>in</strong>g and<br />
<strong>other</strong> revenue <strong>in</strong> the allocation <strong>of</strong> shared costs to market operators? If not, please specify and<br />
expla<strong>in</strong> an alternative proxy.<br />
5.2 Allocation <strong>of</strong> costs to each market operator and participant<br />
A. Proposed <strong>approach</strong>: Proportional fee based on trade count and message count<br />
It is proposed that each market operator and each market participant be charged a proportional quarterly<br />
fee based on each entity's share <strong>of</strong> the trade count and message 21 count <strong>in</strong> ASX listed securities dur<strong>in</strong>g each<br />
21 'Messages' are the total <strong>of</strong> trades, order entry messages, order amend messages (price and/or volume) and order<br />
deletion/cancellation messages.<br />
26
quarter. Such fees are to be based on the trades and messages received by ASIC's IMSS, and are to be<br />
collected quarterly <strong>in</strong> arrears.<br />
An activity based <strong>approach</strong> ensures that the fee paid by each market participant reflects its activity on the<br />
<strong>markets</strong> and therefore the level <strong>of</strong> resources required for monitor<strong>in</strong>g its trad<strong>in</strong>g activities. Similarly, this<br />
<strong>approach</strong> ensures that the fee paid by each market operator reflects the level <strong>of</strong> trad<strong>in</strong>g activity on its<br />
<strong>markets</strong> and therefore the level <strong>of</strong> resources required for monitor<strong>in</strong>g its <strong>markets</strong>.<br />
This <strong>approach</strong> should also provide market participants the ability to assess the impact <strong>of</strong> the proposed<br />
<strong>approach</strong> on their bus<strong>in</strong>ess models with a high degree <strong>of</strong> certa<strong>in</strong>ty.<br />
Trade count to apportion non-IT costs<br />
As noted <strong>in</strong> Section 3.1, trade count is the primary driver <strong>of</strong> ASIC's cash equities <strong>markets</strong> supervision costs,<br />
particularly its non-IT costs. As such, it is proposed to apportion ASIC's non-IT market supervision costs<br />
among both market operators and market participants based on the number <strong>of</strong> trades that are reported to<br />
ASIC's IMSS each quarter (see Section 3.1).<br />
Message count to apportion IT costs<br />
It is proposed to apportion ASIC's total IT costs to each market operator and market participant based on<br />
each entity's share <strong>of</strong> the message count (for both trades and messages) received by ASIC's IMSS dur<strong>in</strong>g<br />
each quarter.<br />
The volume <strong>of</strong> message traffic is the primary driver <strong>of</strong> ASIC's cash equities market supervision IT costs (see<br />
Section 3.1). For the period from 1 January 2012 to 30 June 2013, the total IT costs that will be allocated<br />
based on ASIC's IMSS message count is $9.0 million (see Table 5.4).<br />
Table 5.4: IT and non-IT costs relat<strong>in</strong>g to the cash equities <strong>markets</strong> (for ASX listed securities)<br />
(1 January 2012 to 30 June 2013)<br />
1 January 2012 to 30 June 2013 1 January 2012 to 30 June 2013 Annualised cost<br />
$million per cent $million<br />
IT costs(a) 9.04 34.0 6.03<br />
Non-IT costs 17.56 66.0 11.71<br />
Total 26.60 100.0 17.73<br />
(a) This figure relates to all <strong>of</strong> ASIC’s cash equities market IT costs (i.e. it <strong>in</strong>cludes deferred IT implementation costs, ongo<strong>in</strong>g IT<br />
management costs, and the ongo<strong>in</strong>g costs <strong>of</strong> the ASIC IMSS).<br />
Feedback sought<br />
9. Do you consider that the proposed cost recovery arrangements for the cash equities market<br />
supervision costs (for ASX listed securities) provides the most reasonable basis for recover<strong>in</strong>g costs<br />
from each market operator and each market participant? If not, please expla<strong>in</strong> your preferred<br />
alternative.<br />
10. What impact does the proposed <strong>approach</strong> have on your bus<strong>in</strong>ess model? Can you provide<br />
examples <strong>of</strong> how the proposed <strong>approach</strong> would affect your bus<strong>in</strong>ess <strong>in</strong> dollar terms?<br />
5.3 Market and technology development fees<br />
A. Fixed costs relat<strong>in</strong>g to specific market operators<br />
It is proposed to recover ASIC's costs for connect<strong>in</strong>g its IMSS to Chi-X ($286,000) and ASX's PureMatch<br />
($182,000) directly from each market operator over 18 months from 1 January 2012 to 30 June 2013. In l<strong>in</strong>e<br />
27
with the Cost Recovery Guidel<strong>in</strong>es, it is proposed to recover ASIC's implementation/establishment costs<br />
directly from the entity that causes ASIC to <strong>in</strong>cur those additional costs. The ongo<strong>in</strong>g costs would be<br />
recovered from market operators and market participants based on the proposed cost recovery <strong>approach</strong><br />
for the cash equities <strong>markets</strong>.<br />
Feedback sought<br />
11. Do you have any comments about the <strong>approach</strong> for recover<strong>in</strong>g fixed costs relat<strong>in</strong>g to specific<br />
market operators, <strong>in</strong>clud<strong>in</strong>g the proposed timeframe for the recovery <strong>of</strong> the costs?<br />
B. Potential future scenarios that would impact on ASIC's market supervision costs<br />
The Government proposes to recover ASIC's future market supervision costs from both market operators<br />
and market participants, with the implementation costs be<strong>in</strong>g recovered directly from the market operator<br />
that <strong>in</strong>itiates such a change and the ongo<strong>in</strong>g costs be<strong>in</strong>g shared among market operators and market<br />
participants based on the proposed cash equities market supervision fee model detailed <strong>in</strong> this paper.<br />
More detail on potential future market supervisions costs is outl<strong>in</strong>ed <strong>in</strong> Section 4.2.<br />
Feedback sought<br />
12. Do you have any comments about the proposed <strong>approach</strong> for recover<strong>in</strong>g ASIC's future market<br />
supervision costs?<br />
5.4 Penalties for late payment <strong>of</strong> fees and failure to pay<br />
Current regime under the Corporations Fees Regulations 2001<br />
Currently, the Fees Regulations prescribe a late payment penalty if fees are not paid on the due day 22 . The<br />
late payment penalty fee is calculated by multiply<strong>in</strong>g the amount <strong>of</strong> the fee liability by the yield to maturity<br />
rate (expressed as a percentage) quoted by the Reserve Bank <strong>of</strong> Australia and applicable on the due day.<br />
22 Under Regulation 9, a late penalty fee applies if a fee prescribed under Regulation 8 <strong>of</strong> the Fees Regulations, <strong>in</strong> relation to the<br />
performance by ASIC <strong>of</strong> its functions under Part 7.2A (Supervision <strong>of</strong> f<strong>in</strong>ancial <strong>markets</strong>) <strong>of</strong> the Corporations Act, is not paid on<br />
the day on which liability for the fee is <strong>in</strong>curred (the due day).<br />
28
6 ILLUSTRATION OF FEE PROPOSALS ON OPERATORS AND PARTICIPANTS (CASH EQUITIES<br />
MARKETS)<br />
This section provides work<strong>in</strong>g illustrations <strong>of</strong> how the proposed cost recovery <strong>approach</strong> would apply for<br />
each market operator and segment <strong>of</strong> market participants <strong>in</strong> the cash equities market (ASX listed securities)<br />
under projected market conditions. Work<strong>in</strong>g illustrations <strong>of</strong> the first alternative <strong>approach</strong> (that is, the<br />
proportional fee based on trade count only) is also shown.<br />
These illustrations have been developed based on a projection <strong>of</strong> market participants' trade and message<br />
related activity and their level <strong>of</strong> market operator patronage. These illustrations should therefore be taken<br />
as <strong>in</strong>dicative only. In general, it was assumed that the levels and trends <strong>in</strong> trade and message related<br />
activity <strong>in</strong> FY11 will cont<strong>in</strong>ue until 31 December 2011, and that market participants' behaviour changes <strong>in</strong><br />
response to competition from the beg<strong>in</strong>n<strong>in</strong>g <strong>of</strong> the 2012 calendar year.<br />
6.1 Illustration <strong>of</strong> proposed <strong>approach</strong> and first alternative<br />
To assist market operators and market participants to compare the two methods for activity-based<br />
charg<strong>in</strong>g, Tables 6.1 and 6.2 below are provided to illustrate the approximate fees that they could expect<br />
under the proposed cost recovery <strong>approach</strong> and the first alternative.<br />
The tables demonstrate that <strong>in</strong>clud<strong>in</strong>g messages <strong>in</strong> the calculation will <strong>in</strong>crease the fees payable by market<br />
operators and market participants with more message <strong>in</strong>tensive bus<strong>in</strong>ess models but reduce the fees for<br />
those with less message <strong>in</strong>tensive bus<strong>in</strong>ess models.<br />
As shown <strong>in</strong> Tables 6.1 and 6.2, if alternative 1, apply<strong>in</strong>g cost recovery to trades only, was chosen <strong>in</strong>stead <strong>of</strong><br />
the preferred option (based on trades and messages), it is expected that new <strong>markets</strong> and HFTs <strong>in</strong><br />
particular would pay less but this would be made up by the <strong>other</strong> market operators and participants.<br />
Table 6.1: Proposed <strong>approach</strong> and alternative 1 — Illustrative example market operator cost recovery (by<br />
market)<br />
Market Illustrative share <strong>of</strong> Illustrative share <strong>of</strong> Illustrative quarterly Illustrative quarterly<br />
trade count end message count end fee - preferred option fee - alternative 1<br />
FY 2013 FY 2013 (trade and messages) (trade only)<br />
per cent(a) per cent(a) $ $<br />
ASX (TradeMatch) 65.6 54.3 504,288 524,304<br />
ASX (Purematch) 16.1 22.7 106,594 94,642<br />
Chi-X 18.3 23.0 111,248 103,183<br />
Total 100.0 100.0 722,129 722,129<br />
(a) Note that the table assumes that trade and message percentage will have reached these levels by the end <strong>of</strong> the cost recovery<br />
period. Earlier <strong>in</strong> the period the differences between trades and messages are expected to be smaller.<br />
29
Table 6.2: Proposed <strong>approach</strong> and alternative 1 — Illustrative example market participant (by segment<br />
and assum<strong>in</strong>g 5 per cent share <strong>of</strong> that segment) (a)<br />
Segment Illustrative share <strong>of</strong> Illustrative share <strong>of</strong> Illustrative quarterly Illustrative quarterly<br />
trade count end message count end fee - preferred option fee - alternative 1<br />
FY 2013 FY 2013 (trade and messages) (trade only)<br />
per cent(a) per cent(a) $(b) $(b)<br />
Institutional 79.2 71.7 145,227 146,148<br />
Small <strong>in</strong>stitutional 2.3 0.5 3,625 4,725<br />
Retail - execution only,<br />
no advice 6.8 1.0 10,619 14,518<br />
Retail - full service 3.0 0.3 4,831 6,907<br />
Other (<strong>in</strong>cl warrants) 1.4 0.7 2,918 3,140<br />
Unclassified (c) 0.3 0.1 625 779<br />
New HFT-style entrants 6.9 25.6 17,735 9,363<br />
Total 100.0 100.0 3,711,619 3,711,619<br />
(a) Note that the table assumes that trade and message percentage will have reached these levels by the end <strong>of</strong> the cost recovery<br />
period. Earlier <strong>in</strong> the period the differences between trades and messages are expected to be smaller.<br />
(b) All fee estimates are calculated based on a broker with 5 per cent share <strong>of</strong> the activity <strong>in</strong> each segment. The numbers can be<br />
multiplied or divided for higher or lower activity. That is if you have 10 per cent <strong>of</strong> activity, double the number.<br />
(c) Other types <strong>of</strong> participants identified <strong>in</strong> government analysis but not able to be categorised (e.g. ABN Amro Clear<strong>in</strong>g).<br />
Notes: Largest <strong>in</strong>stitutional broker <strong>in</strong>cludes: Credit Suisse; Nomura; UBS; Macquarie Institutional; Citigroup; Inst<strong>in</strong>et; Deutsche; RBS;<br />
Goldman Sachs; JP Morgan; Morgan Stanley; CBA Equities; ITG; and Merrill Lynch.<br />
Small <strong>in</strong>stitutional broker <strong>in</strong>cludes: Euroz; Petra Capital; BBY; Foster Stockbrok<strong>in</strong>g; BTIG; Moelis Securities; CLSA S<strong>in</strong>gapore;<br />
CLSA; Investec; CCZ Statton; RBC Securities; Intersuisse; Daiwa; Lodge Partners; and Veritas Securities.<br />
6.2 Second alternative <strong>approach</strong>: Fixed fee per trade<br />
This alternative is a different method for charg<strong>in</strong>g rather than a different method for allocat<strong>in</strong>g costs. The<br />
allocation <strong>of</strong> costs between market participants and market operators will be the same as those shown <strong>in</strong><br />
Tables 6.1 and 6.2 above, provided there are no unexpected changes <strong>in</strong> trade and message activity and fees<br />
are adjusted to deal with anticipated <strong>in</strong>creases <strong>in</strong> trade and message activity.<br />
30
Key Po<strong>in</strong>ts<br />
7 IMPACT AND IMPLEMENTATION CONSIDERATIONS OF THE PROPOSED COST RECOVERY FEE<br />
ARRANGEMENTS (ASX LISTED SECURITIES)<br />
• This section illustrates the estimated costs <strong>of</strong> establish<strong>in</strong>g a framework for market supervision<br />
under competition and compares the impact <strong>of</strong> the proposed cost recovery with several <strong>other</strong><br />
<strong>in</strong>ternational jurisdictions.<br />
• It is expected that the additional supervisory fees imposed on <strong>in</strong>dustry by the proposedcost<br />
recovery arrangement will be more than <strong>of</strong>fset by the anticipated benefits <strong>of</strong> competition. A<br />
summary <strong>of</strong> the potential benefits that may be experienced by <strong>in</strong>dustry stakeholder type has been<br />
provided, along with estimates provided by ASIC to illustrate potential cost sav<strong>in</strong>gs. Industry<br />
feedback on the benefits and impacts discussed <strong>in</strong> this section is <strong>in</strong>vited.<br />
• Although the costs <strong>of</strong> supervision will be recovered from <strong>in</strong>dustry, competition is expected to<br />
lower the costs <strong>of</strong> transact<strong>in</strong>g <strong>in</strong> Australian cash equity <strong>markets</strong>. Overall, Australia's<br />
competitiveness and rank<strong>in</strong>g <strong>in</strong> global cash equity market trad<strong>in</strong>g is estimated to improve under<br />
competition.<br />
7.1 Basis Po<strong>in</strong>ts Impact <strong>of</strong> supervision costs<br />
To aid <strong>in</strong> assess<strong>in</strong>g the impact <strong>of</strong> the proposed cost recovery arrangements a basis po<strong>in</strong>t impact <strong>of</strong> ASIC's<br />
market supervision cost recovery on <strong>in</strong>dustry is shown below us<strong>in</strong>g several possible turnover growth<br />
scenarios. This allows for <strong>in</strong>ternational comparisons <strong>of</strong> similar charges <strong>in</strong> <strong>other</strong> jurisdictions. It also<br />
provides an <strong>in</strong>dication <strong>of</strong> the scale <strong>of</strong> the costs to be recovered <strong>in</strong> terms <strong>of</strong> the <strong>in</strong>dustry’s turnover (traded<br />
cash market value).<br />
A conservative assumption <strong>of</strong> no growth <strong>in</strong> turnover from 1 July 2011 to 31 December 2011 has been <strong>used</strong>,<br />
and growth rates rang<strong>in</strong>g from 0 per cent up to 20 per cent per annum are applied thereafter for illustrative<br />
purposes (Table 7.1).<br />
Table 7.1: Impact <strong>of</strong> ASIC’s market supervision costs relative to projections <strong>of</strong> <strong>in</strong>dustry turnover<br />
$million 2nd half FY12 FY13 FY14 FY15<br />
Transfer <strong>of</strong> supervision 4.74 9.90 9.90 9.90<br />
Competition 6.16 8.97 6.72 6.31<br />
Total 10.90 18.87 16.62 16.21<br />
FY2011 turnover(a) 1,373.4<br />
Impact assum<strong>in</strong>g growth rate p.a. 0% 0.0794 0.0687 0.0605 0.0590<br />
(<strong>in</strong> bp per side)(b) 5% 0.0775 0.0638 0.0536 0.0498<br />
10% 0.0757 0.0595 0.0477 0.0423<br />
15% 0.0740 0.0557 0.0427 0.0362<br />
20% 0.0725 0.0523 0.0384 0.0312<br />
(a) Source: IRESS; trade type equity only. Downloaded 6 July 2011.<br />
(b) Growth <strong>in</strong> FY12 only applied for 1H2012.<br />
31
International comparisons — Canada (IIROC)<br />
In FY2010, IIROC charged both market operators and participants a total <strong>of</strong> CAD $23.1 million 23<br />
(approximately AUD $25.6 million at the time 24 ) for the type <strong>of</strong> supervision encompassed by market<br />
supervision and competition. This represents a 0.125 bp 25 charge to the Canadian <strong>in</strong>dustry <strong>in</strong> terms <strong>of</strong><br />
overall traded value that, when applied per side <strong>of</strong> trade, is equivalent to 0.0625 bp.<br />
However, IIROC's <strong>in</strong>vestments <strong>in</strong> advanced surveillance technology are made from a 'restricted fund' and<br />
are not subject to full <strong>in</strong>dustry cost recovery. As such, the proposed implementation and ongo<strong>in</strong>g costs are<br />
<strong>in</strong> l<strong>in</strong>e with those <strong>in</strong> Canada.<br />
International comparisons — USA (FINRA)<br />
The Government obta<strong>in</strong>ed the revenue FINRA receives for services comparable to the market supervision<br />
cost recovery arrangements from FINRA's 2009 and 2010 annual reports — FINRA's revenue streams <strong>of</strong><br />
‘regulatory fee revenue’, ‘contract services revenue’ and ‘activity assessment’.<br />
Although this is not exactly comparable to the regulatory services provided by ASIC that are subject to cost<br />
recovery, this is considered the best proxy for this jurisdiction. These FINRA costs to <strong>in</strong>dustry were<br />
compared with aggregate turnover data sourced from the SEC, adjusted for 2010 FINRA <strong>in</strong>dustry coverage<br />
(see Table 7.2).<br />
(a), (b), (c)<br />
Table 7.2: Key FINRA revenue<br />
$US million CY2010 CY2009 CY2008 CY2007<br />
Regulatory fee revenue 428.60 387.90 453.40 345.00<br />
Contract services revenue 111.10 57.10 72.00 62.70<br />
Activity assessment 295.20 341.40 154.80 281.60<br />
Comparable' revenue (A) 834.90 786.40 680.20 689.30<br />
Impact <strong>of</strong> (A) (bp per side) 0.0815 0.0821 0.0518 0.0651<br />
(a) FINRA 2009 Annual Report (p. 3-7, 30) and 2010 Annual Report (p. 3-14). Government analysis performed on 19 May 2011;<br />
updated on 20 July 2011.<br />
(b) ‘Comparable’ revenue is not exactly comparable to the services provided for ASIC fee recovery, but this is the closest data available<br />
for this jurisdiction.<br />
(c) Denom<strong>in</strong>ator = 80 per cent <strong>of</strong> aggregate dollar amount <strong>of</strong> sales published by the SEC at http://www.sec.gov/rules/<strong>other</strong>/2011/<br />
34-64373.pdf. 80 per cent adjustment applied as FINRA stated on p.3 <strong>of</strong> their 2010 Annual Report that they are ‘responsible for<br />
surveillance, <strong>in</strong>vestigation and enforcement <strong>of</strong> more than 80 per cent <strong>of</strong> U.S. equity trad<strong>in</strong>g’. 80 per cent adjustment applied to prior<br />
years, although this may not be the appropriate adjustment to apply <strong>in</strong> those years.<br />
This analysis does not, however, <strong>in</strong>clude all market regulation costs imposed on the <strong>in</strong>dustry <strong>in</strong> the US. For<br />
example, the SEC also levies <strong>in</strong>vestors for regulation via brokers.<br />
More details about comparable jurisdictions can be found <strong>in</strong> the Appendix.<br />
7.2 Estimated <strong>in</strong>dustry benefits<br />
S<strong>in</strong>ce the <strong>in</strong>troduction <strong>of</strong> competition <strong>in</strong> different overseas jurisdictions, new entrant platforms have<br />
directly competed with traditional stock exchanges for customer order flow. As a result, trad<strong>in</strong>g costs have<br />
reduced significantly.<br />
23 IIROC 2009-10 Annual Report.<br />
24 Us<strong>in</strong>g an exchange rate AUDCAD <strong>of</strong> 0.9.<br />
25 IIROC 2009-10 Annual Report; Note that IIROC conducts similar but not exactly the same market supervision functions as ASIC.<br />
32
This reduction has largely reflected cuts <strong>in</strong> fees and commissions charged by trad<strong>in</strong>g venues from brokers<br />
and traders, as platforms vie for market share. However, a number <strong>of</strong> jurisdictions have also seen<br />
improvements <strong>in</strong> liquidity, and the consequent reduction <strong>in</strong> market-related trad<strong>in</strong>g costs such as bid-ask<br />
spreads and market impact. 26 Usually, jurisdictions where competition has been <strong>in</strong>troduced have more<br />
efficient <strong>markets</strong> than those <strong>in</strong> which the pr<strong>in</strong>cipal exchange still operates as a monopoly.<br />
Experience shows that competition also fosters <strong>in</strong>novation and promotes the use <strong>of</strong> new and more efficient<br />
technologies and bus<strong>in</strong>ess strategies. The benefits <strong>of</strong> competition can broadly be characterised as:<br />
(a) reduction <strong>in</strong> exchange and brokerage fees;<br />
(b) improved market efficiency <strong>in</strong>clud<strong>in</strong>g the narrow<strong>in</strong>g <strong>of</strong> bid-ask spreads; and<br />
(c) greater <strong>in</strong>novation.<br />
This section estimates only two <strong>of</strong> the potential benefits that could accrue to stakeholders as competition<br />
among exchange platforms is <strong>in</strong>troduced <strong>in</strong> Australia. It is expected that market competition will benefit<br />
<strong>markets</strong> through two ma<strong>in</strong> channels: reductions <strong>in</strong> exchange fees and narrow<strong>in</strong>g <strong>of</strong> bid-ask spreads. 27<br />
The impacts proposed <strong>in</strong> this section are based on estimates provided by ASIC. These figures should be<br />
taken as illustrations to <strong>in</strong>form further discussion. They should not be taken as forecasts. At the end <strong>of</strong> this<br />
section, <strong>in</strong>dustry <strong>in</strong>put on the potential benefits and costs <strong>of</strong> competition for their bus<strong>in</strong>ess and their<br />
<strong>in</strong>vestors is <strong>in</strong>vited. The Government also seeks <strong>in</strong>dustry views on the impact on the Australian f<strong>in</strong>ancial<br />
sector as a whole <strong>of</strong> the open<strong>in</strong>g up <strong>of</strong> the market for competition.<br />
‘No growth’ hypothetical scenario<br />
The most conservative scenario <strong>in</strong> which competition could play out assumes zero growth <strong>in</strong> cash equity<br />
market turnover from current levels all the way to FY2015. This assumption gives rise to cost sav<strong>in</strong>gs <strong>of</strong><br />
$100.9 million due to the reduction <strong>in</strong> exchange fees and around $166.8 million reflect<strong>in</strong>g a narrow<strong>in</strong>g <strong>of</strong><br />
bid-ask spreads.<br />
‘High growth’ hypothetical scenario 28<br />
Alternatively, if strong growth <strong>in</strong> market turnover (<strong>of</strong> around 20 per cent per year) is assumed, the benefits<br />
from lower exchange fees would accrue to $146.5 million over FY2011 to FY2015 and $242.3 million due to<br />
narrower bid-ask spreads.<br />
26 Bid-ask spreads are the difference between the highest available bid (buy) and the lowest available ask (<strong>of</strong>fer to sell) at any<br />
specific time <strong>in</strong> the market. Traders will<strong>in</strong>g to transact immediately (and therefore will<strong>in</strong>g to ‘cross the spread’) will <strong>in</strong>cur a cost<br />
equal to the prevail<strong>in</strong>g bid-ask spread <strong>in</strong> order to access immediate liquidity. Market impact is the adverse price movement that<br />
a trader experiences as his or her large order is executed. Large buy (sell) orders would push prices higher (lower) as they are<br />
implemented, result<strong>in</strong>g <strong>in</strong> a higher (lower) average executed price than the trader might have <strong>in</strong>itially <strong>in</strong>tended. Markets with<br />
higher liquidity (turnover and depth <strong>of</strong> book at appropriate prices) tend to operate with lower spreads and market impact.<br />
27 In some jurisdictions where competition has been <strong>in</strong>troduced, there has been some reduction <strong>in</strong> brokerage commissions. In<br />
Australia, market participants already operate <strong>in</strong> a competitive framework. Because <strong>of</strong> this, the brokerage commission cuts <strong>in</strong><br />
response to competition among operators have not been estimated.<br />
28 Australian cash equity market turnover was broadly flat from FY2010 to FY2011, but it grew by over 20 per cent per year from<br />
FY2001 to FY2008. These figures suggest that our growth scenarios are plausible.<br />
33
How to <strong>in</strong>terpret the scenarios<br />
Importantly, the benefit due to exchange fee reductions over FY2011 to FY2015 (between $100.9 million<br />
under ‘no growth,’ and $146.5 million under ‘high growth’) has already began to materialise. The ASX last<br />
year reduced exchange fees and this has already benefited <strong>markets</strong> by $23 million dollars <strong>in</strong> FY2011 alone.<br />
It is generally accepted that this was <strong>in</strong> response to the threat <strong>of</strong> competition,<br />
The predictions that competition would give rise to cost sav<strong>in</strong>gs have already begun to be realised.<br />
Competition (or the threat <strong>of</strong> it) may already have had some prelim<strong>in</strong>ary impact <strong>in</strong> reduc<strong>in</strong>g bid-ask<br />
spreads. However, it is likely that these effects will be more evident after a few years <strong>of</strong> fully competitive<br />
market operation. This has been the experience <strong>in</strong> jurisdictions that have adopted competition and has<br />
been corroborated <strong>in</strong> the academic literature.<br />
Apportion<strong>in</strong>g the benefits to stakeholder groups<br />
The total ‘no growth’ scenario benefits will affect stakeholders <strong>in</strong> different ways. For <strong>in</strong>stance, participants<br />
may choose to absorb the reduction <strong>in</strong> exchange fees <strong>in</strong> full. In this hypothetical scenario, market operators<br />
would see a ‘cost’ <strong>of</strong> $100.9 million (represent<strong>in</strong>g the end <strong>of</strong> the monopoly rent receipts) and participants<br />
would see a benefit <strong>of</strong> equal size. In turn, <strong>in</strong>vestors would see a benefit <strong>of</strong> $166.8 million <strong>in</strong> the form <strong>of</strong><br />
lower bid-ask spreads. To the extent that a large number <strong>of</strong> participants also trade <strong>in</strong> pr<strong>in</strong>cipal accounts,<br />
they too would enjoy the benefits <strong>of</strong> narrower spreads. It is also possible that if competitive pressures<br />
among participants <strong>in</strong>tensify, some participants could transfer a fraction <strong>of</strong> the exchange cost cuts to<br />
<strong>in</strong>vestors.<br />
In most <strong>markets</strong> where it has been <strong>in</strong>troduced, competition has also led to higher turnover. If this takes<br />
place <strong>in</strong> Australia, operators and participants could reap additional receipts for <strong>in</strong>creased volume.<br />
Competition has also been associated overseas with a push for greater technological progress (lead<strong>in</strong>g to<br />
productivity ga<strong>in</strong>s), that benefit all market stakeholders and the broader economy <strong>in</strong> the long term. The net<br />
benefit by type <strong>of</strong> stakeholder is summarised <strong>in</strong> Table 7.3.<br />
34
Table 7.3: Potential benefits by stakeholder type<br />
Ga<strong>in</strong> Lose Net impact<br />
· Increased turnover as <strong>in</strong>vestors · Per trade fee reductions · Might be positive if the <strong>in</strong>crease<br />
respond to lower costs <strong>of</strong> trad<strong>in</strong>g. (loss <strong>of</strong> the capacity to earn <strong>in</strong> the number <strong>of</strong> trades times the<br />
Vertical <strong>in</strong>tegration also means monopoly rents). reduced fees per trade exceeds<br />
that some operators could benefit the revenue foregone by the<br />
Market from higher turnover through their · Have to <strong>in</strong>vest <strong>in</strong> research and reduction <strong>in</strong> unit prices and<br />
operators list<strong>in</strong>g and clear<strong>in</strong>g facilities. development to accommodate remunerates R&D outlays or if<br />
· Increased turnover as <strong>in</strong>vestors for accelerated pace <strong>of</strong> <strong>in</strong>novation drives cuts <strong>in</strong><br />
and participants respond to an technological <strong>in</strong>novation operational expenses<br />
accelerated pace <strong>of</strong> technological (e.g. low latency and coand<br />
bus<strong>in</strong>ess <strong>in</strong>novation (such as location facilities).<br />
low latency trad<strong>in</strong>g, maker-taker<br />
pric<strong>in</strong>g etc).<br />
· Lower exchange fees. · Have to <strong>in</strong>vest <strong>in</strong> research and · Very likely to be positive and<br />
· Greater choices <strong>of</strong> execution development to accommodate large as monopoly exchange<br />
venues. Ability to choose venue for accelerated pace <strong>of</strong> fees have been historically high.<br />
accord<strong>in</strong>g to bus<strong>in</strong>ess model, <strong>in</strong>novation (e.g. high frequency Brokerage sector <strong>in</strong> Australia<br />
prioritis<strong>in</strong>g what is more trad<strong>in</strong>g capabilities). already operates competitively.<br />
important (pric<strong>in</strong>g, latency, cost Adjustments to accelerated pace<br />
<strong>of</strong> trad<strong>in</strong>g, market-mak<strong>in</strong>g <strong>of</strong> <strong>in</strong>novation likely to be ‘sunk’<br />
Market <strong>in</strong>centives etc). costs. Some technological<br />
participants · Increased turnover as <strong>in</strong>vestors solutions and new trad<strong>in</strong>g<br />
respond to lower costs <strong>of</strong> trad<strong>in</strong>g. strategies could be imported<br />
· Increased turnover as <strong>in</strong>vestors from US and European<br />
respond to new technologies subsidiaries, or bought ‘<strong>of</strong>f-the-<br />
(such as low latency trad<strong>in</strong>g). shelf’ from specialised firms.<br />
· Pr<strong>in</strong>cipal trad<strong>in</strong>g will become<br />
cheaper, as market impact<br />
(<strong>in</strong>clud<strong>in</strong>g spreads) costs decl<strong>in</strong>e.<br />
· New cross-platform arbitrage<br />
opportunities for pr<strong>in</strong>cipal traders.<br />
· Lower market impact (<strong>in</strong>clud<strong>in</strong>g · It is possible that some trade · Very likely to be positive and<br />
spreads) costs. fragmentation across exchange large <strong>in</strong> net terms.<br />
Investors · Greater choice <strong>of</strong> execution platforms could <strong>in</strong>crease<br />
venues. volatility and negate some <strong>of</strong><br />
· Scope for HFTs and the possibility the impact <strong>of</strong> deeper <strong>markets</strong>.<br />
<strong>of</strong> arbitrag<strong>in</strong>g across platforms.<br />
· Higher liquidity <strong>in</strong> secondary · It is possible that some trade · Very likely to be positive and<br />
<strong>markets</strong> may <strong>in</strong>crease the fragmentation across exchange large <strong>in</strong> net terms.<br />
attractiveness <strong>of</strong> primary and platforms could <strong>in</strong>crease<br />
Issuers secondary issuance. It is possible volatility and negate some <strong>of</strong><br />
that IPO and secondary rais<strong>in</strong>gs the impact <strong>of</strong> deeper <strong>markets</strong>.<br />
discounts and brokerage/<br />
underwrit<strong>in</strong>g costs could fall.<br />
Estimat<strong>in</strong>g the benefits <strong>of</strong> competition<br />
The estimation <strong>of</strong> the benefits <strong>of</strong> competition is by necessity imprecise. This section proposes a<br />
methodology for such an exercise and suggests some numbers for the benefits result<strong>in</strong>g from competition.<br />
These numbers should be taken as generic guidel<strong>in</strong>es to <strong>in</strong>form further discussion and ref<strong>in</strong><strong>in</strong>g, not as<br />
forecasts.<br />
In this exercise, it is assumed that the benefits <strong>of</strong> competition will arise from two ma<strong>in</strong> factors:<br />
(i) a reduction <strong>in</strong> exchange fees <strong>in</strong> preparation for competition (this reduction has already been<br />
announced by ASX <strong>in</strong> July 2010); and<br />
(ii) narrow<strong>in</strong>g <strong>of</strong> bid-ask spreads, as a result <strong>of</strong> <strong>in</strong>creased turnover and depth <strong>of</strong> book at appropriate<br />
prices.<br />
35
A third possibility is that stakeholders could also benefit from a decl<strong>in</strong>e <strong>in</strong> market impact costs. 29 However,<br />
these potential cost sav<strong>in</strong>gs have not been estimated, given that they are highly dependent on the<br />
quantum and the characteristics <strong>of</strong> the projected <strong>in</strong>crease <strong>in</strong> liquidity (that is, how much the depth <strong>of</strong> the<br />
order book would grow, and how close to the midpo<strong>in</strong>t <strong>of</strong> the spread would the prices be at which<br />
additional orders would be placed). In addition, bid-ask spreads are a component <strong>of</strong> market impact costs.<br />
Because <strong>of</strong> this, the simulation <strong>of</strong> a reduction <strong>in</strong> spreads can be seen as a m<strong>in</strong>imum value for the estimation<br />
<strong>of</strong> the benefits <strong>of</strong> reduced market impact costs.<br />
Competition is also expected to promote <strong>in</strong>novation and advancements <strong>in</strong> trad<strong>in</strong>g technology <strong>in</strong> the market<br />
more generally. Similarly, the more substantial potential benefits <strong>of</strong> <strong>in</strong>novation have not been estimated <strong>in</strong><br />
the analysis below.<br />
It is assumed that there will be no further reductions <strong>in</strong> exchange fees <strong>other</strong> than what was announced by<br />
ASX <strong>in</strong> June 2010. Should any further reductions take place (for <strong>in</strong>stance, via maker-taker pric<strong>in</strong>g or <strong>other</strong><br />
models) the actual benefits <strong>of</strong> competition could be higher than estimated.<br />
Exchange fees<br />
In June 2010, the ASX reduced its fees for headl<strong>in</strong>e trades 30 (those <strong>in</strong> the central limit order book) from<br />
0.28 bp to 0.15 bp (a reduction <strong>of</strong> 0.13 bp per side); for on-order book cross<strong>in</strong>gs from 0.15 bp to 0.1 bp (a<br />
reduction <strong>of</strong> 0.05 bp per side); and for <strong>of</strong>f-order book cross<strong>in</strong>gs from 0.075 bp to 0.05 bp (a reduction <strong>of</strong><br />
0.025 bp per side).<br />
These reductions take place per trade side (that is, on the buy side and on the sell side). As such, the total<br />
reductions per trade are doubled to 0.26 bp for headl<strong>in</strong>e trades, 0.1 bp for on-order book cross<strong>in</strong>gs and<br />
0.05 bp for <strong>of</strong>f-order book cross<strong>in</strong>gs. As a result, the total estimated benefit from FY2011 to FY2015 is<br />
$88.8 million for headl<strong>in</strong>e trades, $7.5 million for on-order book trades and $4.6 million for <strong>of</strong>f-order book<br />
trades — assum<strong>in</strong>g no growth <strong>in</strong> turnover. This equates to $100.9 million over the period from FY2011 to<br />
FY2015 (Table 7.4).<br />
29 Market impact is def<strong>in</strong>ed as the adverse price dislocation from the desired price that takes place as large orders are<br />
implemented. Market impact costs tend to be higher when spreads are wide; the depth <strong>of</strong> the book is small or when book<br />
orders are placed at prices substantially far from the midpo<strong>in</strong>t <strong>of</strong> the spread.<br />
30 ASX fees and activity rebates, ASX, 3 June 2010. Excludes auctions and capped trades.<br />
36
Table 7.4: Potential benefits from reductions <strong>in</strong> exchange fees, accru<strong>in</strong>g over 5 years from FY2011 to<br />
FY2015, assumes zero growth <strong>in</strong> turnover from FY2011<br />
FY2011 FY2012 FY2013 FY2014 FY2015 Total<br />
$’000 20,247 18,922 17,685 16,528 15,446 88,828<br />
Headl<strong>in</strong>e<br />
(FY2011 dollars)<br />
Bp (two-sided)<br />
(<strong>of</strong> FY2011 turnover)<br />
0.147 0.138 0.129 0.12 0.112<br />
On-order<br />
book<br />
cross<strong>in</strong>gs<br />
Off-order<br />
book<br />
cross<strong>in</strong>gs<br />
$’000 1,703 1,592 1,488 1,390 1,299 7,472<br />
(FY2011 dollars)<br />
Bp (two-sided) 0.012 0.012 0.011 0.01 0.009<br />
(<strong>of</strong> FY2011 turnover)<br />
$’000 1,044 976 912 852 796 4,579<br />
(FY2011 dollars)<br />
Bp (two-sided) 0.008 0.007 0.007 0.006 0.006<br />
(<strong>of</strong> FY2011 turnover)<br />
$’000 22,994 21,490 20,084 18,770 17,542 100,879<br />
Total<br />
(FY2011 dollars)<br />
Bp (two-sided)<br />
(<strong>of</strong> FY2011 turnover)<br />
0.167 0.156 0.146 0.137 0.128<br />
Explanatory notes: uses a turnover <strong>of</strong> $1,373 billion for FY2011 (s<strong>in</strong>gle-sided); cost reductions <strong>of</strong> 0.26 bp for headl<strong>in</strong>e trades (that<br />
account for 56.7 per cent <strong>of</strong> turnover, exclud<strong>in</strong>g open auction, close auction and capped trades, accord<strong>in</strong>g to the ASX ‘Australia Cash<br />
Equity Markets, March 2010), 0.1 bp for on-order book cross<strong>in</strong>gs (that account for 12.4 per cent <strong>of</strong> turnover) and 0.05 bp for <strong>of</strong>f-order<br />
book cross<strong>in</strong>gs (that account for 15.2 per cent <strong>of</strong> turnover); assumes a discount factor <strong>of</strong> 7 per cent per year, as prescribed by the<br />
Australian Government Best Practice Regulation Handbook <strong>of</strong> June 2010, paragraph E35.<br />
Source: ASIC analysis.<br />
Us<strong>in</strong>g the same <strong>approach</strong> as <strong>in</strong> Table 7.4, but assum<strong>in</strong>g turnover growth, it is estimated that the benefits <strong>of</strong><br />
the reduction <strong>in</strong> exchange fees could reach $146.5 million if turnover grows by 20 per cent per year from<br />
FY2011 to FY2015 (Table 7.5).<br />
Table 7.5: Potential benefits from reductions <strong>in</strong> exchange fees, added across FY2011 to FY2015,<br />
hypothetical turnover growth scenarios<br />
No growth 5% pa 10% pa 15% pa 20% pa 25% pa<br />
$’000 88,828 97,521 107,073 117,548 129,009 141,523<br />
Headl<strong>in</strong>e (FY2011 dollars)<br />
On-order<br />
book<br />
cross<strong>in</strong>gs<br />
Off-order<br />
book<br />
cross<strong>in</strong>gs<br />
Total<br />
$’000 7,472 8,203 9,006 9,887 10,851 11,904<br />
(FY2011 dollars)<br />
$’000 4,579 5,028 5,520 6,060 6,651 7,296<br />
(FY2011 dollars)<br />
$’000 100,879 110,751 121,600 133,495 146,511 160,723<br />
(FY2011 dollars)<br />
Explanatory notes: uses a turnover <strong>of</strong> $1,373 billion for FY2011 (s<strong>in</strong>gle sided); cost reductions <strong>of</strong> 0.26 bp for headl<strong>in</strong>e trades (that<br />
account for 56.7 per cent <strong>of</strong> turnover, exclud<strong>in</strong>g open auction, close auction and capped trades, accord<strong>in</strong>g to the ASX ‘Australia Cash<br />
Equity Markets, March 2010), 0.1 bp for on-order book cross<strong>in</strong>gs (that account for 12.4 per cent <strong>of</strong> turnover) and 0.05 bp for <strong>of</strong>f-order<br />
book cross<strong>in</strong>gs (that account for 15.2 per cent <strong>of</strong> turnover); assumes a discount factor <strong>of</strong> 7 per cent per year, as prescribed by the<br />
Australian Government Best Practice Regulation Handbook <strong>of</strong> June 2010, paragraph E35.<br />
Source: ASIC analysis.<br />
Bid-ask spreads<br />
Analysis us<strong>in</strong>g 2010 data suggests that almost all <strong>of</strong> the highest market capitalisation stocks (top 50 stocks<br />
<strong>in</strong> the S&P/ASX 200) already trade at, or are very close to, the m<strong>in</strong>imum tick size. Because <strong>of</strong> this, further<br />
reductions <strong>in</strong> spreads for these stocks are unlikely. The next group<strong>in</strong>g <strong>of</strong> stocks — rank<strong>in</strong>g from 51 to 140 —<br />
tend to trade at spreads that are 3 bp wider than the top 50 stocks. The f<strong>in</strong>al group<strong>in</strong>g, from 141 to 200,<br />
trade at spreads that are on average 9.6 bp wider than the top 50 stocks.<br />
37
These spread estimates are <strong>used</strong> <strong>in</strong> comb<strong>in</strong>ation with the experiences <strong>in</strong> overseas <strong>markets</strong> to estimate the<br />
potential for reductions <strong>in</strong> bid-ask spreads <strong>in</strong> Australian stocks. It is assumed that the <strong>in</strong>creased market<br />
efficiency brought about by competition should reduce the abovementioned spread differences by half.<br />
That is, the ‘51-to-140’ stock group<strong>in</strong>g that trades at spreads 3 bp above that <strong>of</strong> large stocks would see a<br />
reduction <strong>of</strong> 1.5 bp <strong>in</strong> spreads. The ‘141- to-200’ stock group<strong>in</strong>g that trades at spreads 9.6 bp above the<br />
largest stocks, would see a reduction <strong>in</strong> spreads <strong>of</strong> 4.8 bp. It is assumed that there will be no improvement<br />
for the top 50 stocks or for stocks outside the top 200. 31<br />
These assumptions lead to a potential FY2011 to FY2015 cost sav<strong>in</strong>g <strong>of</strong> $166.8 million, assum<strong>in</strong>g zero<br />
growth <strong>in</strong> turnover (Table 7.6). Assum<strong>in</strong>g 20 per cent growth per year <strong>in</strong> turnover, potential cost sav<strong>in</strong>gs<br />
rise to $242.3 million (Table 7.7).<br />
Table 7.6: Potential benefits from reductions <strong>in</strong> bid-ask spreads, accru<strong>in</strong>g over 5 years from FY2011 to<br />
FY2015, assumes zero growth <strong>in</strong> turnover from FY2011<br />
FY2011 FY2012 FY2013 FY2014 FY2015 Total<br />
Stocks 51<br />
to 140<br />
Stocks 141<br />
to 200<br />
Total<br />
$’000 24,070 22,496 21,024 19,649 18,363 105,602<br />
(FY2011 dollars)<br />
Bp (two-sided) 0.175 0.164 0.153 0.143 0.134<br />
(<strong>of</strong> FY2011 turnover)<br />
$’000<br />
(FY2011 dollars)<br />
13,951 13,038 12,185 11,388 10,643 61,204<br />
Bp (two-sided)<br />
(<strong>of</strong> FY2011 turnover)<br />
0.102 0.095 0.089 0.083 0.077<br />
$’000<br />
(FY2011 dollars)<br />
38,021 35,534 33,209 31,036 29,006 166,806<br />
Bp (two-sided)<br />
(<strong>of</strong> FY2011 turnover)<br />
0.280 0.260 0.240 0.230 0.210<br />
Explanatory notes: uses a turnover <strong>of</strong> $1,373 billion for FY2011 (s<strong>in</strong>gle-sided); cost reductions <strong>of</strong> 0.26 bp for headl<strong>in</strong>e trades (that<br />
account for 56.7 per cent <strong>of</strong> turnover, exclud<strong>in</strong>g open auction, close auction and capped trades, accord<strong>in</strong>g to the ASX ‘Australia Cash<br />
Equity Markets, March 2010), 0.1 bp for on-order book cross<strong>in</strong>gs (that account for 12.4 per cent <strong>of</strong> turnover) and 0.05 bp for <strong>of</strong>f-order<br />
book cross<strong>in</strong>gs (that account for 15.2 per cent <strong>of</strong> turnover); assumes a discount factor <strong>of</strong> 7 per cent per year, as prescribed by the<br />
Australian Government Best Practice Regulation Handbook <strong>of</strong> June 2010, paragraph E35.<br />
Source: ASIC analysis.<br />
Table 7.7: Potential benefits from reductions <strong>in</strong> bid-ask spreads, added across FY2011 to FY2015,<br />
hypothetical turnover growth scenarios<br />
Stocks 51<br />
to 140<br />
Stocks 141<br />
to 200<br />
Total<br />
No growth 5% pa 10% pa 15% pa 20% pa 25% pa<br />
$’000 105,602 115,936 127,292 139,745 153,370 168,248<br />
(FY2011 dollars)<br />
$’000<br />
(FY2011 dollars)<br />
61,204 67,193 73,775 80,992 88,889 97,512<br />
$’000<br />
(FY2011 dollars)<br />
166,806 183,129 201,068 220,737 242,260 265,760<br />
Explanatory notes: uses a turnover <strong>of</strong> $1,373 billion for FY2011; cost reduction <strong>of</strong> 1.5 bp on spreads for stocks rank<strong>in</strong>g 51 to 140<br />
(account<strong>in</strong>g for 11.68 per cent <strong>of</strong> turnover) and a cost reduction <strong>of</strong> 4.8 bp on spreads for stocks rank<strong>in</strong>g 141 to 200 (account<strong>in</strong>g for<br />
around 2.11 per cent <strong>of</strong> turnover); assumes a discount factor <strong>of</strong> 7 per cent per year, as prescribed by the Australian Government Best<br />
Practice Regulation Handbook <strong>of</strong> June 2010, paragraph E35.<br />
Source: ASIC analysis.<br />
7.3 Estimate <strong>of</strong> overall net benefits — Summary table<br />
The table below (Table 7.8) provides a comparison <strong>of</strong> the costs <strong>of</strong> supervision <strong>in</strong> a multi-market<br />
environment and some <strong>of</strong> the potential benefits <strong>of</strong> competition from 1 January 2012 to 30 June 2015. This<br />
table reflects the two quantifiable components <strong>of</strong> potential benefits – benefits result<strong>in</strong>g from reductions <strong>in</strong><br />
31 If Chi-X <strong>in</strong>itially only allows trade on S&P/ASX 200 stocks <strong>in</strong> its platform, high-frequency traders and <strong>other</strong> market participants<br />
are likely to be more active <strong>in</strong> these stocks. It is possible that more stocks could benefit from narrower spreads if Chi-X allows<br />
trad<strong>in</strong>g on S&P/ASX 300 stocks. This means that the benefits would likely be greater than what is estimated here.<br />
38
exchange fees and bid-ask spreads.<br />
Table 7.8: Summary <strong>of</strong> estimated average benefits, costs and net benefits 1 Jan 2012 — 30 Jun 2015<br />
$million Average Average Estimated Average<br />
FY2011 turnover<br />
(s<strong>in</strong>gle-sided)(a) 1,373.4<br />
Estimated benefits Estimated costs total net net benefits<br />
total benefit (bp p.a.) total costs (bp p.a.) benefits (bp p.a.)<br />
Impact assum<strong>in</strong>g(b) 0% 178.16 0.1881 62.60 0.0669 115.56 0.1212<br />
growth rate p.a. 5% 202.93 0.1927 62.60 0.0612 140.33 0.1316<br />
(<strong>in</strong> bp per side) 10% 230.29 0.1973 62.60 0.0563 167.69 0.1410<br />
15% 260.43 0.2017 62.60 0.0521 197.83 0.1496<br />
20% 293.54 0.2061 62.60 0.0486 230.94 0.1575<br />
(a) Source: IRESS; trade type Equity only. Downloaded 6 July 2011.<br />
(b) Growth <strong>in</strong> FY12 only applied for H1 2012.<br />
Note: ASX announced exchange fee reductions <strong>in</strong> July 2010; this table only reflects the benefits from exchange fee reductions that<br />
accrued from 1 January 2012.<br />
Feedback sought<br />
13. What benefits and costs from competition have you experienced <strong>in</strong> your bus<strong>in</strong>ess or <strong>in</strong> those <strong>of</strong><br />
your clients? What future benefits and costs from competition do you expect for your bus<strong>in</strong>ess and<br />
for your clients?<br />
14. Do you have any views on whether the <strong>in</strong>troduction <strong>of</strong> competition will achieve an improvement <strong>in</strong><br />
Australia’s competitiveness and rank<strong>in</strong>g <strong>in</strong> global cash equity market trad<strong>in</strong>g?<br />
39
PART C: COST RECOVERY FOR SUPERVISION OF SMALL FINANCIAL MARKETS<br />
AND FUTURES MARKETS<br />
8 SMALL FINANCIAL MARKETS<br />
The Government proposes to cont<strong>in</strong>ue to charge the small f<strong>in</strong>ancial <strong>markets</strong> (that is NSX, SIM, IMB and<br />
APX) a fixed quarterly fee. As ASIC does not currently undertake real time market surveillance on the small<br />
f<strong>in</strong>ancial <strong>markets</strong> the Government considers it more appropriate to cont<strong>in</strong>ue to recover ASIC's costs for<br />
supervis<strong>in</strong>g these <strong>markets</strong> based on the supervisory effort expended by ASIC <strong>in</strong> terms <strong>of</strong> full time<br />
equivalent (FTE) employees.<br />
ASIC's total cost for supervis<strong>in</strong>g the small f<strong>in</strong>ancial <strong>markets</strong>, as outl<strong>in</strong>ed <strong>in</strong> the market supervision CRIS for<br />
1 July 2011 to 31 December 2011, is currently approximately $150,000 per annum. The supervisory effort<br />
required for the small f<strong>in</strong>ancial <strong>markets</strong> is based on the current risk pr<strong>of</strong>ile and trad<strong>in</strong>g activity on the four<br />
<strong>markets</strong> that comprise the small f<strong>in</strong>ancial <strong>markets</strong> segment and ASIC's estimate <strong>of</strong> the supervisory effort<br />
required to supervise these <strong>markets</strong>. Apart from employee costs, ASIC will not <strong>in</strong>cur any <strong>other</strong> costs to<br />
supervise the four <strong>markets</strong> with<strong>in</strong> the small f<strong>in</strong>ancial <strong>markets</strong> segment. For the period from 1 January 2012<br />
to 30 June 2013 ASIC's total supervisory cost for the small f<strong>in</strong>ancial <strong>markets</strong> is $225,000; this means that<br />
the proposed fixed quarterly fee for each small f<strong>in</strong>ancial market is $9,375 per quarter. These fees are to be<br />
collected quarterly <strong>in</strong> arrears. Participants on small f<strong>in</strong>ancial <strong>markets</strong> will not pay any fee under this<br />
proposal.<br />
9 FUTURES MARKETS<br />
It is proposed to extend the exist<strong>in</strong>g cost recovery <strong>approach</strong> for the ASX 24 market for 18 months. 32 This<br />
<strong>in</strong>volves the imposition <strong>of</strong> a fixed quarterly fee on the market operator only — participants <strong>in</strong> futures<br />
<strong>markets</strong> will not pay a direct fee to ASIC under this proposal. The extension will provide time to consult on<br />
the pr<strong>in</strong>ciples for the recovery <strong>of</strong> ASIC’s futures <strong>markets</strong> costs to ensure that fair and transparent cost<br />
recovery arrangements that appropriately reflect the complex nature <strong>of</strong> the futures <strong>markets</strong> are<br />
implemented.<br />
The Government proposes to consult further dur<strong>in</strong>g the 18 months from 1 January 2012 with a view to<br />
develop<strong>in</strong>g activity based cost recovery arrangements that apply to both operators and participants <strong>of</strong><br />
futures <strong>markets</strong>.<br />
New cost recovery arrangements for futures <strong>markets</strong> are proposed to be implemented from 1 July 2013.<br />
As outl<strong>in</strong>ed <strong>in</strong> the CRIS for 1 July 2011 to 31 December 2011, ASIC's supervisory effort for the ASX 24<br />
market <strong>in</strong>cludes seven FTE employees. Apart from employee costs, ASIC will also <strong>in</strong>cur systems/IT costs,<br />
MDP costs, and IT and non-IT overhead expenses to supervise the ASX 24 market. ASIC's total cost for<br />
supervis<strong>in</strong>g the ASX 24 market is currently approximately $1.5 million per annum.<br />
32 At this po<strong>in</strong>t, the only market with<strong>in</strong> this segment is ASX 24.<br />
40
For the period from 1 January 2012 to 30 June 2013, ASIC's total supervisory cost for the ASX 24 market is<br />
approximately $2.3 million. The proposed fixed quarterly fee for the ASX 24 market for the period from<br />
1 January 2012 to 30 June 2013 is therefore $386,000 per quarter. This fee is to be collected quarterly <strong>in</strong><br />
arrears.<br />
The <strong>in</strong>crease <strong>in</strong> the fixed quarterly fee from $217,000 per quarter dur<strong>in</strong>g the period from 1 July 2011 to<br />
31 December 2011 reflects the fact that no further contributions from the ASEFF are anticipated to <strong>of</strong>fset<br />
ASIC's costs for supervis<strong>in</strong>g the ASX 24 market from 1 January 2012.<br />
Feedback sought<br />
15. Do you have any comments regard<strong>in</strong>g the proposed 18 month extension to the exist<strong>in</strong>g cost<br />
recovery arrangements for the ASX 24 market - that is, the imposition <strong>of</strong> a fixed quarterly fee on<br />
the market operator only?<br />
16. Either now or for the future, what <strong>in</strong> your view are the <strong>key</strong> pr<strong>in</strong>ciples that should be applied to the<br />
allocation <strong>of</strong> costs between market operators and market participants for the futures market?<br />
17. Either now or for the future, what is a reasonable basis for the allocation <strong>of</strong> supervisory costs<br />
between market operators and market participants (for example contracts traded, open<br />
positions)?<br />
41
PART D: NEXT STEPS AND FEEDBACK<br />
10 NEXT STEPS<br />
10.1 Legislation to support the new market supervision fees<br />
The ASIC supervision cost recovery arrangements will be established by legislative amendments to the<br />
Corporations (Fees) Act 2001 (the Fees Act) and the Fees Regulations.<br />
The Fees Act provides legal authority for the charg<strong>in</strong>g <strong>of</strong> market operators for the performance by ASIC <strong>of</strong><br />
its functions under Part 7.2 (supervision <strong>of</strong> f<strong>in</strong>ancial <strong>markets</strong>) <strong>of</strong> the Corporations Act. Currently, only<br />
market operators are liable to be charged under the Fees Act.<br />
A bill will be <strong>in</strong>troduced to Parliament <strong>in</strong> the 2011 Spr<strong>in</strong>g sitt<strong>in</strong>gs. The purpose <strong>of</strong> this amendment is to<br />
enable the direct charg<strong>in</strong>g <strong>of</strong> market participants <strong>in</strong> addition to market operators under the Fees Act.<br />
Section 6A <strong>of</strong> the Fees Act states that the Fees Regulations may prescribe a fee for a chargeable matter by<br />
specify<strong>in</strong>g an amount as the fee or by specify<strong>in</strong>g a method for calculat<strong>in</strong>g the amount <strong>of</strong> the fee.<br />
The Fees Regulations will be amended prior to 1 January 2012 <strong>in</strong> order to <strong>in</strong>corporate the new methods <strong>of</strong><br />
fee calculations under the Government’s market supervision cost recovery arrangements. The current Fees<br />
Regulations will cease to operate at the end <strong>of</strong> 2011.<br />
Further consultation<br />
Industry comments on this consultation paper will <strong>in</strong>form the development <strong>of</strong> the Fees Regulations. An<br />
exposure draft <strong>of</strong> the Fees Regulations will be released for public comment <strong>in</strong> the f<strong>in</strong>al quarter <strong>of</strong> 2011.<br />
10.2 Cost recovery impact statement<br />
Under the Australian Government's Cost Recovery Guidel<strong>in</strong>es all agencies with significant cost recovery<br />
arrangements are required to prepare a CRIS. Your comments on this consultation paper will <strong>in</strong>form the<br />
development <strong>of</strong> the CRIS.<br />
A CRIS reflect<strong>in</strong>g the f<strong>in</strong>al cost recovery arrangements will be published on the ASIC website before the<br />
amendments to the Fees Regulations giv<strong>in</strong>g effect to the new cost recovery arrangements come <strong>in</strong>to effect<br />
on 1 January 2012.<br />
While the proposed cost recovery framework contemplates competition <strong>in</strong> a multi-operator environment,<br />
the proposed cash equity market supervision fee model <strong>in</strong> this paper is readily adaptable to a s<strong>in</strong>gle market<br />
operator environment for all or part <strong>of</strong> a period as fees are allocated based on activity.<br />
42
11 SUMMARY OF FEEDBACK SOUGHT<br />
This consultation paper seeks your views on the proposed market supervision fee model for the cash<br />
equities <strong>markets</strong> (for ASX listed securities), as well as the proposed cost recovery arrangements more<br />
generally. An <strong>in</strong>dex to these questions and the context <strong>in</strong> which they have been posed is provided below.<br />
Section Feedback questions Page<br />
3.1 Overview Of The Market Supervision<br />
Fee Model And Cost Recovery<br />
Arrangements For The Cash Equities<br />
Markets (For ASX Listed Securities)<br />
5.1 Allocation Of Costs Between Market<br />
Operators And Market Participants<br />
5.2 Allocation Of Costs To Each Market<br />
Operator And Participant<br />
5.3 Market / Technology Development<br />
Fees<br />
1. Do you prefer the proposed proportional fee <strong>approach</strong> (based on trades and<br />
messages) or the first alternative (proportional fee based on trades only)?<br />
2. Do you prefer the proposed <strong>approach</strong> <strong>of</strong> charg<strong>in</strong>g proportionally <strong>in</strong> arrears to the<br />
alternative fixed fee per trade <strong>approach</strong>?<br />
3. Are there any <strong>other</strong> <strong>approach</strong>es you would propose <strong>in</strong> respect <strong>of</strong> charg<strong>in</strong>g for<br />
supervis<strong>in</strong>g cash equity market trad<strong>in</strong>g activity <strong>in</strong> an efficient and effective way?<br />
4. What measures do you th<strong>in</strong>k need to be <strong>in</strong> place to ensure a strong framework <strong>of</strong><br />
accountability and transparency?<br />
5. Do you th<strong>in</strong>k an ongo<strong>in</strong>g framework for <strong>review</strong><strong>in</strong>g the market supervision cost<br />
recovery arrangements is desirable?<br />
6. Do you th<strong>in</strong>k an <strong>in</strong>dustry stakeholder committee could usefully form part <strong>of</strong> the<br />
<strong>review</strong> process?<br />
7. Do you agree with the proposed <strong>approach</strong> for the allocation <strong>of</strong> costs between<br />
market operators and market participants? If not, please specify and expla<strong>in</strong> an<br />
alternative <strong>approach</strong> for the allocation <strong>of</strong> costs between market operators and<br />
market participants.<br />
8. Do you agree with the proposed revenue based proxy for allocat<strong>in</strong>g some <strong>of</strong> the<br />
shared costs between market operators and market participants? Do you agree<br />
with the <strong>in</strong>clusion <strong>of</strong> list<strong>in</strong>g and <strong>other</strong> revenue <strong>in</strong> the allocation <strong>of</strong> shared costs to<br />
market operators? If not, please specify and expla<strong>in</strong> an alternative proxy.<br />
9. Do you consider that the proposed cost recovery arrangements for the cash<br />
equities market supervision costs (for ASX listed securities) provides the most<br />
reasonable basis for recover<strong>in</strong>g costs from each market operator and each market<br />
participant? If not, please expla<strong>in</strong> your preferred alternative.<br />
10. What impact does the proposed <strong>approach</strong> have on your bus<strong>in</strong>ess model? Can you<br />
provide examples <strong>of</strong> how the proposed <strong>approach</strong> would affect your bus<strong>in</strong>ess <strong>in</strong><br />
dollar terms?<br />
11. Do you have any comments about the <strong>approach</strong> for recover<strong>in</strong>g fixed costs relat<strong>in</strong>g<br />
to specific market operators, <strong>in</strong>clud<strong>in</strong>g the proposed timeframe for the recovery <strong>of</strong><br />
the costs?<br />
12. Do you have any comments about the proposed <strong>approach</strong> for recover<strong>in</strong>g ASIC's<br />
future market supervision costs?<br />
43<br />
15<br />
15<br />
15<br />
16<br />
16<br />
16<br />
26<br />
26<br />
27<br />
27<br />
28<br />
28
7 Impact and implementation<br />
considerations <strong>of</strong> the proposed cost<br />
recovery fee arrangements<br />
13. What benefits and costs from competition have you experienced <strong>in</strong> your bus<strong>in</strong>ess<br />
or <strong>in</strong> those <strong>of</strong> your clients? What future benefits and costs from competition do you<br />
expect for your bus<strong>in</strong>ess and for your clients?<br />
14. Do you have any views on whether the <strong>in</strong>troduction <strong>of</strong> competition will achieve an<br />
improvement <strong>in</strong> Australia’s competitiveness and rank<strong>in</strong>g <strong>in</strong> global cash equity<br />
market trad<strong>in</strong>g?<br />
9 Futures Markets 15. Do you have any comments regard<strong>in</strong>g the proposed 18 month extension to the<br />
exist<strong>in</strong>g cost recovery arrangements for the ASX 24 market - that is, the imposition<br />
<strong>of</strong> a fixed quarterly fee on the market operator only?<br />
16. Either now or for the future, what <strong>in</strong> your view are the <strong>key</strong> pr<strong>in</strong>ciples that should be<br />
applied to the allocation <strong>of</strong> costs between market operators and market<br />
participants for the futures market?<br />
17. Either now or for the future, what is a reasonable basis for the allocation <strong>of</strong><br />
supervisory costs between market operators and market participants (for example<br />
contracts traded, open positions)?<br />
44<br />
39<br />
39<br />
41<br />
41<br />
41
REFERENCES<br />
ASIC, Cost Recovery Impact Statement, Supervision <strong>of</strong> domestic licensed f<strong>in</strong>ancial <strong>markets</strong>, 1 July 2011 to<br />
31 December 2011, 2011.<br />
ASIC, Cost Recovery Impact Statement, Supervision <strong>of</strong> Australia’s F<strong>in</strong>ancial Markets, July 2010.<br />
Commonwealth <strong>of</strong> Australia, Budget Measures 2011-12, Budget Paper No. 2 Part 2: Expense Measures, p.<br />
319, May 2011.<br />
Commonwealth <strong>of</strong> Australia, Mid-year Economic and Fiscal Outlook 2009-10, Appendix A: Policy decisions<br />
taken s<strong>in</strong>ce the 2009-10 Budget, p. 216, November 2009.<br />
Corporations (Fees) Regulations 2001.<br />
Department <strong>of</strong> F<strong>in</strong>ance and Deregulation, Australian Government Cost Recovery Guidel<strong>in</strong>es July 2005,<br />
F<strong>in</strong>ancial Management Guidance No. 4, Canberra 2005.<br />
Former M<strong>in</strong>ister for F<strong>in</strong>ancial Services, Superannuation and Corporate Law Chris Bowen, ‘Government<br />
Announces Competition <strong>in</strong> F<strong>in</strong>ancial Markets’ media release, 31 March 2010.<br />
FSA, Fees Manual, 2011<br />
IIROC Annual Report 2009-10.<br />
IIROC, IIROC’s Regulatory Agenda for Canadian Equity Marketplaces speech by Susan Wolburgh Jenah,<br />
President and Chief Executive Officer IIROC, Trade Tech Canada Conference, December 7 2010.<br />
IIROC, New Market Regulation Fee Model, IIROC Adm<strong>in</strong>istrative Notice 10-0316, November 30, 2010.<br />
IOSCO, Regulatory issues Raised by the Impact <strong>of</strong> Technological Changes on Market Integrity and Efficiency,<br />
July 2011<br />
IRESS, Half Year Results Presentation, IRESS Market Technology, 25 August 2010.<br />
IRESS, Full Year Results Presentation, IRESS Market Technology, 24 February 2011.<br />
45
APPENDIX: REVIEW OF APPROACH USED IN OTHER KEY MARKETS<br />
KEY POINTS<br />
• International <strong>approach</strong>es to recover costs associated with supervision <strong>of</strong> secondary <strong>markets</strong><br />
are diverse.<br />
• Fund<strong>in</strong>g arrangements vary across the different jurisdictions. For example, the FSA is fully<br />
f<strong>in</strong>anced by the UK f<strong>in</strong>ancial services <strong>in</strong>dustry (as it does not receive any government fund<strong>in</strong>g),<br />
and consults annually on its fee proposals. The US Congress determ<strong>in</strong>es the fund<strong>in</strong>g for the<br />
Securities and Exchange Commission (SEC), while IIROC has specific periodic <strong>review</strong> provisions<br />
<strong>in</strong> place.<br />
• There are a number <strong>of</strong> different <strong>in</strong>ternational <strong>approach</strong>es to recover costs associated with<br />
supervision <strong>of</strong> f<strong>in</strong>ancial <strong>markets</strong> with a general theme <strong>of</strong> mov<strong>in</strong>g towards impos<strong>in</strong>g<br />
activity-based fees.<br />
INTERNATIONAL COMPARISONS<br />
• Australia compares relatively well <strong>in</strong> terms <strong>of</strong> the cost <strong>of</strong> trad<strong>in</strong>g <strong>in</strong> cash equity <strong>markets</strong>. The<br />
total cost that <strong>in</strong>stitutional <strong>in</strong>vestors faced <strong>in</strong> Australia — as surveyed by market research<br />
house Elk<strong>in</strong>s McSherry — averaged 23.5 bp (<strong>of</strong> value traded) from 2008 to 2010 (Chart A.1).<br />
This places Australia among the most competitive <strong>markets</strong> <strong>in</strong> the Asia Pacific region, with<br />
lower costs than jurisdictions such as Hong Kong, S<strong>in</strong>gapore and Taiwan.<br />
– The additional fee proposed under cost recovery is too small to affect our rank<strong>in</strong>gs.<br />
• Australia is also <strong>in</strong>ternationally competitive <strong>in</strong> terms <strong>of</strong> brokerage and exchange fee costs<br />
faced by <strong>in</strong>stitutional <strong>in</strong>vestors (Chart A.2).<br />
A 1
Chart A.1: Total Cost <strong>of</strong> Trad<strong>in</strong>g for Institutional Investors — Average costs from 2008 to 2010 (a) ,<br />
expressed as basis po<strong>in</strong>ts <strong>of</strong> the average trade size<br />
140<br />
120<br />
100<br />
80<br />
60<br />
40<br />
20<br />
0<br />
US - NYSE<br />
Japan<br />
US - NASDAQ<br />
UK - Sells<br />
France<br />
Germany<br />
Netherlands<br />
Sweden<br />
Switzerland<br />
Denmark<br />
South Africa - Sells<br />
Italy<br />
Portugal<br />
New Zealand<br />
Canada<br />
Norway<br />
Luxembourg<br />
Australia<br />
Spa<strong>in</strong><br />
Ireland - Sells<br />
S<strong>in</strong>gapore<br />
Mexico<br />
Poland<br />
Hong Kong<br />
Czech Republic<br />
Brazil<br />
Malaysia<br />
Thailand<br />
Greece<br />
Korea<br />
South Africa - Buys<br />
Taiwan<br />
Indonesia<br />
India<br />
Ch<strong>in</strong>a<br />
UK - Buys<br />
Ireland - Buys<br />
Source: Elk<strong>in</strong>s/McSherry. Note: Data for 2010 <strong>in</strong>cludes the first three quarters only and is based on calendar years.<br />
Chart A.2: Brokerage and exchange fee costs faced by <strong>in</strong>stitutional <strong>in</strong>vestors — 2010 (basis po<strong>in</strong>ts)<br />
30<br />
25<br />
20<br />
15<br />
10<br />
5<br />
0<br />
Indonesia<br />
Thailand<br />
Poland<br />
India<br />
Czech Republic<br />
Malaysia<br />
Taiwan<br />
Brazil<br />
Mexico<br />
Korea<br />
Greece<br />
Ch<strong>in</strong>a<br />
South Africa - Buys<br />
S<strong>in</strong>gapore<br />
South Africa - Sells<br />
Hong Kong<br />
Canada<br />
Australia<br />
Luxembourg<br />
Ireland - Buys<br />
UK - Buys<br />
Switzerland<br />
France<br />
Netherlands<br />
US - NASDAQ<br />
US - NYSE<br />
Germany<br />
UK - Sells<br />
Norway<br />
Italy<br />
Japan<br />
Spa<strong>in</strong><br />
Denmark<br />
Sweden<br />
Ireland - Sells<br />
Portugal<br />
New Zealand<br />
Source: Elk<strong>in</strong>s/McSherry. Note: Data for 2010 <strong>in</strong>cludes the first three quarters only and is based on calendar years.<br />
INTERNATIONAL APPROACHES TO COST RECOVERY<br />
This part describes the <strong>key</strong> fund<strong>in</strong>g arrangements for supervis<strong>in</strong>g secondary <strong>markets</strong> that apply <strong>in</strong> the<br />
United K<strong>in</strong>gdom (UK), the United States <strong>of</strong> America, Canada, S<strong>in</strong>gapore and Hong Kong.<br />
A 2<br />
5<br />
0<br />
140<br />
120<br />
100<br />
80<br />
60<br />
40<br />
20<br />
0<br />
30<br />
25<br />
20<br />
15<br />
10
United K<strong>in</strong>gdom<br />
The F<strong>in</strong>ancial Services Authority (FSA) has been the s<strong>in</strong>gle regulator for f<strong>in</strong>ancial services <strong>in</strong> the UK<br />
s<strong>in</strong>ce December 2001 and has a wide range <strong>of</strong> rule-mak<strong>in</strong>g, <strong>in</strong>vestigations and enforcement powers<br />
to enable it to meet its four statutory objectives:<br />
• market confidence — ma<strong>in</strong>ta<strong>in</strong><strong>in</strong>g confidence <strong>in</strong> the UK f<strong>in</strong>ancial system;<br />
• f<strong>in</strong>ancial stability — contribut<strong>in</strong>g to the protection and enhancement <strong>of</strong> stability <strong>of</strong> the UK<br />
f<strong>in</strong>ancial system;<br />
• consumer protection — secur<strong>in</strong>g the appropriate degree <strong>of</strong> protection for consumers; and<br />
• the reduction <strong>of</strong> f<strong>in</strong>ancial crime — reduc<strong>in</strong>g the extent to which it is possible for a regulated<br />
bus<strong>in</strong>ess to be <strong>used</strong> for a purpose connected with f<strong>in</strong>ancial crime.<br />
The FSA is responsible for the market supervision function and is fully f<strong>in</strong>anced by the UK f<strong>in</strong>ancial<br />
services <strong>in</strong>dustry; it does not receive any government fund<strong>in</strong>g. The FSA consults annually on its fee<br />
proposals with stakeholders.<br />
FSA’s revenue streams <strong>in</strong>clude 33 :<br />
• <strong>in</strong>itial and ongo<strong>in</strong>g annual fees from firms undertak<strong>in</strong>g a regulated activity;<br />
• fees to register a person with a controlled function at a firm;<br />
• f<strong>in</strong>es for market misconduct or <strong>other</strong> non-compliance with the F<strong>in</strong>ancial Services and Market<br />
Act 2000 or FSA Handbook;<br />
• fees for submitt<strong>in</strong>g periodic reports to the FSA through FSA systems; and<br />
• fees for transaction report<strong>in</strong>g. Firms that report transactions through the FSA’s TRS are<br />
charged £235 per annum <strong>in</strong> addition to a per transaction fee as set out <strong>in</strong> the FSA’s Fees<br />
Manual. 34<br />
Table A.1: Transaction fee apply<strong>in</strong>g to firms report<strong>in</strong>g transactions through the FSA’s TRS<br />
Number <strong>of</strong> transactions Price <strong>in</strong> pence<br />
First 1000 0.00<br />
1,001 - 1,000,000 1.91<br />
1,000,001 - 4,000,000 1.70<br />
4,000,001 - 8,000,000 1.49<br />
8,000,001 - 13,000,000 1.28<br />
13,000,001 - 20,000,000 1.06<br />
> 20,000,000 0.85<br />
33 Fees received by the FSA vary depend<strong>in</strong>g on the nature <strong>of</strong> activity (for example <strong>in</strong>surer, deposit taker, dealer) and the<br />
size <strong>of</strong> the firm (number <strong>of</strong> approved persons). In order to determ<strong>in</strong>e contributions to the transaction report<strong>in</strong>g system<br />
(TRS), an algorithm is applied to the total monies out <strong>of</strong> this pool received.<br />
34 The FSA Fees Manual is available at http://fsahandbook.<strong>in</strong>fo/FSA/html/handbook/FEES.<br />
A 3
Canada<br />
Canadian securities regulation is managed through laws and agencies established by Canada's<br />
13 prov<strong>in</strong>cial and territorial governments. Each prov<strong>in</strong>ce and territory has a securities commission or<br />
equivalent authority and its own prov<strong>in</strong>cial or territorial legislation. Unlike any <strong>other</strong> major<br />
federation, Canada does not have a securities regulatory authority at the federal government level.<br />
To ensure effective and <strong>in</strong>dependent marketplace <strong>in</strong>tegrity exchanges and alternative trad<strong>in</strong>g<br />
systems outsource market surveillance to IIROC. IIROC is a Canadian, not-for-pr<strong>of</strong>it, <strong>in</strong>dependent<br />
self-regulatory organisation that, among <strong>other</strong> th<strong>in</strong>gs, oversees trad<strong>in</strong>g <strong>in</strong> exchanges and<br />
marketplaces.<br />
On 30 November 2010, IIROC released its proposed new market regulation fee model for comment.<br />
IIROC’s Recognition Order 35 stipulates that it must operate on a cost recovery basis. In develop<strong>in</strong>g the<br />
fee model, IIROC was guided by the pr<strong>in</strong>ciples <strong>of</strong> fairness, transparency, <strong>in</strong>dustry competitiveness<br />
and cost recovery.<br />
IIROC developed its new fee model with the <strong>in</strong>volvement <strong>of</strong> an <strong>in</strong>dustry committee that was<br />
specifically established to consider this issue. The new market supervision fee model proposed is<br />
based on messages and the number <strong>of</strong> trades as the cost drivers for recovery <strong>of</strong> market supervision<br />
costs.<br />
The features <strong>of</strong> IIROC’s proposed market regulation fees are:<br />
• a m<strong>in</strong>imum monthly fee <strong>of</strong> $4,800 per marketplace member;<br />
• a fee charged to each marketplace based on that marketplace’s share <strong>of</strong> the total number <strong>of</strong><br />
messages processed by IIROC’s surveillance system dur<strong>in</strong>g the month — this component<br />
recovers the IT costs <strong>of</strong> the surveillance system;<br />
• a fee charged to each marketplace based on that marketplace’s share <strong>of</strong> the total number <strong>of</strong><br />
trades dur<strong>in</strong>g the month — this component recovers all <strong>other</strong> regulation costs; and<br />
• IIROC will cont<strong>in</strong>ue to recover marketplace-specific costs directly from the marketplace that<br />
<strong>in</strong>curs such costs.<br />
IIROC also proposes to extend an earlier discount for market makers 36 , and endorsed submissions<br />
received that:<br />
• market makers’ performance <strong>of</strong> their obligations provides liquidity, promotes price discovery,<br />
mitigates price volatility and supports order flow for retail <strong>in</strong>vestors; and<br />
• remov<strong>in</strong>g the market maker discount may create an un<strong>in</strong>tended <strong>in</strong>centive for Dealer Members<br />
to <strong>in</strong>ternalise order flow. 37<br />
35 Ontario Securities Commission Recognition Order, Schedule 1, part 4, May 16 2008.<br />
36 Market makers <strong>in</strong> Canada have a number <strong>of</strong> obligations <strong>in</strong> their stocks <strong>of</strong> responsibility, <strong>in</strong>clud<strong>in</strong>g ma<strong>in</strong>ta<strong>in</strong><strong>in</strong>g a twosided<br />
market, ma<strong>in</strong>ta<strong>in</strong><strong>in</strong>g the bid-ask spread with<strong>in</strong> a certa<strong>in</strong> target range, assist<strong>in</strong>g dur<strong>in</strong>g the open<strong>in</strong>g and with<br />
<strong>in</strong>quiries and anomalies, provid<strong>in</strong>g guaranteed fills for small orders and servic<strong>in</strong>g odd lot orders. In exchange for<br />
assum<strong>in</strong>g these obligations, market makers are entitled to direct benefits that <strong>in</strong>clude discounted trad<strong>in</strong>g fees charged<br />
by the marketplace for active trad<strong>in</strong>g and the right to participate <strong>in</strong> trades. Market makers also benefit from their status<br />
by attract<strong>in</strong>g <strong>in</strong>creased order flow for their stocks <strong>of</strong> responsibility because <strong>of</strong> their expert status <strong>in</strong> those stocks.<br />
A 4
United States <strong>of</strong> America<br />
Securities regulation <strong>in</strong> the United States covers various aspects <strong>of</strong> transactions and <strong>other</strong> deal<strong>in</strong>gs<br />
with securities and is usually understood to <strong>in</strong>clude both Federal and State level regulation by purely<br />
governmental regulatory agencies. Sometimes it may also encompass list<strong>in</strong>g requirements <strong>of</strong><br />
exchanges like the New York Stock Exchange and rules <strong>of</strong> self-regulatory organizations like FINRA.<br />
On the Federal level, the primary securities regulator is the SEC. However, futures and some aspects<br />
<strong>of</strong> derivatives are regulated by the Federal Commodity Futures Trad<strong>in</strong>g Commission (CFTC).<br />
Securities Exchange Commission (SEC)<br />
The SEC is funded by US Congress. The Investor and Capital Markets Fee Relief Act (Public Law<br />
107-123, 115 Stat. 2390-2401) (the Fee Relief Act) requires that the SEC annually adjusts <strong>key</strong> fee<br />
rates so that their projected revenues equate to annual targets specified <strong>in</strong> the Fee Relief Act.<br />
The relevant SEC market regulation fee to consider <strong>in</strong> this paper (specified under Section 31 <strong>of</strong> the<br />
Securities Exchange Act 1934) is levied twice annually on self regulatory organisations (SRO). The SRO<br />
will typically pass these fees on to its members. The SROs have adopted rules that require their<br />
broker members to pay per-transaction charges that the SROs use to pay these SEC fees. In turn,<br />
brokers generally charge their customers per-transaction charges to recoup these fees. However,<br />
neither the SEC nor the Fee Relief Act prescribe the manner <strong>in</strong> which SROs may obta<strong>in</strong> funds to make<br />
such payments, nor is a direct obligation imposed on brokers or their clients.<br />
Commodity Futures Trad<strong>in</strong>g Commission (CFTC)<br />
The CFTC is solely funded by US Congress. S<strong>in</strong>ce the 1980s, successive US adm<strong>in</strong>istrations have<br />
proposed that CFTC impose fees designed to recover costs. Currently, the Obama adm<strong>in</strong>istration's<br />
fiscal 2012 budget plan proposes charg<strong>in</strong>g user fees to entities supervised by the CFTC. Allow<strong>in</strong>g CFTC<br />
to charge user fees would br<strong>in</strong>g it <strong>in</strong>to l<strong>in</strong>e with all <strong>other</strong> federal f<strong>in</strong>ancial regulators.<br />
Exchange SROs<br />
The New York Stock Exchange (NYSE) Regulation Inc performs the NYSE market surveillance function<br />
on listed company compliance. It has a base budget that is set as a percentage <strong>of</strong> NYSE trad<strong>in</strong>g fees<br />
paid by all broker-dealers. It typically requires additional fund<strong>in</strong>g that is negotiated between the<br />
NYSE CEO and the CEO <strong>of</strong> NYSE Regulation Inc.<br />
F<strong>in</strong>ancial Industry Regulatory Authority<br />
FINRA regulates brokers across several <strong>markets</strong> and is self-funded through collection <strong>of</strong> regulatory<br />
fees, user fees, dispute resolution fees, transparency services fees, and f<strong>in</strong>es. FINRA also performs<br />
market regulation under contract for the major U.S. stock <strong>markets</strong>, <strong>in</strong>clud<strong>in</strong>g the NYSE, NYSE Arca,<br />
NYSE Amex, NASDAQ and the International Securities Exchange which is funded by contract services<br />
fees.<br />
37 IIROC Adm<strong>in</strong>istrative Notice 11-0125<br />
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(i) Regulatory fees<br />
Regulatory fees represent fees to fund regulatory activities, <strong>in</strong>clud<strong>in</strong>g the supervision and regulation<br />
<strong>of</strong> firms through exam<strong>in</strong>ation, policy mak<strong>in</strong>g, rulemak<strong>in</strong>g and enforcement activities. Regulatory fees<br />
<strong>in</strong>clude the Trad<strong>in</strong>g Activity Fee (TAF), Gross Income Assessment (GIA), Personnel Assessment (PA)<br />
and Branch Office Assessment (BOA).<br />
• The TAF is calculated on the sell side <strong>of</strong> all transactions by firms <strong>in</strong> all covered securities,<br />
regardless <strong>of</strong> where the trade is executed, and is assessed directly on the firm responsible for<br />
clear<strong>in</strong>g the transaction. The TAF is self-reported by firms, and the revenue is recognised <strong>in</strong> the<br />
month the transactions occur. As the TAF is a self-reported revenue stream, subsequent<br />
adjustments by firms may occur and are recognised as an adjustment to revenue <strong>in</strong> the period<br />
the adjustment becomes known.<br />
• The GIA and PA represent annual fees charged to firms and representatives.<br />
• The BOA has an <strong>in</strong>itial fee component <strong>in</strong> addition to annual fees. The <strong>in</strong>itial fee is recognised<br />
over the estimated bus<strong>in</strong>ess relationship period and the annual fee over the related annual<br />
period.<br />
The SEC authorised changes to several FINRA fees effective 1 Jan 2010. The PA and GIA were<br />
amended to achieve a more consistent and predictable fund<strong>in</strong>g stream as the economic and <strong>in</strong>dustry<br />
downturns experienced <strong>in</strong> 2008 and 2009 stra<strong>in</strong>ed FINRA resources. The updated details are:<br />
• The PA has a three-tier rate structure and assessment amounts were <strong>in</strong>creased to (from) per<br />
registered person :<br />
– members with one to five registered representatives and pr<strong>in</strong>cipals: $150 ($75) each;<br />
– 6-25 registered persons: $140 ($70) each; and<br />
– 26 or more registered persons: $ 130 ($65) each.<br />
• The GIA (the most important component <strong>of</strong> FINRA’s regulatory fund<strong>in</strong>g) is assessed through a<br />
seven-tier rate structure with a m<strong>in</strong>imum GIA <strong>of</strong> $1,200.00 per annum and is calculated as<br />
follows:<br />
– GIA = Maximum <strong>of</strong>:<br />
: 1. current GIA calculated as per the rate structure below; and<br />
: 2. a three-year average <strong>of</strong> the GIA to be calculated by add<strong>in</strong>g the current year<br />
plus the GIA assessed on the firm over the previous two calendar years,<br />
divided by three<br />
• Current GIA rate structure:<br />
– $1,200.00 on annual gross revenue up to $1 million;<br />
– 0.12 per cent <strong>of</strong> annual gross revenue greater than $1 million up to $25 million;<br />
– 0.26 per cent <strong>of</strong> annual gross revenue greater than $25 million up to $50 million;<br />
A 6
– 0.05 per cent <strong>of</strong> annual gross revenue greater than $50 million up to $100 million;<br />
– 0.04 per cent <strong>of</strong> annual gross revenue greater than $100 million up to $5 billion;<br />
– 0.04 per cent <strong>of</strong> annual gross revenue greater than $5 billion up to $25 billion; and<br />
– 0.09 per cent <strong>of</strong> annual gross revenue greater than $25 billion.<br />
For a newer firm that has only been assessed <strong>in</strong> the prior year, FINRA will compare the current year<br />
GIA to the firm’s two-year average and assess the greater amount.<br />
(ii) User fees<br />
Fees are charged for <strong>in</strong>itial and annual registrations, qualification exams, FINRA-sponsored<br />
educational programs and conferences, <strong>review</strong>s <strong>of</strong> advertisements and corporate fil<strong>in</strong>gs (corporate<br />
f<strong>in</strong>anc<strong>in</strong>g fees). Registration fees primarily <strong>in</strong>clude both <strong>in</strong>itial and annual fees charged on all<br />
registered representatives and <strong>in</strong>vestment advisers. Qualification fees consist <strong>of</strong> exam<strong>in</strong>ation and<br />
cont<strong>in</strong>u<strong>in</strong>g education fees. Advertis<strong>in</strong>g fees represent fees charged for the <strong>review</strong> <strong>of</strong> firms’<br />
communications to ensure that they are fair, balanced and not mislead<strong>in</strong>g. Corporate f<strong>in</strong>anc<strong>in</strong>g fees<br />
consist <strong>of</strong> fees charged for <strong>review</strong><strong>in</strong>g proposed public <strong>of</strong>fer<strong>in</strong>gs.<br />
(iii) Dispute resolution fees<br />
Fees are levied dur<strong>in</strong>g the arbitration and mediation processes. For example, adm<strong>in</strong>istrative fil<strong>in</strong>g<br />
fees are charged to each party when the parties agree to mediate their case with FINRA dispute<br />
resolution or parties must pay a mediation session deposit, cover<strong>in</strong>g the anticipated fees for the<br />
mediator's time and expenses.<br />
(iv) Transparency services fees<br />
Fees are charged for the use <strong>of</strong> TRACE and the ADF (Alternative Display Facility). In addition, fees are<br />
charged for services related to quot<strong>in</strong>g <strong>of</strong> certa<strong>in</strong> OTC Equities on the OTCBB (OTC bullet<strong>in</strong> board)<br />
and trade report<strong>in</strong>g <strong>of</strong> OTC Equities through the ORF (OTC report<strong>in</strong>g Facility). TRACE fees <strong>in</strong>clude<br />
market data fees as well as fees charged on secondary market transactions <strong>in</strong> eligible fixed <strong>in</strong>come<br />
securities reported to FINRA. ADF fees <strong>in</strong>clude market data fees as well as fees for post<strong>in</strong>g quotes.<br />
OTCBB is a regulated quotation service <strong>in</strong> which fees are charged for a variety <strong>of</strong> services related to<br />
the display <strong>of</strong> real-time quotes <strong>in</strong> OTC Equity securities that are eligible for quotation on the OTCBB.<br />
In addition, fees are earned for the sale <strong>of</strong> market data from the OTCBB and the ORF.<br />
(v) Contract services fees<br />
Amounts are charged by FINRA and FINRA REG for regulatory and registration services provided<br />
under contractual arrangements (e.g. for exchanges and trade report<strong>in</strong>g facilities regard<strong>in</strong>g<br />
surveillance, monitor<strong>in</strong>g, technology development, legal and enforcement activities).<br />
(vi) F<strong>in</strong>es<br />
Sanctions for rule violations — FINRA do not view f<strong>in</strong>es as part <strong>of</strong> their operat<strong>in</strong>g revenues and have<br />
processes <strong>in</strong> place designed to guard aga<strong>in</strong>st potential conflicts <strong>in</strong> FINRA's collection and use <strong>of</strong> f<strong>in</strong>e<br />
monies, <strong>in</strong>clud<strong>in</strong>g that f<strong>in</strong>e revenue is separately accounted for, are not <strong>in</strong>cluded <strong>in</strong> operat<strong>in</strong>g<br />
budgets, and not <strong>used</strong> for employee compensation amongst <strong>other</strong>s.<br />
A 7
National Futures Association (NFA)<br />
The NFA is an <strong>in</strong>dustry-wide self-regulatory organisation for the U.S. futures <strong>in</strong>dustry. Membership <strong>in</strong><br />
NFA is mandatory. The NFA has no ties to any specific marketplace. It is funded exclusively from<br />
membership dues and from assessment fees paid by the users <strong>of</strong> the futures <strong>markets</strong>.<br />
Member firms are required to pay annual membership dues as part <strong>of</strong> a firm's annual fil<strong>in</strong>gs and are<br />
subject to a late payment charge <strong>of</strong> $25.00 per month if paid after the date that they are payable.<br />
Table A.2: NFA annual membership dues schedule<br />
Fee Amount ($US)<br />
Futures Commission Merchant - Exchange is Designated Self-Regulatory Organization 1,500<br />
Futures Commission Merchant - NFA is Designated Self-Regulatory Organization 5,625<br />
FCM Forex Dealer Member - Exchange is Designated Self-Regulatory Organization that has<br />
agreed to exam<strong>in</strong>e the Forex Dealer Member's forex activities 13,500<br />
FCM Forex Dealer Member - NFA is Designated Self-Regulatory Organization with annual<br />
forex revenue <strong>of</strong> $500,000 or less(a) 50,000<br />
FCM Forex Dealer Member - NFA is Designated Self-Regulatory Organization with annual<br />
forex revenue <strong>of</strong> more than $500,000 but not more than $2 million(a) 75,000<br />
FCM Forex Dealer Member - NFA is Designated Self-Regulatory Organization with annual<br />
forex revenue <strong>of</strong> more than $2 million, but not more than $5 million(a) 100,000<br />
FCM Forex Dealer Member - NFA is Designated Self-Regulatory Organization with annual<br />
forex revenue <strong>of</strong> more than $5 million(a) 125,000<br />
Commodity Pool Operator 750<br />
Commodity Trad<strong>in</strong>g Advisor 750<br />
Introduc<strong>in</strong>g Broker 750<br />
(a) FCM Forex Dealer Member dues will be assessed on membership renewal date. Regular FCM dues apply to <strong>in</strong>itial<br />
application.<br />
In addition to annual membership dues, Forex dealer members are required to pay an annual fee<br />
based on the highest number <strong>of</strong> unregulated solicitors and account managers that they were<br />
responsible for any given time for the 12 month period preced<strong>in</strong>g the members’ annual dues notice.<br />
The follow<strong>in</strong>g table lists the fee levels.<br />
Table A.3: Number <strong>of</strong> unregulated entities annual fee<br />
Number <strong>of</strong> unregulated entities Annual fee ($US)<br />
0 0<br />
1 to 4 5,000<br />
5 to 19 10,000<br />
20 to 99 25,000<br />
100 or more 50,000<br />
S<strong>in</strong>gapore<br />
The S<strong>in</strong>gapore Stock Exchange (SGX) ma<strong>in</strong>ta<strong>in</strong>s the surveillance <strong>of</strong> all trad<strong>in</strong>g activities. SGX conducts<br />
surveillance <strong>of</strong> trad<strong>in</strong>g activities <strong>of</strong> the securities and derivatives <strong>markets</strong> to detect unusual trad<strong>in</strong>g<br />
activities and prohibited trad<strong>in</strong>g practices or conduct, <strong>in</strong>clud<strong>in</strong>g <strong>in</strong>sider trad<strong>in</strong>g and market<br />
manipulation.<br />
For securities supervision, SGX utilises a real-time market surveillance system that employs<br />
technology to automatically alert them to irregular market behaviour such as unusual price and<br />
volume movements.<br />
Surveillance <strong>of</strong> derivatives is conducted via a two pronged <strong>approach</strong> that comb<strong>in</strong>es electronic<br />
surveillance and exception reports <strong>review</strong>.<br />
A 8
Costs associated with the supervision <strong>of</strong> the market are recovered through trad<strong>in</strong>g fees, possibly<br />
expla<strong>in</strong><strong>in</strong>g slightly higher costs to market participants as per Chart A.1.<br />
Hong Kong<br />
The Securities and Futures Commission (SFC) is an <strong>in</strong>dependent statutory body established by the<br />
Securities and Futures Commission Ord<strong>in</strong>ance (SFCO). The SFCO and n<strong>in</strong>e <strong>other</strong> securities and futures<br />
related ord<strong>in</strong>ances were consolidated <strong>in</strong>to the Securities and Futures Ord<strong>in</strong>ance, which came <strong>in</strong>to<br />
operation on 1 April 2003.<br />
The SFC has six regulatory objectives to:<br />
• keep the securities and futures <strong>markets</strong> fair, efficient, competitive, transparent and orderly;<br />
• help the public understand how the securities and futures <strong>in</strong>dustry works;<br />
• protect <strong>in</strong>vestors’ <strong>in</strong>terests;<br />
• m<strong>in</strong>imise market crime and misconduct;<br />
• reduce systemic risks <strong>in</strong> the <strong>in</strong>dustry; and<br />
• help ma<strong>in</strong>ta<strong>in</strong> the f<strong>in</strong>ancial stability <strong>in</strong> Hong Kong.<br />
In carry<strong>in</strong>g out its regulatory objectives, the SFC seeks to establish and ma<strong>in</strong>ta<strong>in</strong> a sound regulatory<br />
regime that is consistent with prevail<strong>in</strong>g <strong>in</strong>ternational practices, for example, the objectives and<br />
pr<strong>in</strong>ciples <strong>of</strong> securities regulation developed by the International Organization <strong>of</strong> Securities<br />
Commissions (IOSCO).<br />
Major sources <strong>of</strong> fund<strong>in</strong>g for the SFC <strong>in</strong>clude:<br />
• levies collected by the Stock Exchange <strong>of</strong> Hong Kong Ltd (SEHK) and Hong Kong Futures<br />
Exchange Ltd (HKFE) on transactions recorded on the Exchanges at rates specified by the Chief<br />
Executive <strong>in</strong> Council; and<br />
• Fees and charges related to its functions and services accord<strong>in</strong>g to the provision <strong>of</strong> subsidiary<br />
legislation.<br />
A levy is payable on:<br />
• every sale and purchase <strong>of</strong> any securities that is recorded on a recognised stock market or<br />
notified to a recognised exchange company under its rules;<br />
• every sale and purchase <strong>of</strong> any futures contract traded on a recognised futures market; and<br />
• every sale and purchase <strong>of</strong> any securities or futures contracts traded by means <strong>of</strong> authorised<br />
automated trad<strong>in</strong>g services.<br />
In October 2010, the SFC effected a 25 per cent reduction <strong>in</strong> the levy payable <strong>in</strong> respect <strong>of</strong> trad<strong>in</strong>g <strong>in</strong><br />
securities, futures or options contracts after a <strong>review</strong> <strong>of</strong> its reserves position.<br />
A 9
The levy payable by the seller and the purchaser on the sale or purchase <strong>of</strong> f<strong>in</strong>ancial products from<br />
1 October 2010 are outl<strong>in</strong>ed <strong>in</strong> the table below:<br />
Product Levy<br />
i. Securities 0.003% <strong>of</strong> the consideration<br />
ii. Futures contracts HKD 0.60<br />
iii. M<strong>in</strong>i-Hang Seng Index Futures Contract; M<strong>in</strong>i-Hang Seng Index Options Contract; or<br />
M<strong>in</strong>i-Hang Seng Ch<strong>in</strong>a Enterprises Index Futures Contract<br />
A 10<br />
HKD 0.12<br />
Where the exchange has collected the levy on behalf <strong>of</strong> the SFC, it pays the levy 15 days follow<strong>in</strong>g the<br />
collection <strong>of</strong> the levy.