OVERSIGHT REVIEW OF NZX 2007

EXECUTIVE SUMMARY

1. The Securities Commission has reviewed NZX's performance of its regulatory functions as a registered exchange under the Securities Markets Act 1988. This review, the third oversight review of NZX conducted by the Commission, focussed on NZX's arrangements in the 2007 calendar year for discharging its obligations.
2. We report on NZX's performance under the following headings:
   • NZX's frontline regulation
   • Policies in respect of continuous disclosure
   • Impact of expanding commercial activities on NZX's regulatory function
   • The Special Division
   • Matters arising from the review of the 2006 year
     1. Conflict management
     2. NZX Discipline
     3. The Special Division
     4. The NZAX market
3. The Commission's overall conclusion is that NZX is satisfying its obligation to operate its markets in accordance with its conduct rules.
4. NZX's performance as a registered exchange is good. The Commission has made findings which are set out below.
5. The Commission has communicated its findings to NZX, NZX Discipline and the Special Division.
6. NZX, NZX Discipline and the Special Division have agreed to report to the Commission by 30 September 2008 in regard to matters arising from this review, and the Commission will publish such responses.

Findings

NZX's frontline regulation

7. The Commission is satisfied with the processes which NZX uses in considering admission or approval of listed issuers and market participants to its markets. The Commission is satisfied that NZX is taking appropriate action to minimise the risk of non-compliance by listed issuers and market participants in relation to their obligations under the Listing Rules and Participant Rules.

Policies in respect of continuous disclosure

8. The Commission is satisfied that NZX's policies in respect of its continuous disclosure rules are adequate and that NZX appropriately administers these policies, including its practices regarding publication of market announcements. The Commission believes that attachments to announcements, particularly annual reports, should be disclosed on the NZX website without the need to make a request. NZX has publicly announced that new features will be added to the website in the next several months.

Impact of expanding commercial activities on NZX's regulatory function

9. The Commission is concerned with the risk of potential conflicts that might arise between its regulatory and commercial functions as NZX expands its commercial activities. While we are not aware of any such conflicts at this time, we will continue to review this issue in our future oversight review of NZX.

The Special Division

10. The Commission believes that in one instance the Special Division exceeded the scope of its role under the Listing Rules. The Commission will continue to review the Special Division's exercise of its role in our future oversight reviews.

Matters arising from the review of the 2006 year

Conflict management

11. NZX is aware that some parties, including the Commission, perceive that NZX is subject to conflict between its commercial and regulatory functions and the risks that arise from such conflict. The Commission is satisfied that NZX has taken satisfactory practical measures to address this issue. We will continue to review this issue in our future oversight review of NZX.

NZX Discipline

12. NZX Discipline has followed the Commission's recommendation that NZX Discipline should ensure that, when determining the procedure to apply to a proceeding before it, it treats all parties evenly.
13. NZX Discipline has adopted a policy guideline on the naming of market participants, which sets out the criteria for NZX Discipline to use in its determination of whether to publish the name of a market participant subject to adjudication by NZX Discipline. The Commission is satisfied that NZX Discipline's policy guideline has addressed the Commission's recommendation and the Commission will continue to review the application of the policy guideline in our future oversight reviews.
14. NZX Discipline and NZX are currently working collaboratively on the amendments to the NZX Discipline Rules. The Commission expects that the amended rules will be implemented by December 2008.
15. NZX Discipline has communicated its resource needs to NZX. NZX is supportive of NZX Discipline's requirements.
16. The Commission is satisfied that the NZX website has the appropriate information about NZX Discipline.

The Special Division

17. The Commission is satisfied that the NZX website has the appropriate information about the Special Division.

The NZAX market

18. The Commission is satisfied with the changes made to the NZAX market and the educational initiatives in regard to these changes.