ASIC’s financial markets roundtable: emerging themes in innovation and regulation

Fund managers should keep abreast of developments in financial market innovation so they can:

• leverage opportunities to obtain exposure to a broader range of assets;
• pursue more cost effective and streamlined trading, settlement and asset holding arrangements to minimise expenses; and 
• ensure they properly understand, and can appropriately manage, the new types of risks that accompany new developments in markets, assets, market infrastructure and the manner in which trading, settlement, custody, registry and administration services are provided.

The threat of offshore competition is real

Opportunities for Australian investors to invest in foreign markets are accelerating Australia therefore needs to ensure its capital markets remain competitive and attractive to domestic and foreign capital. 

This means being more ambitious. ASIC’s recent novel decision to allow Australian investors to directly participate in the SpaceX initial public offering (IPO) is one example of this.

Technological developments should be harnessed to help reduce costs and remove structural barriers to market entry. Relevant initiatives which are in the pipeline include tokenising Austraclear (Australia’s central securities depository) and extending post-trade processing windows (which will be important in overcoming the challenge of cross-border time zone differences that Australia is currently faced with) by 2027.

Infrastructure and regulatory settings will be critical

Market infrastructure needs to be modern, trusted and resilient. In equities markets, there are efficiency gains to be made in clearing, trading and settlement systems, liquidity and functionality. In fixed income and private markets, price discovery, liquidity and accessibility were earmarked for improvement.

Clear regulatory settings will be important to support market and product innovation and encourage greater IPO activity.  Concerns were raised that aspects of the existing framework, in particular disclosure requirements, may no longer be fit for purpose.

Innovation initiatives need to be carefully targeted

There was caution against pursuing innovation for innovation’s sake. A lack of competition in the provision of market infrastructure was cited as an impediment to innovation.

The pace of innovation is likely to vary between market segments. Current frictions in over-the-counter and fixed income, currency, and commodities markets make them ‘ripe for innovation’, and ASIC was encouraged to focus on institutional market participants’ diverging collateral management practices.

While tokenisation is considered ‘inevitable’, views differed on how beneficial it would be. Central bank digital currency or stablecoin settlement rails were perceived as integral to realising benefits such as reducing intermediation and friction, greater transparency, traceability, programmability, capital management and atomic settlement.

Innovation was also identified as a possible solution to ongoing challenges associated with introducing new products to market, using derivatives for risk management activities, facilitating private market access for retail investors, barriers to market making and the speed of IPO pathways.

Trust and investor protection still matter

The importance of retaining appropriate investor protection safeguards was recognised, because trust in the regulatory framework impacts the ability to attract capital to Australian financial markets. ASIC was encouraged to avoid reporting and assurance measures which do not demonstrably improve investor outcomes.

The types of risks that might warrant regulatory attention include Australian retail investors losing Australian regulatory protection, the distinction between gambling and investment becoming more blurred, and the potential for technology to exacerbate poor outcomes for investors.

Regulatory clarity around the rules, disclosure requirements and oversight of tokenised products, AI-enabled services and new market models will be important.

Innovation that encourages greater retail investor participation in financial markets and access to advice will be welcomed, provided investor protection is not unduly compromised.

ASIC intends to hold targeted industry workshops, engage with its regulatory peers and then hold a follow-up roundtable with participants to mark progress made and move the conversation forward.

ASIC’s willingness to engage with a broad range of stakeholders is a positive step. However, this momentum must be sustained and accompanied by targeted, meaningful and outcomes focused regulatory change if Australia is to remain a desirable destination for capital market investment over the medium to longer term.

Fund managers should continue to monitor these developments, both for the opportunities emerging from financial market innovation and the regulatory and operational risks that may accompany them.