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NZX Regulatory Agenda2017

NZX Regulatory Agenda

This is the second annual NZX Regulatory Agenda.

NZX plays a critical role in supporting and driving the

development of New Zealand’s listed capital

markets, which it does with the cooperation of

issuers, market participants and other market

advocates. The markets NZX operates provide

businesses with access to capital that supports their

growth, and provide investors with access to listed

financial products to create wealth and to manage risk.

NZX continues to focus on policy initiatives that

support New Zealand's markets ecosystem. This

includes pursuing stronger and deeper listed capital

markets, and transparent market trading activity.

As a licensed market operator, NZX is required to

regulate the conduct of issuers and participants on

its markets. It does this through NZX Regulation,

which is independent of NZX’s commercial business.

It is fundamental to NZX’s commercial success that

it operates, and is seen to operate, markets with a

strong reputation for market integrity. The work of

NZX Regulation and NZX Policy contributes to New

Zealand's markets ecosystem and to maintaining

confidence in the integrity of those markets.

NZX's 2017 Regulatory Agendafocuses on five key areas:

Market Infrastructure

Orderly Markets

Market Engagement

Risk-Based Approach to Regulation

Market Development

In order to be an effective regulator, NZX Regulation

proactively addresses market trends, changes in

technology and law, and developments in

international best practice. This agenda forms part

of that work – to provide clarity on NZX’s regulatory

priorities and resourcing, and the outcomes we seek

to achieve.

We have appreciated the engagement with issuers

and participants over the course of the last year, and

look forward to continuing to collaborate in 2017.

Joost van Amelsfort

Head of MarketSupervision

Hamish Macdonald

General Counsel


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Contents

NZX Regulatory Agenda 04

Market Infrastructure 05

Orderly Markets 10

Market Engagement 12

Risk-Based Approach to Regulation 13

Market Development 14

NZX's Regulatory Functions 17

Risk and Trends Context 19

Legislative Context 21


03


NZX’s Regulatory Agenda for 2017 focuses on fivekey areas:

Marketinfrastructure

Orderly markets

Marketengagement

Risk-basedapproach toRegulation

Marketdevelopment

These areas, and the objectives for each, reflect NZX’s statutory obligations, the current economic environment, and NZX’s observation of the risks andtrends that are impacting or will impact operation of NZX’s markets. The agenda expands on the scope of focusin 2016.


04

Market Infrastructure

NZX’s objectives:

NZX’s market rules and guidance:

Balance the need for informed, confident participation in NZX’s markets, and the efficient

operation of those markets

Appropriately reflect international best practice and principles, as well as technological and

legal trends

Encourage on-market trading of securities

NZX’s regulatory infrastructure comprises the rules, technology andprocesses – effectively the architecture – that NZX uses to operate itsmarkets. Key to this architecture is NZX’s market rules.

NZX’s regulatory infrastructure supports NZX to

operate fair, orderly and transparent markets.

Informed, confident participation by investors in

NZX’s markets is facilitated by effective regulatory

oversight of conduct rules. Those rules should

reflect international best practice for the regulation

of securities exchanges, listed financial products,

issuers and market participants – to the extent

appropriate for the New Zealand capital markets.

They should also seek to address the key risks and

trends that influence conduct and behaviour on

NZX’s markets.

AREAS OF FOCUS FOR 2017

Embedding revised corporate governance bestpractice code

During 2016, NZX consulted extensively with the

market on a review of NZX’s corporate governance

best practice code for issuers (Code). The revised

Code proposed by NZX sought to strike a balance

between effective disclosure and the cost to issuers,

with corporate governance arrangements

appropriately reflecting New Zealand’s market size,

and the diversity of listed issuers on NZX’s markets.

The key objectives of the updated NZX Code were

to:

Improve corporate governance practices to

provide long term value for shareholders

Promote efficient delivery of quality information

by listed issuers to help investors make informed

decisions in respect of corporate governance

practices

Balance the costs and challenges of disclosure

requirements with requiring disclosure which

provides value for investors

Create a code for New Zealand listed issuers which

has greater alignment with other relevant reporting

frameworks

Provide listed issuers with clear recommendations

that are fit for purpose, flexible and easy to

implement


05

The level of market engagement in the consultation

process exceeded NZX’s expectations. Although

this ensured a collaborative approach to the

development of the final proposed Code

amendments, the level of feedback and requests

from market participants for additional time to

engage in the process meant NZX was not in a

position to implement the amended reporting

requirements in 2016 as originally intended.

NZX will shortly apply to the Financial Markets

Authority (FMA) for approval of the specific rule

amendments required to give effect to the revised

corporate governance Code and anticipates that the

Code will be published in Q2 2017.

Based on feedback received on the timeframe for implementation, NZX anticipatesthat issuers will be required to commencereporting against the updated Code forperiods ending 31 December 2017 andonwards in order to allow for anappropriate transition timeframe forissuers.

As part of implementation plans, NZX will also:

Consider the guidance that supports the updated

Code, including for example, guidance in relation

to environmental, social and governance

reporting, and considering existing guidance in

relation to diversity reporting

Consider its approach to oversight of the updated

Code

Embedding revised Administrative Trading Haltsregime

In 2015, NZX initiated consultation on its current

practice for identifying price sensitive information,

flagging this information to the market and applying

short administrative trading halts following the

release of such announcements. Feedback received

on NZX’s initial proposal to cease that practice

resulted in NZX engaging further with the market

in 2016.

NZX concluded its second round of market

consultation on administrative trading halts practice

in Q3 2016, which resulted in NZX reconsidering its

initial proposal.

Under the revised regime, operational changes will

be made to NZX’s market announcement platform

(MAP) so that issuers, rather than NZX, will be

required to flag if information being released (i) fits

into one of a series of prescribed categories, (ii) is

an interim update for the purposes of the NXT

Market Rules, or (iii) is material information for the

purposes of the NZX Main Board or NZAX Listing

Rules. Administrative trading halts will then be

applied and removed automatically if applicable.

Implementation of the revised process involved NZX

undertaking a significant amount of design and

build work in late 2016 to the technology that

underpins NZX’s announcement and trading

infrastructure.

NZX will seek to implement the revised

administrative trading halt regime in mid-2017. This

will include:

Minor rule amendments being made to some of

NZX’s market rules to allow issuers to only release

announcements via MAP

Training for issuers on how to use the updated

MAP, and publication of user guides to support

issuers with these operational changes

Development of processes to monitor the extent

to which issuers are correctly implementing the

process

Review of NZX Participant Rules and guidance

During 2016, NZX conducted a substantive review

of the NZX Participant Rules.

The review reflected recent market developments

and trends, the activities of participants, and

matters consequential to recent legislative changes.

Proposed amendments were made to several areas

governing the regulation of accredited participants

who provide brokerage and advisory services for

NZX’s markets. The themes of that review included:


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Reducing overlap with other applicable legislation,

for example, in relation to the regulation of

financial advice, operation of discretionary

accounts, custody of client assets and the

requirements of know your client obligations for

client advising participants

Addressing known issues with the rules, including

in relation to control of broking offices and

modernising methods for delivery of contract notes

Introducing additional surveillance tools and

heightened requirements in relation to order

records, to further enhance NZX’s capabilities to

monitor trading activity

Updates to capital adequacy requirements,

including a more risk based approach to

notification requirements

Feedback on an exposure draft of proposed

amendments to the Participant Rules was received

in February 2017.

Implementation of those amended rules will follow

conclusion of the formal FMA approval process. In

addition to the changes to the Participant Rules, NZX

also intends to make corresponding amendments

to the Clearing and Settlement Rules and Derivatives

Market Rules, as appropriate.

In tandem with these rules changes, NZX will

conduct a review of its current guidance notes,

practice notes and forms. That review will support

the amendments being made to the rules, and

clarify NZX’s current expectations on best practice

and conduct by participants operating in NZX’s

markets.

NZX is targeting a staged implementation of the

rules changes, as well as release of revised guidance

and forms, and will communicate firm time frames

for amendments to take effect in due course.

Commence review of NZX Main Board/DebtMarket Rules

NZX has commenced internal scoping of a proposed

review of the NZX Main Board/Debt Market Rules.

NZX considers it an opportune time to conduct a

review of the listing rules, and consult on a range

of issues relating to the scope and application of

those rules, including:

Simplifying the rules to better enable them to be

used as a tool to support issuers’ compliance

programmes

Further tailoring the rules to reflect, and facilitate,

the diverse range of financial products and issuer

types listed and quoted on the NZX Main Board

and Debt Market

Responding to domestic and international

legislative, capital markets and financing

Considering changes to the mandatory corporate

governance requirements, to support the changes

to the NZX corporate governance best practice

Code

Considering changes to address situations where

NZX frequently grants routine waivers in order to

reduce unnecessary compliance costs

As noted in the 2016 NZX RegulatoryAgenda, NZX is conscious that a reviewwill need to ensure that an appropriatebalance is maintained between theinterests of investors, issuers and marketparticipants.

Any review of the listing rules will be a significant

project. NZX will implement a multi-stage

consultation process for the review, given the

potential scale of the changes that may be

proposed, and the extent of stakeholder interest

NZX anticipates will occur.


07

Participant Portal

NZX Participants are subject to various ongoing and

periodic reporting and notification obligations.

There is currently no centralised platform used by

participants to submit such information.

In 2017, NZX intends to launch acentralised participant portal. This portalwill be used by authorised brokerpersonnel to access information on theirbusiness and compliance obligations.

In addition, it is intended that the portal will:

Allow uploading of capital and prudential

information and periodic reporting

Provide access to online forms for completing

applications and compliance certificates

Allow participants to perform a range of

regulatory tasks, including processing waiver/

exemption applications, and submitting

notifications required under the Rules

Automate due date reminders for participants

Provide access to NZX guidance and template

documents

Automate aspects of NZX’s internal reporting and

enhance analysis of quantitative data

NZX envisages that the portal will incorporate data

generated by NZX Surveillance and the Clearing

House, which is used as part of NZX’s risk profiling.

This initiative will:

Significantly improve the efficiency of the

interaction between NZX and accredited participants

Remove a significant number of manual processes

currently in place that relate to the maintenance

of governance and administrative information

Further enhance data integrity


08


09

Orderly Markets

NZX’s objectives:

Deliver comprehensive and effective frontline monitoring and enforcement of trading

misconduct on NZX’s markets

Ensure market participants understand the scope of permissible trading conduct on NZX’s

markets, and proactively demonstrate NZX recommendations and expectations on best practice

Ensure market participants effectively monitor and mitigate risks associated with potential

market misconduct at an operational level

As a licenced market operator NZX undertakes comprehensive frontlinemonitoring of trading on NZX’s markets, and takes appropriate action inrespect of suspected trading misconduct.

NZX’s broader engagement strategy includes

targeted education of participants on the

parameters of permissible trading conduct, and

principles and best practice on matters relevant to

trading on NZX’s markets. In addition, NZX’s annual

inspection programme and ongoing risk assessment

processes provide NZX with oversight of

participants’ operational and compliance

frameworks. Together, these support the detection

and prevention of potential market misconduct, and

maintaining the orderliness of NZX’s markets.


Trading conduct guidance

During 2016, NZX and the FMA engaged further

with participants in the broker and funds

management industries on current trading

practices. This engagement was part of a joint

regulatory initiative between NZX and the FMA to

provide greater clarity on the parameters of

permissible trading conduct.

NZX considers that good trading conduct practices

underpin fair, orderly and transparent markets and

promote market integrity. This increases public

confidence in the operation of NZX’s markets, which

in turn enhances market liquidity.

In February 2017, NZX issued a consultation

document seeking feedback on a draft trading

conduct guidance note, which:

Sets out the key principles that NZX considers

underpin the role of participants who trade on NZX

markets

Describes acceptable market practices, best

practice and recommendations on procedures

relevant to order execution

Describes regulatory expectations for participants

conducting principal trading, as either proprietary

trading or to facilitate client transactions

Highlights the types of conduct or behaviour that

may be viewed as potentially manipulative,

potentially breach NZX market rules or otherwise

result in regulatory scrutiny

NZX will seek to implement this guidance at the same

time as implementation of the NZX Participant Rule


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amendments referred to in the Market Infrastructure

section of this agenda. As part of this, NZX will

continue to actively engage with participants in

2017, and facilitate training for participants’

compliance and trading personnel, on practical

implications of that guidance.

Inspection programme and risk profile procedures

As part of NZX’s ongoing monitoring programme,

accredited market participants are subject to annual

risk assessments, and on-site or desk-based

inspections.

NZX made a number of enhancements to its risk

assessment methodology in 2016, including

integration of additional trade activity, client asset

and capital position reporting, together with

additional monthly risk data from NZX Surveillance

and NZX Clearing. This has enhanced the quality and

relevance of data available to NZX to monitor

participants.

NZX’s 2017 inspection programme willfocus on Participants’ understanding of,and planning for implementation of, theParticipant Rule changes and tradingconduct guidance.

NZX will also follow up on recommendations made

in the 2016 programme, particularly in relation to

Direct Market Access (DMA) arrangements, and

compliance monitoring plans. NZX will continue its

approach of proactively working with participants

to identify and implement best practice improvements.

NZX will continue to collaborate with the FMA on

the inspection programme in 2017, given the FMA’s

role in oversight of brokers under the Financial

Advisers Act 2008.

Embedding enhanced surveillance tools

The amendments to be implemented to the

Participant Rules and Derivatives Market Rules in

2017 include a number of enhancements to NZX’s

surveillance capabilities.

In 2017, NZX will review its surveillance processes

to leverage the additional information that will

become available. This will further support real-time

and post-trade monitoring of trading conduct,

including by reference to:

New rules for flagging of trades (for example,

short sales and prescribed person trading), which

enables NZX to more readily identify different

trading types and assists with centralised recording

Client reference numbers that will allow NZX to

directly identify wholesale client trading

New rules requiring clear identification of all

individual NZX dealers accessing the trading

system, whether directly or via third party systems

MABRA membership and access to information

NZX is a member of the Intermarket Surveillance

Group (ISG) and the World Federation of Exchanges

(WFE). In 2016, NZX continued to leverage those

memberships as forums for sharing information and

coordinating regulatory efforts, including in respect

of initiatives to address potential intermarket

manipulations and trading abuses.

In 2017, NZX will look to further build on its

regulatory relationship with the Australian Securities

and Investment Commission (ASIC). This will include

NZX seeking certification of its status as a foreign

regulator in relation to the administration or

enforcement of foreign business law for the

purposes of the Mutual Assistance in Business

Regulation Act 1992 (Australia) (MABRA).

Certification under MABRA will enable NZX to

directly request ASIC to gather information,

documents or evidence on NZX’s behalf and to

disclose that information to NZX. This will enhance

the efficiency and effectiveness of NZX’s surveillance

and investigation capabilities, and further contribute

to the maintenance of fair, orderly and transparent

markets. NZX considers this an important initiative,

given the continued growth of DMA trading and

participation of Australian-based participants and

investors in NZX’s markets.


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Market Engagement

NZX objectives:

Support and facilitate the development of issuer and participant compliance frameworks

Set expectations for how issuers and participants approach organisational culture and

conduct, with proactive ownership by boards and management of compliance obligations

under NZX’s market rules

NZX commits significant resource to engaging with

issuers, participants, and their external advisers, on

obligations under NZX’s market rules, guidance and

best practice expectations. NZX collaborates with

regulatory agencies and external stakeholders on

capital market issues and policy initiatives.


Enhanced visibility of NZX’s investigations andenforcement function

NZX conducts a significant number of enquiries and

investigations each year. This forms part of its

ongoing monitoring of compliance by issuers and

participants with NZX’s market rules.

In Q1 2017, NZX will publish the first of an annual

series of reports to increase public awareness of this

work, and to further improve visibility of NZX’s

enforcement function. That report will provide an

overview of NZX’s investigations and enforcement

work over the preceding year. It will also detail:

Other work performed by NZX Regulation over the

year in support of broader market regulation

NZX’s current approach to market monitoring and

oversight/compliance

How NZX utilised the various enforcement tools

available to it and the key regulatory outcomes

that it sought to achieve

Increased issuer engagement

NZX will continue to develop its issuer engagement

strategy in 2017, leveraging recent work undertaken

to better understand the dynamics of issuers’

operating environments and their different

compliance approaches.

Engagement will continue to be tailored toreflect the particular needs, size andexperience of issuers listed on NZX’smarkets, and will include direct one-on-one engagement with management andworkshops on key regulatory themes andissues.

In Q1 2017, NZX commenced publication of a

regular series of practice notes, aimed at assisting

issuers and their advisers with questions and

providing practical guidance on the Listing Rules.

These will be an additional compliance tool, and sit

alongside NZX’s existing guidance notes.

Increased broker engagement

As part of the implementation strategy for changes

to NZX’s Participant Rules, NZX will engage with

brokers on the implications of those rules

amendments. NZX also intends to support its

current work on developing trading conduct

guidance, by hosting workshops for brokers’

compliance and trading teams as part of the

implementation of that guidance.


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Risk-Based Approach to Regulation

NZX objectives:

Enhance NZX’s risk-based regulatory approach

Prioritise and target resourcing to issuers, participants and financial products which present

the more significant risks to the operation of fair, orderly and transparent markets

NZX takes a risk-based approach to its regulatory functions. This includesutilising an issuer and participant risk framework to assist NZX prioritise itsoversight and monitoring activities. NZX also directly interacts with issuersand participants through a combination of its formal inspection programmeand ad hoc engagement, to develop a better understanding of the riskprofile of individual organisations and their industry. This enables NZX tobe more proactive and targeted in its regulatory oversight.


NZX thematic reviews

In 2017, NZX will undertake the first of a series of

thematic reviews of issuers to support its ongoing

monitoring of market and compliance trends. NZX

proposes that the first thematic review will be on

issues, practices and conduct in respect of market

disclosure by issuers. NZX will publish its findings

and any recommendations.

The subject matter of the initial thematic review

reflects a continued focus by NZX on disclosure

practices. NZX considers this a particularly important

area, as investors need access to full, timely and

accurate information in order to make informed

investment decisions. The ability to access material

information on an issuer and its securities are also

key to transparent operation of NZX’s markets and

the price discovery process for on-market trading.

Risk-based offer document reviews

NZX Regulation has a role in reviewing offer

documents for primary and secondary capital

raisings on NZX’s markets. NZX has continued its

practice of collaborating with the FMA on offer

document reviews, given the FMA’s role in relation

to securities offers under the Financial Markets

Conduct Act 2013 (FMCA).

In 2017, NZX will undertake a review of its approach

to the review of offer documents. This will seek to

ensure that NZX’s approach appropriately balances

the need for effective and adequate disclosure of

material offer information to potential investors, with

issuers’ primary responsibility for ensuring

compliance with other prescribed content

requirements.


13

Market Development

NZX objectives:

Market development is supported through the application and enforcement of clear,

appropriate standards of conduct, disclosure and reporting

NZX’s policy framework creates a market environment that is conducive to the listing and

quotation of new issuers and financial products, and access to comprehensive trading and

advisory services for products listed on NZX’s markets

NZX’s regulatory function is separate from its commercial function as amarket operator. NZX has in place robust processes, conflicts managementarrangements and review procedures to ensure this functional separation.It is fundamental to NZX’s commercial success that it operates, and is seento operate, markets with a strong reputation for market integrity.

The combination of that reputation, and NZX’s

ongoing policy programme and initiatives, supports:

Deeper and more liquid capital markets activity

NZX’s markets being an effective mechanism for

raising capital

A diverse range of accredited participants

providing comprehensive trading, advisory and

clearing services to support operation of NZX’s

markets

The listing and quotation of a diverse range of

investment products


Issuer support

In connection with NZX’s continued focus on

engagement, NZX Regulation intends to develop

additional materials and training in 2017 to support:

Issuers new to operating in a listed company

environment, or which are migrating between NZX

markets that are subject to different listing rules

Small to medium-sized issuers

New board members and senior managers

This initiative will seek to provide pragmatic

guidance on key matters relevant to those issuers,

directors and senior managers under the Listing

Rules, and support effective compliance strategies.

Product and market design

Recent trends in financing, and changes in New

Zealand’s securities legislation, has seen an

increasing variety of financial products available for

investment, options available to issuers to offer

financial products, and distribution channels for

financial products in the New Zealand capital markets.


14

As part of NZX’s proposed review of the NZX Main

Board/Debt Market Listing Rules in 2017, NZX will

be reviewing the policy settings and rules

framework in relation to:

Equity, debt and managed investment scheme

products (ie unit trusts, funds)

Different types of corporate structure for issuers

listed on NZX’s markets

Issuers and products that are also listed and/or

quoted on securities exchanges in other jurisdictions

From a policy perspective, NZX wishes to ensure

that investors have access to a diverse range of listed

financial products available for investment. More

generally, NZX seeks to ensure that its policy

settings and regulatory approach for different

product and issuer types reflects international trends

and best practice and continues to support NZX’s

ability to operate fair, orderly and transparent markets.


15


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NZX's Regulatory FunctionsA summary of NZX’s regulatory functions is set out

below.

REGULATORY FUNCTIONS

NZX has two key regulatory functions in respect of

the operation of NZX’s markets:

Regulating market conduct – NZX is responsible

for monitoring and enforcing the rules under

which NZX’s markets operate. This applies

directly to issuers, market participants and

indirectly (through market participants) to

investors. This function is undertaken by the NZX

Regulation team.

Market rules and policies – NZX is responsible for

developing and enhancing the market rules,

practices and policies under which NZX’s markets

operate. This function is undertaken by the NZX

Policy team.

These functions are supported by the NZX Market

Services team, which provides operational support

to NZX’s markets and conducts frontline trade

monitoring.

NZX Regulation

NZX Regulation is led by the Head of Market

Supervision, who reports directly to the NZX Board.

It covers two broad areas of regulatory focus:

Issuer Compliance

Participant Compliance

The Issuer Compliance team administers the NZX

Listing Rules, and supervises compliance by listed

issuers with those rules. The team:

Advises and guides issuers on best practice

Engages with issuers on continuous disclosure

issues and market releases

Provides ad hoc guidance on the application of the

Listing Rules

Considers applications for new listings

Considers applications for waivers and rulings in

relation to the NZX Listing Rules

Reviews documents for compliance with the NZX

Listing Rules

Manages trading halt applications

Responds to queries and complaints from

members of the public

Investigates suspected rule breaches and takes

enforcement action, as appropriate

The Participant Compliance team administers the

Participant Rules, Derivatives Market Rules and

Clearing and Settlement Rules, and supervises

compliance with those rules by market participants.

The team:

Undertakes capital and prudential monitoring

Undertakes risk profiling and monitoring of

participants

Considers applications for accreditation as a

market participant


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Considers applications for waivers and rulings in

relation to the NZX Participant Rules, Derivatives

Market Rules and Clearing and Settlement Rules

Investigates suspected rules breaches, and refers

suspected rule breaches to the Enforcement team

for enforcement, if appropriate

NZX Regulation also investigates suspected

breaches of NZX’s market rules and takes action in

accordance with NZX’s enforcement policies.

NZX Policy

NZX sets the rules for its markets. Those rules are

enforceable as a contract between NZX and each

participant or issuer, and the continuous disclosure

provisions are also enforceable under the FMCA.

NZX publishes guidance to assist with compliance.

The NZX CEO is responsible for NZX’s regulatory

policy, and the work is led by the General Counsel

whose responsibilities include leading the NZX

Policy team.

Market Services

In addition to the core regulatory functions

undertaken by NZX Regulation and NZX Policy,

market operations are monitored by NZX’s Market

Services team, namely:

Surveillance

Client and Data Services (CDS).

The Surveillance team performs real time and post-

trade monitoring. This includes analysis of abnormal

market conduct or trading, and allegations of

market misconduct on NZX’s markets.

The Surveillance team uses market-monitoring

software (SMARTS), market information from the

NZX’s trading system (X-stream), databases that

update in real time with securities movements and

volume statistics from information providers such as

Iress and Bloomberg, as well as NZX's historical

database of market activity.

The CDS team monitors and processes market

announcements, and monitors for compliance with

issuers’ periodic reporting requirements.


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RISK AND TRENDS CONTEXT

Capital markets inherently involve risk and are

impacted by market trends. These include

macroeconomic risks, market activity and capital

inflows and outflows, as well as other risks which

directly or indirectly impact on NZX's markets.

These risks are a factor for NZX in setting its

regulatory agenda, as they are often drivers of conduct.

Some of the key drivers of risk and recent trends

affecting NZX’s regulatory environment are set out

below.

Participation in NZX’s markets

Issuers and brokers are key drivers of conduct on

NZX’s markets. Their resources, experience and

governance shape their compliance culture and

their approach to compliance with NZX’s rules.

Although the NZX Main Board includes a number

of large, sophisticated companies, a key feature of

NZX’s markets is the prevalence of smaller and

medium-sized issuers. NZX has observed that this

can impact the level of resource committed to issuer

compliance. There are also differing levels of

expertise and experience within management and

boards of operating in a listed company

environment. This can occasionally present

challenges to those issuers, their compliance

frameworks, and their ability respond to market

events that have implications under NZX’s market

rules.

A number of Issuers on NZX’s Main Board also have

a primary or secondary listing on another overseas

exchange. Such issuers are often subject to multiple

market rule sets and compliance obligations. This

can increase the risk of information asymmetry,

different regulatory and operational approaches

being taken by the relevant exchanges, and

opportunities for trading arbitrage between listing

venues.

NZX accredits brokers and advisors to undertake

certain services on NZX’s markets. The composition

of this group of market participants is evolving.

New Zealand's capital markets are subject to

significant concentration - this includes concentration

in the key brokers that service the market, the

wholesale investors that participate, and pools of

domestic capital. This concentration can impact

trading strategies employed by wholesale investors

and brokers, including a preference for off market

trading.

There has been a continued increase in participation

by overseas entities in the NZX Derivatives Market,

with three US-based entities now accredited as

trading and clearing participants for that market.

NZX has also observed an increase in market

participants outsourcing internal functions offshore,

such as those relating to finance and technology.

This trend reflects participants seeking to leverage

international arrangements that are often available

through related company and parent company

relationships.

NZX notes that where participants’ operational

functions are based overseas or they rely on group

compliance functions based overseas, this can give

rise to logistical constraints and/or more limited

knowledge of the New Zealand regulatory

environment.

These trends influence NZX’s approach as the

regulator of participant conduct on its markets. In

particular, NZX dedicates significant resource to

inducting newly accredited participants to ensure

working knowledge of relevant market rules and

legislation, guidance and NZX best practice

expectations.

Technological innovation

The regulation of exchanges is increasingly being

impacted by technology. As noted in last year’s

agenda, developments in electronic trading and the

integration of global markets are particularly

relevant to NZX.


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The following trends have continued in New Zealand

and on NZX’s markets:

Algorithmic and high frequency trading, which use

computer trading programmes to execute trades

Dark pool arrangements, which involve direct off-

market trading, usually between market

participants and institutional investors

DMA, which allows clients to directly access and

place orders in NZX’s trading system

Each has benefits for efficiency and cost

effectiveness in order execution.

The use of these technologies continues tobe an area of interest for NZX, consistentwith a broader international focus on thepotential impact of technology on marketorderliness. In particular, regulatoryconcern focuses on the potential impactsof trading technology not operating asdesigned, or operating with inadequateoversight.

Those scenarios could potentially result in abnormal

trading, and consequently pose a risk to market

efficiency and integrity, as well as the transparency

of market liquidity and the price discovery process.

Trading conduct

Good trading conduct practices underpin fair,

orderly and transparent markets and promote

market integrity. NZX actively supervises trading

conduct on its markets to support this objective.

This increases public confidence in the operation of

NZX’s markets. Public confidence in turn enhances

the market liquidity and efficiency.

Some fundamental components of this for trading

participants include:

Ensuring price transparency which reflects genuine

supply and demand

Managing potential conflicts of interest between

client and principal trading

Ensuring the priority of client order execution

Having procedures and processes, and governance

and oversight arrangements, that prevent

manipulative trading occurring

Manipulative behaviour poses risks for NZX. It can

damage the integrity of the markets and undermine

investor confidence, by creating a false or misleading

appearance as to the extent of trading, supply or

demand, or the price of securities.

NZX’s Surveillance function, together with the

NZX’s market rules and guidance, are integral to the

monitoring for potential market manipulation on

NZX’s markets and for enforcing the rules.

Information quality

Investors in NZX’s markets must have access to full,

timely and accurate disclosure to make informed

investment decisions.

The quality of disclosures and disclosure practices

varies significantly between issuers on NZX’s

markets. Inadequate disclosure practices can

adversely impact confident participation on NZX’s

markets, particularly if it means that trading occurs

where there is an asymmetry of information in the

market.

NZX will focus on disclosure practices in

2017, particularly in the context of recent

trends and conduct observed in relation to:

Developing business trends

Adverse operational and financial results

Deviation from analyst and issuer

financial forecasts

Working capital constraints


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Regulatory coordination

NZX and the FMA have joint regulatory

responsibility for a number of regulatory issues,

including:

Continuous disclosure

Surveillance and investigation of insider trading

and market manipulation

Investigations and complaints concerning brokers

Approval of market rules

Review of offer documents for regulated offers of

securities under the FMCA

These require coordination and collaboration

between NZX and the FMA to ensure that oversight

is efficiently managed.

In addition, other government agencies have roles

that directly impact NZX’s markets. These include

the Ministry for Business, Innovation and

Employment, the Reserve Bank of New Zealand, the

Commerce Commission, and the Takeovers Panel.

Measures introduced by these agencies can impact

participants in NZX’s markets, and affect NZX’s

regulatory functions. This requires NZX to be

proactively involved in relevant policy debates, and

to coordinate with those agencies on relevant matters.

LEGISLATIVE CONTEXT

The legal framework that underpins New Zealand’s

capital markets activity is subject to ongoing change.

Recent changes and developments have included

the end of the transitional period for implementation

of the FMCA, review of the financial advisers and

financial service providers’ regime and continued

changes in international financial services, AML and

audit requirements.

These changes, and the policy drivers that influence

them, will continue to affect the way in which NZX

performs its oversight function, delivers on its

regulatory policy strategy, and is assessed on the

discharge of those functions.

The FMCA is key to the operation of New Zealand’s

public financial markets. It imposes obligations on

NZX as a licensed market operator. This includes

requiring NZX to do all things, to the extent that it

is reasonably practicable, necessary to ensure that

its markets are fair, orderly, and transparent. NZX

is assessed annually by the FMA on its compliance

with those requirements.


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NZX Limited Level 1 / NZX Centre 11 Cable Street PO Box 2959 WELLINGTON Tel: +64 4 472 7599

[email protected] www.nzxgroup.com

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