ASX developed the TAS for potential new market operators in preparation for competition for market services inAustralia. The TAS has been operationally-ready since October 2010.

New entrants must have clearing and settlement arrangements in place that are approved by the Minister for Financial Services and Superannuation before they can begin operating alternative trade execution venues. Clearing and settlement arrangements provided by ASX’s clearing and settlement subsidiaries have been approved by the Minister for this purpose.

ASX’s TAS will provide non-discriminatory access to clearing and settlement arrangements for Chi-X and any other new market operator.

The TAS enables trades in CHESS-eligible ASX-listed or quoted securities executed on any licensed trading platform to be cleared and settled by ASX Clear and ASX Settlement in an identical fashion to trades executed on ASX’s own cash equity market.

Chi-X has committed to a five-year service agreement on commercial terms available on ASX’s website via the link below. The annual fee for the service has been set to partially recover the costs incurred by ASX in developing and operating this new service. In the event that three or more market operators were to use the TAS, ASX will reduce the annual service fees for each market operator consistent with ASX’s cost recovery objectives.

Click to view the complete details about ASX’s TAS

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The charges were brought by ASIC.

Mr Tang faced Melbourne Magistrates Court on Thursday, 9 June 2011 on four counts of market manipulation relating to his involvement in the trading of Wintech Group Limited securities on the Australian Securities Exchange (ASX) between 28 April 2009 and 24 July 2009.

ASIC alleges that Mr Tang used an online share trading account in his own name, and an alias, to engage in transactions in Wintech Group Limited securities during this period that created a false or misleading appearance of active trading in these securities.

ASIC also alleges that he made or authorised the making of false or misleading statements in documents submitted to ASIC in August 2008 and April 2009.

Mr Tang was bailed to appear before the Melbourne Magistrates Court on 1 September 2011 for committal mention upon a number of conditions including that:

• surety of $100,000 be provided;
• he will not leave Australia;
• he will surrender all passports; and
• he will not attend international points of departure.

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ASIC’s investigation arose from a referral from the ASX.
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The Commonwealth Director of Public Prosecutions is prosecuting this matter.

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Click to open the White Paper on Domestic Covered Bonds

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The suggestion to introduce domestic Covered Bonds was contained in the Federal Government’s proposals for a “Competitive and Sustainable Banking System”.

The Federal Government then released an Exposure Draft on Covered Bonds legislation in March 2011.

Comments on the draft are due by 22 April 2011 before the Bill in its final form is tabled in Parliament.

Introducing Covered Bonds form part of a strategy to: create an additional AAA-rated funding source; lower bank funding costs; create competition in the bank lending market; and address the issue of the liquid assets requirement in Basel III.

A Covered Bond is a security issued by a bank with assets (usually mortgages, but sometimes other loans) assigned to provide security for the debt. Typically the size of the asset pool (or ‘cover pool’) is larger than the bond issue.

As the Tyndall paper, co-authored by John Sorrell, head of credit at Tyndall Investments, and senior credit analyst Ileria Chan, explains, unlike a residential mortgage-backed security (RMBS), Covered Bond cashflows are funded by the financial institution and not by the cashflows of the pool of assets.
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Thus a Covered Bond has regular payments and no prepayment, so that it resembles a traditional bond issue.
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Dr Sorrell says that it is possible we could see domestic Covered Bonds traded before the end of 2011.
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“They offer investors further high-quality credit investments but investors must remember that they are still bank debt and not a direct substitute for government-guaranteed bank debt.

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“Indeed, despite the government’s intention, while the introduction of Covered Bonds in Australia is a strong positive for the major banks, they may weaken, rather than enhance, competition in the banking sector and could further widen the funding access gap between the major and the second tier banks.
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“Covered Bonds may also cause consequences for senior debt holders and bank depositors leading to potential conflicts and regulatory risk,” he said.
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The Tyndall paper notes that the size of the Australian Covered Bond market will be constrained by investors’ existing senior debt exposures, so for most Australian portfolios, offshore issues of Covered Bonds available domestically will probably still be of more interest.
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Nevertheless, Dr Sorrell said that the Tyndall fixed interest team will itself consider Covered Bonds as a potential sector for investment, depending upon pricing and liquidity, and adding Covered Bonds to the total fund exposure to each issuer.
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The Tyndall White Paper points out that Australia is one of the last developed countries to introduce Covered Bonds, and considers why they are now being introduced, who will buy them, and what the risks are.
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Co-author Ileria Chan says that unless controlled, Covered Bonds could lead to conflict and regulatory risk for senior debt and depositors.

“They do have some attractive risk features – perhaps the most important for investors is the dual recourse to the bank and to the collateral, while senior bank investors can only claim on the bank and RMBS investors can only claim on the collateral. This is an important risk enhancement but comes at a price in yield to investors.
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“Also, as the assets used to provide the cover must be assigned unambiguously to the Covered Bond issue it does result in a reduction to the amount of assets available to other unsecured lenders, including depositors.
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“In addition, risks are not completely removed since the assets are correlated with the issuer and are long-dated illiquid assets,” Ms Chan said.
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Dr Sorrell added that being able to issue Covered Bonds does provide an attractive alternative funding option in a bank’s funding mix – but perhaps not as attractive as might at first appear and they may impact on lower-rated entities’ ability to compete.

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“In Europe Covered Bonds form a deep and mature market. The European experience showed that they were one of the first asset classes to recover and provide liquidity during the credit crisis.
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“Canadian investors have preferred senior debt to Covered Bonds for their banks and Canadian banks have issued their Covered Bonds outside their borders.
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“Australian banks may, likewise, find more acceptance for their Covered Bond issues offshore than they will domestically, as they could cannibalise their Australian dollar senior debt programs,” he says.
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Ms Chan believes that overall they have a place for investors, but the risks need to be understood and priced appropriately.
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“Covered Bonds are well suited to the needs of investors who can only invest in AAA-rated securities (i.e. sovereign funds) or have a minimum allocation to AAA-rated assets. They potentially also offer an alternative to supras or government guaranteed debt.
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“For investors who are able to invest in senior bank paper and have comfort with the issuer’s name, Covered Bonds may be less appealing since they can use up limits on exposures to these names with lower yielding investments,” she said.

Click to open a full copy of the report

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In its first quarter update to investors, the AAIC has decided to maintain a neutral stance on Australian equities, hold an overweight to income securities and maintain listed property allocations at zero across all of Implemented Portfolios’ individually managed accounts.

According to AAIC member Jon Reilly, Australian Equities will be supported by continued demand for resources from China, India and other emerging markets, whilst the banks may have slow growth but will still provide solid returns underpinned by their dividends.

“This quarter we have determined to move towards a lower allocation in international equities, but will do gradually, taking advantage of further strength to lock in returns.”

“This is consistent with our investment strategy of buying when we view classes as fair value or undervalued and selling incrementally as they become more expensive,” Mr Reilly said.

Continuing to favour income securities over cash, the AAIC has held its overweight position and maintains a preference for securities issued by the major banks.

The committee’s assessment of A-REITs last quarter was that they were expensive and the outlook was likely to remain subdued. This assessment has not changed in the first quarter, and the portfolios have now moved to a 0% allocation to listed property.

“The AAIC’s decisions this quarter reflect the continued need to be cautious. We have positioned the portfolios defensively but will add to equities allocations when valuations become more attractive. On balance the portfolios will continue to capture the growth from Australian equities, and consistent distributions from the income securities exposure.” he said.

“In 2011 we expect there will be continued sluggish economic growth in the developed world, and significant risks from managing the build up of debt in those countries. Whilst growth rates will be better in emerging markets we are conscious that valuations are no longer as attractive as they once were, which will likely suppress longer term returns.”

The AAIC is comprised of a team of professional managers that make implementation and investment decisions for Implemented Portfolio’s range of Individually Managed Accounts. The quarterly update is the AAIC’s long term assessment of each asset class amid the broader context of the economic environment and investment markets.

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In a Tri-Securities lending arrangement, the lender is able to take a blended portfolio of securities as collateral in a highly automated and risk mitigated environment. The innovative structure allows loans to be fully collateralised to lender specification and then held for safekeeping by the collateral agent. Daily reports are provided on the market value and the adequacy of the collateral against previously agreed limits, providing greater security than traditional bilateral agreements.

“We are thrilled to be involved in another industry first,” said Jane Perry, Chief Executive Officer for Treasury & Securities Services Australia and New Zealand. “J.P. Morgan’s Tri-Party Securities Collateral Management service provides the market with an innovative, sophisticated platform built for Australian and New Zealand institutional requirements,” she said.

J.P. Morgan’s Tri-Party Securities Collateral Management service offers clients a sophisticated suite of tools to effectively manage exposures of most forms of secured lending, such as securities lending, repo and foreign exchange swaps, as well as other financial instrument exposures. The offering also provides distinct benefits by using local legal agreements, local service management expertise and on-the-ground support during the transaction.

Ms Perry said: “Tri-Party transactions across all forms of secured lending are common in North America, Europe and Asia and we believe our offering will assist Australian firms in efficiently collateralising exposures in line with overseas practice. We have taken our global expertise and world class collateral management platform and made it accessible for local institutional investors.

“Our unique technology combines sophisticated collateral testing and concentration controls with a proprietary algorithm that determines the optimal use of diverse collateral pools across a range of counterparty exposures. The result is that the needs of both sides of a transaction can be met within one secure, risk-managed process,” she said.

Organisations with large balance sheet exposures to securities and short supply of liquid cash are now able to use their securities more effectively through the Tri-Party structure. By using a third party as the collateral agent, Tri-Securities Lending can supplement the more traditional cashbased securities lending market.

“Where companies have long assets the ability to use securities through an independent collateral agent can ensure balance sheet assets are being used in a more effective manner,” said Greg Keyser Managing Director for Equity Finance at UBS Australia, “We believe Tri-party will entice many new domestic entrants into the secured finance market.”

“Receiving securities as collateral instead of cash is an important element of securities lending, and working with an independent third party to manage the collateral helps give us as a lending agent confidence that collateral and other risks are being managed appropriately,” said Francesco Squillacioti, Regional Director Asia Pacific for Securities Finance at State Street Bank and Trust.

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ING Investment Management (INGIM) Australia has positioned its wholesale business for the next stage of growth, with the final two hires of this year and a four star rating for its Extended Alpha Australian Share Fund.

INGIM has made a concerted effort to build its wholesale business this year with more than seven key hires including industry veteran Jim McKay as head of sales.

“INGIM now has a complete team of experienced professionals including a Melbourne office, allowing us to focus on bringing the best of both our local and global strategies to advisers,” said Mr McKay.

These best of breed strategies include the ING Extended Alpha Australian Share Fund and ING Wholesale Global Property Securities (GPS) Fund, which has just had its ‘Highly Recommended’ rating reaffirmed by
Lonsec.

Experienced BDMs to take on Northern Region

The two new hires are both BDMs for the Northern Region: Heath Branigan, who has 10 years experience in asset management in the United Kingdom and Australia and Jenine Hayman, an experienced business
development and research relationship professional with 19 years experience in the financial services industry.

Both will report to Natalie Grey, the recently announced Northern Regional manager.

“We are very pleased to be working with these highly experienced professionals, who are the final pieces of the puzzle in developing our wholesale team and whose experience will help us develop key relationships in this area,” said Mr McKay.

Ms Hayman most recently worked for Mediascape Analytical & Research Services as a client relationship and business development manager. She has also worked for AXA Australia as a business development manager and spent 11 years at Goldman Sachs JBWere Asset Management as a research and platform support manager.

Mr Branigan joins from Hedge Harbor in the UK where he worked in institutional sales for Europe and Australia, and was responsible for relationship development across a diverse international institutional client base. He has also worked for AMP Capital Investors in Australia and JP Morgan Asset Management in the UK and is a chartered alternative investment analyst.

Four stars for Extended Alpha fund

INGIM has just received a four star rating for the ING Extended Alpha Australian Share Fund from S&P – its first rating of the fund. S&P said the rating “reflects our high conviction that the manager will consistently generate risk-adjusted returns in excess of relevant investment objectives and relative to peers”.

“After significant market dislocations such as the GFC, history shows markets move sideways for long periods of time. With the increased volatility experienced in the last 18 months, and which we expect going into 2011, capturing alpha to generate returns is absolutely imperative for portfolios,” Mr McKay said.

The Extended Alpha fund also has a ‘Highly Recommended’ rating from Lonsec and a ‘Recommended’ rating from Zenith.

Meanwhile Lonsec has reaffirmed the ING Wholesale Global Property Securities (GPS) Fund’s ‘Highly Recommended’ rating which it has maintained since 2006.

According to its report, Lonsec retained this rating due to the fund’s “extensive and stable investment team” and its “clear and comprehensive investment process, which can be consistently applied on a global basis”.

The GPS fund also has a five star rating from S&P and is ‘Highly Recommended’ by Zenith. The fund recently also won the property category at the 2010 S&P Fund Awards for the fourth year in a row.

“The ratings reflect our efforts and performance as well as the strength of our team, and we are pleased to be recognised appropriately,” said Mr McKay. “Since launching Extended Alpha this year we have seen a strong response and the fund is going from strength to strength.

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Consequently, the stock exchange, like many other markets, has developed special procedures to allow for Buy and Sell orders to be placed before and after normal trading, and for any of these orders which match or overlap to be settled at prices which are established differently from those applying to orders placed during the normal trading day.

The Pre-opening pricing formula involves 4 steps. If the price is established at any step, then the remaining steps are not needed. This method, used to establish prices in the Pre-open period, also applies in precisely the same way to establish;

• closing prices at the end of the trading day,
• float prices,
• prices following a trading halt or suspension, and
• prices of new listings.

It is often said in all of these circumstances that the market is in “Pre-open”, even though that might seem to be a strange way to describe the state of the market at the close of the day.

This approach enables optimal opening prices to be established, maximises order matching when the regular trading session begins, reduces the load on the exchange’s trading system (ITS) and helps manage price fluctuation and manipulation at the beginning and end of the normal trading session.
Some investors are very suspicious of these arrangements. This quote from a blog on the internet shows a lack of confidence and knowledge that is not uncommon. Advisers who discuss direct shares with their clients should be ready to explain why these sentiments are not accurate, and how the prices of these trades are calculated.

“We all know it goes on: before 10 am, any number of stocks are quoted with sort of reverse quotes, phoney quite obviously. The sellers selling dirt-cheap, the buyers offering prices way above last night’s close, right up to the official start of trading…
I’d like to know, what is the rationale behind all this? Does it serve any practical purpose? if these people are joking, isn’t it time the exchange put a stop to this silly practice?”

Prohibited conduct

Pre-open periods are particularly vulnerable to manipulation, and some practices which are always prohibited but which are particularly relevant to the Pre-opening periods are;

• Order Stacking or Layering of bids (placing Buy orders at various price points below the market to create a false appearance of buying demand).
• Marking the close (trading a stock near the close, with the objective of affecting the closing price).
• Wash trades (both Buy and Sell orders are entered by the same party to artificially inflate turnover, or influence the price of a security).
• Matched Orders (placing an order in the knowledge that an associate intends to make a corresponding offer to buy or sell the same securities on the same terms).
• Placing orders then cancelling them without apparent reason, especially close to the market open or before or during the afternoon Closing Single Price Auction.

Market Phases

Before we look at the pricing calculations, the following is a reminder of the various phases of the Integrated Trading System (ITS) throughout a normal trading day.

From 7 am to 10 am, no trading takes place. Brokers and investors enter orders which are ranked in order of price then time. This is the morning Pre-open.

At a time randomly chosen by a computer to be within 15 seconds of 10 am, share codes beginning with A or B commence trading. Existing orders that can be matched are traded at the Match Price (see below) established in the Pre-open.

The remaining stocks open progressively in tranches every two and a quarter minutes (+/- 15 secs) until the 5th and last block of stocks (S to Z) starts trading at 10:09 (+/- 15 secs).

Up to 4 pm the market trades normally.

For 10 minutes after 4 pm brokers enter, change or cancel orders ahead of the close. Trades do not take place, but Match Prices are calculated, updated and displayed. This period is known (oddly) as the Pre-open prior to closing.

For just 2 minutes from 4:10 pm (+/- 15 secs) a Closing Single Price Auction (CSPA) takes place. The auction takes place with all trades in any particular stock taking place at the Match Price which was determined in the Pre-open according to the rules discussed in this article.

The system is then available for adjusting then purging orders, and finally for system maintenance, before closing for 12 hours from 7 pm.

Match Prices in the Pre-Open

Because orders can be entered during Pre-open but trades do not take place, orders may ‘overlap’. This means that highest Buy orders may be at a higher price than the lowest Sell orders. Special rules are required to resolve the difficulty this creates.

For example, a stock in Pre-open has a Buy order at $10 and a Sell order for the same quantity at $8. ITS will not trade these ‘overlapping’ orders. When normal trading (or the CSPA) resumes, these ‘overlapping’ orders will trade at a price known as the Match Price or Single Price Auction. The Match Price is continually updated as new orders enter the system.

But what should that price be? If the system set the price in our simple example at, say, $9.00, then both parties would be satisfied. The buyer would be buying more cheaply than her order specified, and the seller would get more than he was prepared to accept. However, this will be the case at any price between $8 and $10. While it may appear to be fair to “split the difference”, that may not be the fairest solution in the real world, when many orders at various prices and volumes will often exist.

Note that the method described only has effect if there are overlapping orders. If the highest Buy order for a stock in Pre-open is lower than the lowest Sell order, then no trades take place and those orders will remain in the queue established by price and time in the system until cancelled, amended, purged or traded in the normal way in the open market.

Calculating the Match Price 

To calculate the single Match Price, four principles are applied in order. Each stage provides a filter for the next, so that only those possible prices that survive from the first stage are considered in the second. If only one price is possible after applying the rules at any stage, then that becomes the Match Price and it will not be necessary to go to a further stage.

Consequently, if a price can be established under the first of the principles, then that will be the Matched price. The fourth principle always establishes a single price.

The principles applied are these.

1. The price should be the one that provides the maximum volume of executed trades.
   For example, if there are 70,000 buy orders at a price of $10 or less, and 30,000 sell orders at $10 or more, then clearly 30,000 shares would trade if the price were $10. If there were a price at which a higher number of trades would take place, then that would become the Match Price under this first principle.
If the exactly the same volume of trades would be executed at more than one price, then a choice among them will be made by applying the second principle
2. The price should be the one that leaves the least quantity of shares in unfilled orders.
   For example, in the example used in principle 1, 30,000 shares would trade if the price were $10, and 40,000 buy orders would remain unfulfilled. If any other price that was still a possibility after principle 1 resulted in fewer unfulfilled orders, then it would become the Match Price.
If the same quantity of shares in unfilled orders would arise at more than one price, then a choice among them will be made by applying the third principle
3. The highest potential price should be used if market pressure is on the buy side, the lowest if the pressure comes from sellers.
   For example, using the same example again, if two prices remained from principle 2, then the higher of them would become the Match Price, because the unfilled orders are on the buy side. If pressure comes from both sides, the final principle will be applied.
4. The price should be set with reference to the last traded price.
   If the last traded price is within the range of potential prices that are still possible after applying Principle 3, then that will be the Match Price. Otherwise, the Match Price will be the potential price that is closest to the last traded price. For example, assume two prices, $10.90 and $11, are still possibilities after principle 3 is applied. If the last traded price was between these prices, for example $10.95, then that would be the Match Price. If the last price had been $11.05, however, that would lie outside the range, so the closest of the possible prices, in this case $11.00, would be the Match Price.

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