Trusted capital markets support growth, innovation and prosperity and are a hallmark of a well-developed economy. Confidence in capital markets encourage investor participation and in turn liquidity, and a lower cost of capital. Conversely, if investors perceive they are at an unfair disadvantage, they may reduce their exposure to the market or demand a higher return for the perceived increased risk.
To ensure market integrity we need robust market infrastructure, where trading, clearing and settlement of transactions is fair, orderly and transparent and market misconduct is minimised. The increasing incidence, complexity and reach of cyber attacks can destabilise fair, orderly and transparent markets and erode investor and financial consumer trust and confidence. Following our Cyber Resilience Health Check report in 2015, we released a cyber resilience assessment of the ASX and Chi-X. This report includes questions all boards should consider asking to ensure they are appropriately positioned.
Effective listing standards support the Australian equity market to fund growth and innovation. The ASX administers the process for listing and ensuring listed entities meet their ongoing obligations to investors. In June 2016, we released our assessment report on the listing standards of the ASX, which highlighted a number of good practices that may assist all Australian listing markets. ASIC is continuing to develop technology systems to enhance our ability to detect misconduct in the market. Our surveillance system Market Analysis and Intelligence (MAI) enables us to watch and tag investors, identify suspicious trading and modify alerts.
Active debt markets are also vital to the funding of the real economy. Changes to market structures can help enhance an environment of sustainable liquidity. Changes could include increasing trade transparency to improve price discovery and further development of derivatives markets to allow hedging of risk.
New fixed income electronic trading platforms could further enhance liquidity. Some proposed platforms present innovative ways to assist in price discovery such as one platform that, rather than matching bids and offers, aims to create information-sharing networks between sales people, traders and investors.
Initiatives that expand the investor base can also contribute to a deeper, more liquid, secondary debt market. These include:
- Standardisation of documentation and reporting.
- Issuance that is eligible for inclusion in indices against which fund managers are measured.
- Mutual recognition of markets to expand the investor base.
- Innovations targeting non-wholesale clients to trade corporate bonds, on and off exchange.
Australia boasts one of the most liquid and mature futures markets in our region. Benchmarks affect the pricing of financial products including over-the-counter (OTC) and exchange-traded derivatives, equity and bond index futures and other investments and risk management products. ASIC has been working with the Council of Financial Regulators on initiatives to ensure the resilience and robustness of our financial benchmarks.
Centralised infrastructure played a critical role in the recovery of financial stability following the financial crisis. That experience demonstrated that properly governed clearing houses strengthen the markets they serve, particularly in periods of extreme market stress and volatility. In order to mitigate counterparty risk on derivatives and reduced systemic risk, and in line with G20 commitments, the use of trade repositories and centralised counterparty clearing houses has been adopted, raising trust and confidence in the operation of Australia’s OTC derivative markets.
Markets can only properly fund the real economy if investors and issuers have trust and confidence in them. So while markets will continue to evolve and adapt, ASIC will continue its work in building trust and confidence in financial markets.