Inav Provider

[Recaredo Latreche]

Notethat some of the good practices outlined in this information sheet may need to change over time as the market continues to grow and innovate. As this document changes, licensed Australian exchanges may need to adjust their operating rules accordingly.

For each new product application received, irrespective of whether an issuer has previously issued other products, licensed exchanges need to assess whether the issuer is able to fulfil its obligations (see below) in relation to that product. As gatekeepers for Australian financial markets, licensed exchanges have responsibility to set and monitor continuing compliance with admission requirements for ETP issuers to ensure, to the extent that it is reasonably practicable to do so, their ETP market is fair, orderly and transparent. In doing so, licensed exchanges should assess whether an issuer has adequate expertise, procedures, risk management, and human, technological and financial resources for the ongoing quotation of a particular product. This includes:

While this information sheet seeks to provide guidance around certain novel or unique features of ETPs recently admitted to quotation, there will undoubtedly be other novel features or products (not currently captured) as the market continues to evolve. If a new ETP application has unique or new attributes for the Australian market, licensed exchanges should make a detailed assessment of these features and their application against the current regulatory framework, including ASIC guidance that may be relevant to issuers of ETPs. They should then discuss the application with ASIC before making an admission decision.

Licensed exchanges should be satisfied that the underlying assets of ETPs have robust and transparent pricing mechanisms. This supports market liquidity and gives retail investors confidence that they can transact in the ETP units at a price at, or closely resembling, the net asset value (NAV) of the underlying investment portfolio.

Where products have more complex or less liquid constituents, licensed exchanges should be satisfied and be able to demonstrate that there is a robust and transparent pricing mechanism in a range of market conditions, including those with a degree of market stress. If this pricing mechanism is compromised then the price may not be correct, leading to a lack of confidence in pricing which undermines orderly trading in the product. We would also expect licensed exchanges to consider whether any additional retail investor protections are appropriate where the underlying assets are considered illiquid, high risk or complex.

Where the underlying securities are fixed income instruments (e.g. debentures and bonds), they should generally be constituents of an index that is widely regarded by industry as having robust and transparent governance arrangements (such as the eligibility criteria for inclusion and transparent methodology for construction and maintenance of the index). Licensed exchanges should also be satisfied that the authorised participants in these products have access to sufficient information to reliably (and in a timely manner) determine the price at which the relevant debentures or bonds can be bought or sold.

Licensed exchanges should also consider the robustness and transparency of the index (where the ETP relies on an index), particularly in the case of a related party index provider. Licensed exchanges should verify where necessary that their arrangements with the benchmark/index administrator comply with recognised benchmark selection principles such as the International Organization of Securities Commissions (IOSCO) Principals for financial benchmarks (PDF 388 KB), the EU Benchmarks Regulation or other internationally recognised benchmark selection principles for any index relied on by the ETP. These principles relate to governance, quality of the benchmark and methodology, and accountability.

Issuers of ETPs with underlying holdings including derivatives should satisfy the licensed exchange that they are able to reliably measure the value of these derivative positions daily on a mark-to-market basis.

Where an issuer seeks to admit a product with a strategy that would rely on the use of OTC derivatives on an ongoing basis for more than an immaterial extent (other than in exceptional circumstances), the licensed exchange should impose additional requirements on the issuer in relation to:

This disclosure should include any reduction in the NAV of the ETP attributable to discounting the OTC derivative, reflecting any concerns the issuer has around the ability to recover the value of the OTC derivative.

Licensed exchanges may determine that crypto-assets can be permissible underlying assets for ETPs admitted to their market. Given the unique characteristics and risks of crypto-assets, we expect market operators to carefully assess, on an individual basis, whether it is appropriate for a particular crypto-asset to be a permissible underlying asset for ETPs admitted to their market. In conducting this assessment for crypto-assets that are not financial products, we expect market operators to be satisfied that:

These factors are intended to help support the maintenance of a fair, orderly and transparent market by ensuring that only crypto-assets that are sufficiently well regarded, capable of being supported within the ETP structure, and less susceptible to price manipulation may be permissible underlying assets.

In relation to the presence of a regulated futures market, the standard of regulation we refer to is that of a licensed derivatives market which is required to maintain a fair, orderly and transparent market for trading in crypto-asset futures. For overseas markets in comparable jurisdictions, there should be standards that achieve equivalent regulatory outcomes. The futures market should be subject to oversight by a body empowered by law to supervise it.

For crypto-assets that are also financial products, licensed exchanges may determine that a particular crypto-asset is a permissible underlying asset on the basis that the relevant class of financial product is a permissible underlying asset. The licensed exchange must still be satisfied that the crypto-asset is an acceptable underlying asset for ETPs admitted to its market and is consistent with maintaining a fair, orderly and transparent market.

For crypto-assets that are also financial products, licensed exchanges should rely on the relevant class of financial product being a permissible underlying asset as the basis to assess the ETP for admission.

There are unique challenges when pricing crypto-assets. To achieve a robust and transparent pricing mechanism for non-financial product crypto-assets, we consider it is good practice for market operators to verify that:

For crypto-assets that are also financial products, market operators should be satisfied that there is a pricing mechanism for those crypto-assets which is as robust and transparent as those used by non-crypto-assets of that class of financial product.

For all crypto-asset ETPs, we expect market operators to be satisfied that the structure and operation of the product appropriately account for the unique characteristics and risks of crypto-assets. We expect market operators to consider the good practices for crypto-asset investment products set out in Information Sheet 225 Crypto-assets (INFO 225) and verify, as part of the admission process, that the structure and operation of the product seeking admission are consistent with the good practices outlined in INFO 225. It is also good practice for market operators to periodically assess whether admitted crypto-asset ETPs are maintaining an appropriate structure and operation.

This portfolio transparency provides market makers and authorised participants with the ability to create and redeem units in the ETF to maintain liquidity. When there is increased demand relative to supply, the authorised participants apply to the issuer for units (called creation units), which can be settled by delivering a basket of securities or cash. Redemptions occur through a similar process. This process provides an arbitrage mechanism to help bring the value of the units back in line with the NAV under normal market conditions.

If an issuer is relying on the equal treatment relief in Class Order [CO 13/721] when providing information to authorised participants, it must publicly disclose its portfolio holdings or creation/redemption baskets before the start of the trading day after the day on which the disclosure was made to authorised participants and provide an indicative NAV (iNAV) regularly (at least every 15 minutes) throughout the trading day.

Another circumstance where delayed portfolio holdings disclosure is permitted is when an issuer is relying on material portfolio information (MPI) disclosure. Under this model, the issuer agrees with the market maker on the characteristics of the MPI that will be published to the market daily. For example, the MPI could be a basket of proxy assets, rather than the actual holdings of the fund. The issuer must disclose:

If either of these factors is not being achieved, licensed exchanges will need to consider what action may be appropriate (e.g. suspension of trading, revoking admission or additional market-making obligations).

Licensed exchanges may offer rebate agreements by which market makers that are independent of the product issuer receive a rebate on trading fees where they meet the required metrics (maximum spread, minimum size and time in market) for the product type in order to further promote liquidity.

However, as discussed in Regulatory Guide 172 Financial markets: Domestic and overseas operators (RG 172), at RG 172.367(a), we have concerns where market operator trading fees or other incentive-based models may influence behaviour in a way that is not in the best interests of clients, and the integrity and quality of the Australian market. We do not support pricing models where the licensed exchange makes a net payment to a market maker, because they do not promote fair, orderly and transparent financial markets, or the integrity and quality of the wider Australian market. This includes both trade-by-trade and aggregate models. We do not support such pricing models in the Australian market.

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