NZX may shed its role as enforcer

Sharemarket operator NZX is proposing to give up a number of regulatory roles including market enforcement but wants to hang on to others - including market surveillance, which the Australian Government yesterday stripped from the ASX.

NZX's regulatory functions have been the target of criticism on the basis that they create potential conflicts of interest with its operation of the market, its status as a listed company and its widening range of commercial activities. Yesterday, NZX dismissed such criticism as having "no underlying logic beyond sophistry and soundbites".

But in a discussion document, prepared at the request of the Capital Markets Development Taskforce, NZX proposes handing certain regulatory functions to other regulators.

The Securities Commission would handle oversight of investment advice given by brokers and other participants and the Reserve Bank would take over prudential supervision of participant firms' capital and client funds.

NZX also suggests that despite functioning "extremely well", its enforcement arm, the New Zealand Markets Disciplinary Tribunal, should be either merged with the Securities Commission or "reconstituted as a separate, new enforcement body".

However, NZX recommends no change to its existing "front-line" market surveillance role.

NZX argues the establishment of its new clearing house facility would add an extra safety measure as part of a "strong risk-management function".

But as NZX released its discussion document, the Australian Government announced that it was transferring responsibility for market surveillance from market operators including the ASX to the Australian Securities and Investment Commission (ASIC).

In Australia the move is expected to reduce inherent conflicts of interest where the ASX earns money from increased trading but is also the front-line regulator.

NZX acknowledges "there are a small number of vocal critics" of the current model "that point to a perceived conflict of interest".

It argues the "blanket assertion that NZX would use its regulatory mandate to manipulate market outcomes - thereby generating more revenue for itself - has no underlying logic beyond sophistry and soundbites".

One of those critics, the Shareholders Association's Bruce Sheppard, said the NZX was a participant in its own market at many levels, including roles in capital formation, capital raising, transactional trades between parties, funds management, information supply and media.

"They're a fully integrated business and on the back of all that they have the power to dispense justice and investigate crimes. The conflict is now so self-evident that it is damaging confidence in our markets."

Meanwhile, the Australian rejig is also seen as a step forward for potential rivals to ASX's dominance of Australia's capital markets, presumably including NZX's own AXE ECN equities trading platform. NZX and its joint venture partners have been attempting to set up the business for the past three years but have been caught up in red tape.

Under the current system, which is similar to the New Zealand model, ASX monitors the market and refers any issues it detects to ASIC. ASIC's new powers will allow it to monitor the market directly while ASX will retain its role overseeing issuers' compliance with listing rules.

Sheppard said the change was "a wake up call" to Commerce Minister Simon Power, who said three months ago he had "no plans to remove NZX's regulatory responsibilities".

PROPOSED CHANGES

* NZX's enforcement function goes to either the Securities Commission or a newly formed authority.

* All oversight of client advice given by NZX participants, such as brokers, goes to the Securities Commission.

* Handing prudential supervision of NZX participants' capital and client funds goes to the Reserve Bank.

* Approval of offer documents is consolidated with the Securities Commission and Companies Office. The NZX's role is clarified and limited to listing rules where they differ from legislation.

* "Clarification of the scope and remit" of oversight reviews, particularly the Securities Commission's oversight of NZX's remaining regulatory functions.