The Securities Commission’s fourth oversight review of NZX describes NZX’s discharge of its regulatory obligations, once again, as “good”.
The report makes particular mention of the fact that the public can have confidence in NZX’s regulatory oversight of broker firms because, contrary to global trends, no firm has failed and no client funds have been placed at risk during a period of extreme financial turmoil around the world.
The Commission’s oversight report also notes that NZX took appropriate action to assign resource and priority to critical parts of its regulatory role to ensure confidence in the New Zealand capital markets was maintained during the global financial crisis.
The extraordinary circumstances faced by world financial markets, and NZX’s response to these, were reviewed by the Commission from January 2008. The Commission also noted some of the developments and improvements NZX has made up to November 2009.
NZX notes that, in spite of detailed and prolonged investigation by the Commission, there were no incidents of conflict of interest between NZX’s frontline regulatory role and its commercial operations.
NZX believes this is an appropriate conclusion. In fact, on a number of occasions NZX Market Supervision staff made regulatory decisions that had negative commercial impacts on NZX. This demonstrates that NZX - a unique organisation that occupies the public policy and private markets interface - can, and does, place market integrity above any other consideration. If it did not, New Zealand would have no capital markets. Commercial incentives matter, but they are not the only things that matter, and NZX consistently proves that this is the case. So too do the Securities Commission’s oversight reviews, which look into this in detail every year.
However, NZX acknowledges that a perception of such conflict of interest exists - in particular, with respect to enforcement. Therefore NZX believes it is in the market’s best interests - as outlined in the discussion document NZX submitted to the Capital Markets Development Taskforce - that all enforcement capability is held by a single agency that has the expertise and ability to investigate thoroughly, and apply meaningful penalties, where conduct on all markets fails to meet high standards. This would mean folding the functions of the New Zealand Markets Disciplinary Tribunal (NZMDT) into such an organisation which shares their enforcement culture and capital market skills.
The other area which drew specific comment in the Commission’s report was referrals made by NZX to NZMDT, which is independent of NZX. The comment applies specifically to public mention made in October 2009 of the number of referrals to date for the 2009 year.
NZX’s frontline role is to identify potential issues and refer them to the relevant enforcement body - either the Commission itself or NZMDT - for review and action. To ensure complete clarity on this matter, NZX intends, as part of its annual reporting cycle, to publish the number and timing of referrals made by NZX, as evidence that frontline regulation is serving the correct purpose.
