Tighter relationship gives FMA confidence in NZX's market oversight

Thursday 23rd June 2016

A closer relationship between NZX and the Financial Markets Authority means the market watchdog has more confidence in the stock market operator's ability to deal with issues when they crop up.

NZX got the seal of approval in the FMA's 2015 review of the stock market operator's statutory obligations, which was released today. That report shows the FMA was satisfied with the way NZX managed its role as a frontline regulator of the stock market, and also with how it managed potential conflicts of interest, such as its purchase of the SuperLife funds management business.

The review comes a day before what could be a turbulent time in financial markets with the UK set to vote on whether to leave the European Union. While that is half a world away, traders of various asset classes - from bonds to equities - are unsure which way the vote will go, and the Chicago Board Options Exchange's Volatility Index, known as Wall Street's 'fear gauge', is sitting at its highest level in four months.

Director capital markets Garth Stanish, a former NZX regulation executive, says the closer relationship between the two regulators means the FMA is confident that if something serious happens, the stock market operator is "in a better position that it was before."

Since the FMA started its annual reviews of the stock market operator that relationship has been improving, and Stanish said the memorandum of understanding signed last year has drawn the entities even closer.

"There's no issue in terms of NZX talking to us," Stanish said. "It's a far more graduated and cohesive relationship."

The FMA's predecessor, the Securities Commission, operated under a different legislative regime and only had intermittent contact with NZX, whereas the FMA has ongoing discussions. Stanish says that means they can talk about issues "at the time when it matters", rather than autopsy things at a much later date.

The FMA's future focus for its supervision of NZX is to improve the visibility of the stock market operator's regulatory role, much of which "is not obvious to the public".

Stanish said both the FMA and NZX face the same regulatory challenges in trying to engender confidence in the country's capital markets, and the market watchdog has been encouraged by the stock market's open consultation on price inquiries, governance rules, participant rules, and its regulatory agenda.

"If you compare NZX in 2016 to 2011/2012 when the reviews under the FMC (Financial Markets Conduct) Act started there's a world of difference in terms of the level of transparency," Stanish said.

NZX acknowledged the closer relationship in a statement on the review, and said its regulatory agenda aimed to lift transparency.

The FMA report also noted NZX's efforts to monitor the increase in algorithmic trading, typically through direct market access accounts, and also how it watches trading of its newly launched equity derivatives products.

BusinessDesk.co.nz

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