
	Advanced Search

An Inquiry Into the Performance by NZX of its Regulatory Functions as a Registered Exchange During 2003 and 2004 Prior to the Collapse of Access Brokerage

13 December 2005

PART X - DEVELOPMENT OF NZX COMPLIANCE FUNCTION SINCE 2003 AND RESPONSE TO ISSUES

The Commission's inquiry arose from the failure of Access, and has focussed on events as they were in the period prior to that firm's collapse. The Commission informed NZX at the commencement of its inquiry that it would seek to make recommendations, if warranted, for improvements to the rules, procedures, and practices for broker supervision and inspections.
As outlined in this report, the inspection of Access occurred during the development by NZX of its in-house broker compliance role. The Commission has concluded that there were shortcomings in the design and early implementation of this role. However, any assessment of the findings of this report, and any recommendations that might follow, need to be undertaken in the context of changes that have occurred at NZX since the time under review.
The Commission has not at this time undertaken an extensive review of NZX's current broker compliance or other regulatory functions. Evidence relevant to this was received in the course of the inquiry, from NZX and from other witnesses. It is apparent that the broker compliance programme, in its formative stages at the time of the Access insp
Since 2003, NZX has:
1. set up NZX Discipline as an independent body to hear and determine cases of alleged breaches of the NZX Conduct Rules, and introduced the NZX Discipline Rules;
2. appointed a dedicated Head of Regulatory and Public Policy, responsible for NZX Regulation, a unit within NZX responsible for carrying out its regulatory functions;
3. increased numbers and expertise of personnel in its participant compliance team, including members with extensive regulatory and internal audit experience;
4. completed inspections for all Market Participants, allowing the development of risk profiles for the team's ongoing work;
5. introduced spot inspections of Market Participants, in addition to scheduled inspections;
6. tightened re-inspection schedules where breaches are found;
7. introduced the new Participant Rules with higher compliance standards, including daily liquid capital reporting for Market Participants and a requirement for each Market Participant to have a nominated Compliance Manager who must not undertake operational activities;
8. required all Market Participants to undergo accreditation under the new Participant Rules (in the course of which accreditation was denied to two firms); and
9. referred several instances of suspected non-compliance with the Participant Rules to NZX Discipline.
As detailed above, in response to the Grant Thornton report NZX has followed up the individual cases where breaches of the client funds rules were identified, and has published a guidance note to clarify Market Participants' understanding of these rules. NZX also informs the Commission that it intends to prepare a discussion document seeking suggestions for improvements to the client funds rules.
The Commission received evidence from Mr Weldon that the compliance programme had evolved to NZX's satisfaction and that NZX considers the compliance function to be well constructed. Mr Weldon noted that the market was seeing value in compliance. The broking community was now seeing compliance as a source of competitive advantage and was becoming more compliance focussed. Mr Weldon considered that the NZX compliance team in place today had the requisite experience, backgrounds and compliance attitude.
The Commission also received statements from senior market figures to the effect that the introduction of the Participant Rules and NZX's increased focus on compliance through its reporting and inspection programmes have resulted in a more rigorous compliance regime with market participants taking their obligations more seriously, and have enhanced the standing of the securities industry in New Zealand. One Managing Principal wrote:

The benefits from the consistency and accountability of the current processes cannot be underestimated...in summary I believe the introduction of the new participant rules, changes to the inspection and reporting processes and the consistent enforcement of the rules has had a major positive impact on the working and image of the NZX markets.

These comments accord with the Commission's own observations in practice. Since demutualisation NZX has clearly increased its focus on regulatory matters. We have confidence that NZX is committed to maintaining high standards in its markets. At the time of its inspection of Access NZX had not yet completed the development and implementation of its broker compliance programme. The Commission is of the view that the steps NZX has taken since that time address in large part the issues raised in this report.

PREV | CONTENTS | NEXT