 In May, ASX published a circular announcing that fail fees would be increased, and that a new rule would be introduced ‘…to require..close-out (of) any settlement shortfalls after T+5’. Any positions not resolved by T+10 would be referred for disciplinary action. (ASX Circular 244/08 26 May 2008).
In June, Members met with ASX to discuss these measures. Some practical issues were noted, for example late settlement due to foreign registry errors, or the problem of buying-back a stock that is illiquid. The buying-back of such stocks could have a material price effect, which could then be treated by ASXMS as manipulation. These matters will be taken up with ASXMS. In addition members warned that the close-out requirement could result in brokers choosing not to trade in certain stocks where the stock could not be borrowed and the market was illiquid.
ASXMS has now provided the following response to SDIA:
‘The issue apparently causing concern is the proposal that if a trade has not settled by T+5 then a Participant must commence action, including buying back the stock in the market, in order to settle by T+10 and that doing so may place pressure upon the price of less liquid securities.
ASXMS position in relation to buying back securities in these circumstances is as follows.
o The fundamental obligation is to settle by T+3.
o We recognise that there may be circumstances where this is not possible, hence a supervisory response is not initiated until T+10 (although fail fees will accrue in the interim).
o There is also a fundamental obligation to not engage in conduct which is contrary to ASX Market Rule 13.4 (Market Manipulation)
o We would expect that any Participant finding itself in the situation of buying back less liquid securities would do so in a manner which does not offend Rule 13.4. Participants who are faced with having to buy back must exercise care to avoid unnecessary price impact. Buying back in these circumstances is a legitimate need to trade but the Participant needs to use skill and care in doing so.
o If buying back less liquid securities in a manner which utilises due care and does not offend Rule 13.4 results in some or all of the original trade not settling by T+10, ASX would take the Participant’s genuine attempts to settle the transaction in a responsible manner into favourable account when considering whether or not to pursue a supervisory response to the settlement failure. Further, the Participant will continue to pay the increased fail fees whilst ever the settlement remains outstanding.
o Similarly, if a Participant buying back less liquid securities does not use due care and offends Rule 13.4, ASX would take that into account when considering whether or not to pursue a supervisory response, including pursuit of a breach of Rule 13.4 in addition to any supervisory action for failure to settle by T+10. Endeavouring to settle a trade by T+10 (given that the obligation is to settle by T+3) does not act as a mitigating factor when considering Rule 13.4 breaches.
The above position is based on the proposals as set out in the ASX Circular 244/08 dated 26 May 2008. Our final position will be determined by the content of any relevant rule amendments progressed in due course’
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