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Securities Commission Oversight Review

News Release

31 March 2006

Securities Commission Oversight Review of New Zealand Exchange Limited

The Securities Commission and NZX work together as co-regulators, according to principles of partnership and trust, to promote the integrity of and confidence in New Zealand’s capital markets.

The 2004 report of the International Monetary Fund’s Financial Sector Assessment Programme review of New Zealand recommended that the Commission should develop a formal oversight plan of regulated exchanges. The oversight review announced on 1 March 2006 implements that recommendation.

The Commission and NZX agree that an oversight review is a crucial component of the co-regulatory objective of market integrity and investor confidence. NZX and the Commission are committed to working together as co-regulators to achieve these goals.

The Securities Commission today released its terms of reference for its oversight review of NZX. These are published on the Commission’s website, A copy follows.

The Commission expects to complete its review and publish a report by 31 August 2006.


Securities Commission Oversight Review of
New Zealand Exchange Limited


The Securities Commission (“the Commission”) is conducting an oversight review of New Zealand Exchange Limited (“NZX”) under sections 10(b), 10(c) and 10(caa) of the Securities Act 1978. The purpose is to review NZX’s performance of its co-regulatory function, in particular its obligations under Section 36G of the Securities Markets Act 1988 and, in respect of futures and options dealers, NZX’s regulation of dealers under its Futures and Options Participant Rules.

In particular, the Commission will review the following aspects of NZX’s activities:

(a) supervision of market participants and enforcement of the Participant Rules;

(b) supervision of listed issuers and enforcement of the Listing Rules;

(c) allocation of human, technological and financial resources as it affects performance of the regulatory functions of NZX;

(d) internal practices and procedures associated with investigations, price enquiries, complaints-handling and referrals;

(e) discipline practices, procedures and resources;

(f) arrangements for market infrastructure development and maintenance;

(g) Special Division practices, procedures and resources; and

(h) corporate governance arrangements, including board composition, policy setting, crisis response and oversight of executive management, with reference to regulatory standards relating to governance of demutualised exchanges under IOSCO and other international principles.

AND accordingly, will obtain, consider and utilise information for the purposes of any recommendation, report or comment the Commission may decide to make under sections 10(b), 10(c) or 10(caa) of the Securities Act 1978 in relation to the above matters.

SUBJECT to the Commission’s discretion to amend these Terms of Reference as it may consider fit.

March 2006

Securities Commission’s Oversight Review of NZX
The Securities Commission and NZX work together as co-regulators, according to principles of partnership and trust, to promote the integrity of and confidence in New Zealand’s capital markets.

The Commission and NZX agree that an oversight review is a crucial component of the co-regulatory objective of market integrity and investor confidence. NZX and the Commission are committed to working together as co-regulators to achieve these goals.

The following information provides background to this review and places it in the context of the securities markets regulatory framework.
Securities Markets Act

After the New Zealand Stock Exchange demutualised in 2002 the Securities Markets and Institutions Bill was passed. This renamed the Securities Amendment Act 1988 as the Securities Markets Act 1988. The Bill made changes to the Act relating to registered exchanges. It requires an exchange to make conduct rules (business rules and listing rules) and to operate its markets in accordance with those rules. This makes a registered exchange the front line regulator of its markets.

The Securities Markets Act also created a co-regulatory regime for registered exchanges. Under this regime the Commission is required to monitor the performance of a registered exchange’s statutory responsibilities.
The explanatory note to the legislation said one of the key features of the reforms was to:

… provide the Securities Commission with an explicit power of oversight over securities exchanges. These powers will allow the Commission to monitor exchange activity and rules and will signal to the market that there is an effective co-regulatory system for securities exchanges in New Zealand.
Currently NZX is the only registered exchange in New Zealand.
Financial Sector Assessment Programme

The International Monetary Fund conducted a Financial Sector Assessment Programme (FSAP) review of New Zealand in 2003. This included an assessment of New Zealand’s securities regulation.

The FSAP measured our regulatory framework and its operation against the Objectives and Principles of Securities Regulation published by the International Organisation of Securities Commissions (IOSCO). The IOSCO Principles include principles for self-regulatory organisations (SROs).
The FSAP report, published in 2004, found that New Zealand had not fully implemented these principles. A particular criticism was:

”… that the legislative process for registration of an exchange did not expressly establish standards relating to an exchange operator’s operational capacity, integrity, and fitness to exercise SRO-type functions and operate a fair, orderly, transparent, and efficient market.”

The FSAP report recommended that the law be changed in this regard.
The FSAP also recommended that:

- the Securities Commission develop a formal oversight plan for regulated exchanges, providing for risk assessment criteria and periodic inspections that take into account best practices for SROs and exchanges; and that
- there should be public disclosure summarizing the objectives of the oversight plan and of the key findings of such reviews.

The Government response to the FSAP was published with the FSAP report. The response addressed the recommendations about standards and an oversight plan together. It stated:

The Securities Commission has decided to develop a formal oversight plan for regulated exchanges this year and has informed NZX. It is most likely that details of this plan, once settled, will be published. The oversight plan will cover some of the matters identified by FSAP as appropriate “ongoing standards” for regulated exchanges and the Commission expects to report on its oversight actions.

The review now underway implements this recommendation.

International context

The IOSCO Principles, used by the IMF for FSAP reviews, are accepted as the international standards for securities regulation and are influential for overseas investors. The principles recognise the important role of self-regulatory organisations, but require SROs to be subject to ongoing oversight. NZX is considered an SRO for the purpose of these principles.

Regulatory oversight of stock exchanges, in particular those that are demutualised and self-listed, is the international norm. In some countries regulatory functions have been removed from self-listed exchanges entirely. However, the Commission’s view is that the co-regulatory approach is appropriate for our market, given the size of the market and compliance cost issues.

Recent law reforms recognise the importance of these international standards for enhancing the reputation of our markets. The Securities Legislation Bill, currently before Parliament, implements several recommendations of the FSAP review.
The Bill is designed to ensure confidence in, and promote the efficiency of, New Zealand's capital markets. The Acting Minister of Commerce (Hon Judith Tizard), moving the second reading of this Bill, said:

It enhances the integrity of New Zealand's financial markets by providing domestic and international investors with the assurance that our regulation in this area is consistent with international norms.

The Commission’s purpose is to strengthen confidence in New Zealand’s capital markets. This requires an effective co-regulatory system for the NZX, a key part of which is the Commission actively fulfilling its responsibility to oversee NZX’s performance of its regulatory functions.
Statutory functions

The Securities Markets and Institutions Bill added a new function to the Commission’s statutory functions. The new function requires the Commission:
to keep under review activities on securities markets, and to comment on those activities to the appropriate body

The Commission’s oversight function is similar to its long held review and comment function relating to securities practices in general, under the Securities Act. It has been recognised by the Court of Appeal that this function is to be read broadly, and allows the Commission to inquire into both general practices and practices of specific market participants.
The Commission’s review of NZX after the collapse of Access Brokerage was carried out under its function to review and comment. The oversight review relies on the same functions and powers as were used for that work.
Scope of the Commission’s current review

NZX is obliged by law to secure compliance with its listing and business rules, and to perform any obligations it has under those rules. Both the listing and business rules contain commitments from NZX to enforce the rules. The recently created Discipline Rules establish a dedicated body to determine questions of non-compliance with the listing or business rules.

The Commission’s oversight role is essentially to keep under review and comment on NZX’s performance of these obligations. Following the Access collapse resources were diverted into our inquiry into the NZX’s regulatory role at the time. Now that is completed we are resuming business as usual with the normal review process.
The Commission is not reviewing NZX’s general commercial functions. The review relates only to NZX’s regulatory functions as a registered exchange, and seeks the information the Commission needs to effectively evaluate NZX’s performance of its regulatory functions. The terms of reference for the review are published on

The review, now underway, covers eight key areas of NZX’s regulatory functions, linked to the rules made by NZX and NZX’s enforcement of these. NZX will have the opportunity to make submissions in the course of the review.

The Commission intends to publish a report on its review by 31 August 2006.


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