“The Australian Securities & Investments Commission (ASIC) is monitoring the emergence of ‘prop trading’ firms or services relating to CFD trading,” confirmed Dr Rhys Bollen, the regulator’s Senior Executive Leader of the Digital Assets and Markets Group.
Finance Magnates recently sat down with Dr Bollen, who will be participating in the “Transformation in the APAC Trading Landscape and Beyond” panel at the Finance Magnates Pacific Summit on August 27th.
“An area for future focus for ASIC is the distribution of CFDs by issuers via emerging channels, such as ‘prop trading’ services. In 2024/25, we plan to undertake detailed surveillance of new and emerging distribution methods across the CFD industry and review consumer outcomes.”
The confirmation by ASIC has become the latest comment by a regulator on prop trading. Recently, CySEC’s Chair, Dr George Theocharides, also confirmed that there would “certainly be more scrutiny” on prop trading firms in the near future.
Around a month ago, Finance Magnates reported exclusively that the European Securities and Markets Authority (ESMA) conducted an initial check on prop trading firms and discussed potential regulations for the industry. A week later, we published the first EU regulator’s comment on the industry: the Czech regulator asserted that prop trading firms “may be subject to MiFID.”
Now, the confirmation by the ASIC executive shows that more and more regulators are trying to understand the prop trading industry. However, prop trading is not the only area the ASIC focuses on.
“Protect Retail Investors from High-Risk Offers”
“Developments in technology and automation and increased retail investor participation have significantly contributed to changes in the trading industry, resulting in new threats and harms in our regulatory environment,” Dr Bollen added. “This has been reflected in our strategic priorities over the years, with an increased focus on cybersecurity, technological and operational resilience, artificial intelligence, machine learning, electronic trading and crypto assets.”
“These will continue to be areas of focus for ASIC going forward as technology evolves, and we emphasize the importance of strong governance and risk management,” Dr Bollen asserted. He assured that ASIC will also continue to take action to protect retail investors from high-risk offers and business practices that may be unfair, inappropriate, or result in poor outcomes.
Dr Bollen also highlighted that compliance with the requirements of market integrity rules and design and distribution obligations (DDOs) “will continue to be a focus for us.”
ASIC implemented the DDO rules in October 2021 and has strictly enforced these obligations for financial services companies. It requires financial services providers to ensure products are designed with consumer needs in mind and distributed in a targeted manner. They must also monitor outcomes and reassess their product governance arrangements over time.
The regulator took action against several financial services firms for DDO violations, including popular brands like Saxo and Mitrade. It even sued retail broker eToro for violating the DDO rules, and the case is now before the federal court.
“We Continue to See the Consolidation of Traditional Brokers”
“ASIC is promoting compliance with the requirements, disrupting poor practices and taking strong action where appropriate to enforce the law and protect consumers,” Dr Bollen said.
Pointing at the challenges the regulator faces, he observed: “Technological change has fundamentally transformed the trading industry,” adding that “among other impacts, it has made trading and information more accessible, increased competition, fragmentation and speed of markets.”
“We continue to see the consolidation of traditional brokers and the proliferation of online trading providers,“ he noted.
“Explore the Potential Uses of AI”
Another area of concern for the regulator is the “rapid change and expansion” of artificial intelligence (AI). As Dr Bollen admitted, “we expect it to continue to drive efficiencies in risk management and operations, such as price prediction, hedging and fraud detection.” He added that “recent developments, especially in Generative AI, will potentially create new and different risks and issues.”
According to Dr Bollen, this also means that the threat of market misconduct is ever-evolving and increasing in sophistication, so enhancements to surveillance and enforcement capabilities are needed to remain on the front foot. This includes investing in data and technology to help combat innovative forms of market misconduct. “Protecting market integrity is a perennial focus for ASIC,” he affirmed.
Dr Bollen further confirmed that ASIC will continue to explore the potential uses of AI and other technologies to better understand how it is being applied, as well as their risks and opportunities. “All participants in the financial system—including regulators—have a duty to balance innovation with the responsible and ethical use of emerging technologies,” he claimed.
Australia is considered one of the mature markets for retail trading. Over the years, ASIC has drastically changed the rules around retail trading to protect investors' interests. Among many investment instruments, crypto has also made a mark among Aussie investors.
ASIC and @HTI_UTS hosted the ASIC x UTS AI Regulators Symposium last week, bringing together experts from academia, business, industry, and government for a critical conversation on how #AI is changing #regulation and the way regulators go about their work. pic.twitter.com/I1K2rFzJpm
— ASIC Media (@asicmedia) May 30, 2024
“The [Crypto] Issuers... Need an Australian Financial Services Licence”
When asked about the necessity of a MiCA-like regulatory framework in Australia, Dr Bollen said that “many crypto asset products are financial products under the current law.”
He explained that the issuers—and any intermediaries and exchanges who trade in those crypto assets—need an Australian financial services licence. “We are seeking to provide additional guidance where we can, including via court proceedings to provide clarity around the application of existing laws,” he clarified.
Dr Bollen also pointed out that the Australian government has proposed a licensing regime for digital asset facilities, which are facilities providing custody and trading services over crypto assets. This will include all digital assets, not just those that are financial products under the current law. The government has also proposed an updated regime for the regulation of payment services, including certain stablecoins. “Together, these reforms will ensure all major forms of crypto assets activities are regulated in Australia.”
Australia's attitude towards crypto/web3 is making it fall far behind
— Jabz (@jabranthelawyer) July 22, 2024
I simply say that from the many encounters I've had over the last year
Tho I'm sure there's some more quantitative evidence for this eg:
- Aussie talent that moves abroad
- lack of political interest in the… pic.twitter.com/wHQeXBAbSq
“ASIC Received New Rule Making Powers”
When it comes to regulations in Australia, ASIC oversees the country's broader financial services market. Thus, it wields an enormous amount of power and authority over the financial services industry. And the Aussie government is providing more authority to the regulator to better control the markets.
“Our market infrastructure powers, and in particular, CS facilities, are in a period of significant development with the Financial Market Infrastructure (FMI) and Competition in Clearing and Settlement (CiCS) reforms,” noted Dr Bollen.
He further explained that under the CiCS reforms passed by the Parliament last September, ASIC received new rule-making powers for clearing and settlement services. These powers were enlivened for cash equity services in May 2024. “Our new powers are intended to facilitate competitive outcomes in the presence and absence of competition,” he stated. “ASIC intends to consult on draft CS services rules for cash equities to deliver these outcomes in July.”
Dr Bollen assured that ASIC is watchful of other changes in financial markets. It is observing a recent drop in listed companies in Australia and a shift towards private markets. He asserted that ASIC is responding by expanding its focus to changes in the structure of capital markets. “This includes examining other products and markets when we conduct our work on market cleanliness and further considering how firms are managing inside information. ASIC is committed to ensuring that Australia’s markets remain clean and transparent.”
