NZX's and FMA's 'no surprises' policy

Financial Markets Authority chief executive Rob Everett. Photo / Richard Robinson.

The Financial Markets Authority and NZX, the two regulators of New Zealand's capital markets, have signed a memorandum of understanding that formalises how they work together to avoid duplication and ensures a "no surprises" approach to running the markets.

In addition to the FMA's statutory requirement to publish an annual review of the stock exchange operator's performance, the memorandum of understanding confirms a structure for monitoring NZX's day-to-day regulatory functions that cements what has already been taking place in recent months.

FMA head Rob Everett said there needs to be a robust regulatory framework to ensure investors have trust in the capital markets and for the two regulators to work together on growing the market.

A good example of that was the coming launch of the NZX's new growth market, NXT, where there was prolonged and robust debate between the two regulators over its innovative approach.

Everett said the end result was the FMA "imposed its will" on some areas in the interests of protecting investors, particularly on the role of the NXT advisers, the key operating metrics, the role of independent directors, and risk warnings to investors.

On other areas compromises were reached which all led to what NZX chief executive Tim Bennett said was a better outcome than what it originally proposed for the NXT.

A two-year review of the new market, which is unlikely to launched before March at least, will be held to ensure it's working as planned.

The non-binding MOU sets up two new committees for oversight and operations and focuses on four key areas - relationship governance, the oversight review process, operational interaction between the FMA and NZX, and public statements.

To help the FMA assess how well NZX is complying with its oversight, the MOU states it will be sent all reports from the head of market supervision to the NZX board, along with relevant minutes from board meetings and reports to NZX Regulation and the regulatory governance committee.

That's no different to what is happening now but means the process is not "people dependent" if those currently involved leave their roles.

The two regulators will also develop a series of protocols on areas they've agreed need to be key priorities.

These include live market issues, continuous disclosure, insider trading and market manipulation surveillance and investigation, complaints and investigations into market participants, market rules approval, reviews of offer documents, and data requests.

That will help avoid duplication where their regulatory functions overlap in order to keep costs down for participants in what is a relatively small market by global standards.
The MOU also formalises how the two parties already handle media and complainants inquiries, and that all information provided under the agreement will be kept confidential.

Exceptions to that include whether it has come into the public domain already and has been disclosed beforehand to either of them by someone else. Everett and Bennett both say it can come down to a judgement call in some cases as to how much is revealed about a potential investigation or the parties involved.

The FMA's annual reviews of NZX have gradually found less to take it to task on with the most recent, in June last year covering the period January-December 2013, saying it had seen substantial improvements from its previous report.

But the 2014 report still listed 11 actions that NZX was to take to improve managing conflicts, monitoring conduct and enforcing compliance.

Everett said there had been a "big step forward" last year and while he expects the annual reviews to become less headline-worthy over time, there were still some improvements to be made that the NZX will be held to account on.

He didn't want the FMA to be having the same conversations again and again with the NZX on the matters it had identified needed focus and the purpose of the MOU was to ensure there were regular disclosure and dialogue between the two regulators so there were no surprises when the annual review came around.

Bennett said the annual review was important to offshore traders and shareholders rather than domestic participants because they have less understanding of the New Zealand market environment.