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[2026] NSWSC 202
General information, not legal advice.
Supreme Court of NSW
2026-03-13
Nixon J
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Source: NSW Caselaw (www.caselaw.nsw.gov.au). Converted to plain text by ZoeLaw. Not the official version.
Medium Neutral Citation: In the matter of Macquarie Securities (Australia) Limited [2026] NSWSC 202
Hearing dates: 3 March 2026
Date of orders: 13 March 2026
Decision date: 13 March 2026
Jurisdiction: Equity - Corporations List
Before: Nixon J
Decision: Declarations made, pecuniary penalty of $35m imposed, compliance program ordered
Catchwords: CORPORATIONS – Australian Securities and Investments Commission – where Defendant engaged in short selling – where Defendant’s reports to market operator regarding short sales included inaccurate data – where orders submitted to market operator omitted certain required regulatory data – where errors and omissions were due to inadequacies in Defendant’s systems, processes and controls – where issues were remediated following identification – where Defendant admitted contraventions of ss 798H(1)(b), 912A(1)(h) and 1041H(1) of the Corporations Act – where parties prepared a statement of agreed facts and jointly proposed declarations of contravention, a pecuniary penalty and a compliance program – whether declaratory relief should be granted – whether proposed pecuniary penalty is an appropriate penalty – whether compliance program should be ordered
Legislation Cited: Australian Securities and Investments Commission Act 2001 (Cth) s 12DB
Corporations Act 2001 (Cth) ss 9, 763A, 798G, 798H, 912A, s 1020AA – 1020AF, 1020B, 1041H, 1101B, 1317E
Corporations Amendment (Short Selling) Act 2008 (Cth)
Crimes Act 1914 (Cth) s 4AA
Evidence Act 1995 (NSW) s 191
Supreme Court Act 1970 (NSW) s 75
Corporations Regulations 2001 (Cth) regs 7.9.100(1)(a)–(c), 7.9.101(1)
ASIC Market Integrity Rules (Securities Markets) 2017 rr 2.1.3, 5.5.2, 7.4.2
ASIC Market Integrity Rules (ASX Market) 2010
ASIC Market Integrity Rules (Chi-X Australia Market) 2011
Cases Cited: Ainsworth v Criminal Justice Commission (1992) 175 CLR 564 at 581-582; [1992] HCA 10
Australian Building and Construction Commissioner v Construction, Forestry, Mining and Energy Union (2018) 262 CLR 157; [2018] HCA 3
Australian Building and Construction Commissioner v Construction, Forestry, Mining and Energy Union (2017) 254 FCR 68; [2017] FCAFC 113
Australian Competition and Consumer Commission (ACCC) v Employsure Pty Ltd [2023] FCAFC 5
Australian Competition and Consumer Commission v Coles Supermarkets Australia Pty Ltd [2015] FCA 330
Australian Competition and Consumer Commission v MSY Technology Pty Ltd (2012) 201 FCR 378; [2012] FCAFC 56
Australian Competition and Consumer Commission v Reckitt Benckiser (Australia) Pty Ltd [2016] FCAFC 181
Australian Competition and Consumer Commission v Renegade Gas Pty Ltd (trading as Supagas NSW) [2014] FCA 1135
Australian Competition and Consumer Commission v Z-Tek Computer Pty Ltd (1997) 78 FCR 197 at 205; [1997] FCA 871
Australian Securities and Investments Commission v AMP Financial Planning Pty Ltd (No 2) [2020] FCA 69
Australian Securities and Investments Commission v Commonwealth Securities Limited [2022] FCA 1253
Australian Securities and Investments Commission v Dover Financial Advisers Pty Ltd [2019] FCA 1932
Australian Securities and Investments Commission v Narain (2008) 169 FCR 211; [2008] FCAFC 120
Australian Securities and Investments Commission v RI Advice Group Pty Ltd [2022] FCA 496
Australian Securities and Investments Commission v Westpac Banking Corporation (No 3) [2018] FCA 1701
Australian Securities and Investments Commission v Wooldridge [2019] FCAFC 172
Australian Securities and Investments Commission v Youi Pty Ltd [2020] FCA 1701
Carbone v Fowler Homes Pty Ltd [2024] NSWCA 192
Commonwealth v Director, Fair Work Building Industry Inspectorate (2015) 258 CLR 482; [2015] HCA 46
Public Service Association and Professional Officers' Association Amalgamated Union of New South Wales v Industrial Relations Secretary (2018) 96 NSWLR 762; [2018] NSWCA 39
Re Trade Practices Commission v CSR Limited [1990] FCA 521
Category: Principal judgment
Parties: Australian Securities and Investments Commission (Plaintiff)
Macquarie Securities (Australia) Limited (Defendant)
Representation: Counsel:
L Livingston SC with A Reid and N Carey (Plaintiff)
E A Collins SC with S Speirs and H Zhu (Defendant)
Solicitors:
Gadens (Plaintiff)
Herbert Smith Freehills Kramer (Defendants)
File Number(s): 2025/184008
Publication restriction: Nil
By Amended Originating Process filed 18 December 2025, the Australian Securities and Investments Commission (ASIC) seeks declarations that the Defendant, Macquarie Securities (Australia) Limited (MSAL), contravened ss 798H(1)(b), 912A(1)(h) and 1041H(1) of the Corporations Act 2001 (Cth), by its misreporting of short sales to ASX Limited. ASIC also seeks orders that MSAL pay a pecuniary penalty and undertake a compliance program.
MSAL admits that it contravened each of ss 798H(1)(b), 912A(1)(h) and 1041H(1) of the Corporations Act.
On 18 December 2025, a joint Statement of Agreed Facts was filed with the Court (SOAF). A Supplementary Statement of Agreed Facts was filed on 26 February 2026. Each of the facts in those documents is an “agreed fact” for the purposes of this proceeding, within the meaning of s 191 of the Evidence Act 1995 (NSW), upon which the Court may rely to pronounce judgment and make orders.
The parties have agreed on a proposed form of orders, including declarations of contravention, a pecuniary penalty of $35m, orders for a compliance program, and an order for costs. The parties filed joint written submissions in support of the orders sought.
The Relevant Period in which the conduct occurred is defined in the SOAF as the period between 11 December 2009 and 14 February 2024. However, the Contravening Period – that is, the period in respect of which the conduct occurred that is the subject of the proposed declarations and orders – was (by reason of limitations issues) from 14 May 2019 to 14 February 2024.
I set out below an overview of the provisions regarding the reporting of short sales, and of the persons who rely on the accuracy of such reports. I then provide a summary of the relevant factual background, which is based on the SOAF and the parties’ joint submissions, and set out the details of each of the contraventions admitted by MSAL. Finally, I turn to address the parties’ submissions on the proposed orders and, in particular, the proposed pecuniary penalty.
Short selling is the practice of a seller selling a financial product (including a security) that the seller does not currently own and with the intention of benefiting from that sale in various ways. In particular:
a “covered short sale” includes where a person executes a short sale of a financial product and relies on an existing “securities lending arrangement” (within the meaning of s 1020AA of the Corporations Act) to have a presently exercisable and unconditional right to vest the financial product in the buyer; and
a “naked short sale” is a short sale undertaken where the seller does not have a presently exercisable and unconditional right to vest the financial product in the buyer.
Generally, naked short selling is prohibited under the Corporations Act, subject to certain exceptions.
In around September 2008, in the aftermath of the global financial crisis, ASIC and other global regulators expressed concerns that the global market conditions at the time, coupled with extensive short selling of stocks – particularly financial stocks – might have been causing unwarranted price fluctuations, which, if unchecked, had the potential to threaten the operation of fair and orderly stock markets. Shortly thereafter, ASIC took steps to temporarily restrict covered short selling in the Australian market (with limited exemptions), to ban naked short selling, and to implement an interim disclosure regime for permitted covered short sales.
On 11 December 2008, the Corporations Amendment (Short Selling) Act 2008 (Cth) (Amendment Act) commenced. The Amendment Act inserted, with effect from 11 December 2009, a new Div 5B into Pt 7.9 of the Corporations Act (comprising ss 1020AA to 1020AF), which outlined certain disclosure requirements in relation to covered short sales of financial products (subject to certain exceptions). I refer to these requirements, together with the requirements of regs 7.9.100(1)(a)–(c) and 7.9.101(1) of the Corporations Regulations 2001 (Cth), as the Short Sale Reporting Obligations.
The Short Sale Reporting Obligations regulate the disclosure of information regarding sales of “section 1020B products”, which are defined in s 1020B(1) of the Corporations Act as comprising: (a) securities; (b) managed investment products; (c) foreign passport fund products; (d) financial products referred to in subs 764A(1)(j); or (e) financial products of any other kind prescribed by regulations made for the purposes of the definition.
During the Relevant Period, the Short Sale Reporting Obligations required Australian Financial Services Licensees who transacted any covered short sales of section 1020B products in the markets operated by ASX or Cboe Australia Pty Ltd (each a Market Operator) to report to the relevant Market Operator, for each relevant section 1020B product, the total volume of covered short sales of the section 1020B product made in the relevant market on each trading day, on or before 9:00am on the next trading day.
The Short Sale Reporting Obligations required that the following information be provided in relation to covered short sale transactions:
the number of section 1020B products to be vested in the buyer pursuant to the covered short sale transaction;
a description of the product; and
the name of the entity that issued the product.
During the Relevant Period, each Market Operator aggregated and published the total volume of short sales per section 1020B products reported to the Market Operator for each trading day on their websites on the next trading day (Daily Market Short Sale Report).
From at least 1 January 2015 to the end of the Relevant Period, the daily short sale data published by ASX included daily gross short sales reported for the stated trading day for section 1020B products that were listed or quoted for trading on the ASX, or on both the ASX and the Cboe Australia market, per section 1020B product, in aggregate form.
The parties identified, in the SOAF and in their joint submissions, four categories of persons who may use the data published by ASX and Cboe in the Daily Market Short Sale Reports, namely:
“Transactional Users”, including hedge funds, conventional long only funds (who do not short sell), prime brokers (as intermediaries who source financial products from lenders for those who wish to short sell financial products), and the lenders of securities that are short sold;
“Corporate Users”, including companies, investment banking advisors, holders of corporate debt and bonds, commercial bankers, and competitors of companies;
“Observational Users”, including persons who might acquire the financial products (including those who are themselves short sellers), research analysts and journalists; and
“Regulatory Users”, including the Market Operators and ASIC.
The parties further agreed that there is a risk that inaccuracies in the data contained in the Daily Market Short Sale Reports may have adverse effects for persons falling within these categories. By way of example only, there is a risk that inaccuracies in the data:
may, so far as Transactional Users are concerned, mislead traders executing stock transactions due to potential erroneous timing and price limits;
may, so far as Corporate Users are concerned, either mask (where the true volume of short sales in respect of a company’s securities is under-reported) or magnify (where the true volume is over-reported) emerging issues from and to the company itself, as well as the company’s advisers and lenders;
may, so far as Observational Users are concerned, deter (where the true volume of short sales in a particular financial product is over-reported) an investor who is looking to acquire that product, or mask (where the true volume is under-reported) a potentially negative signal to the prospective investor, which otherwise might have impacted their decision to invest or its timing; and
may, so far as Regulatory Users are concerned, jeopardise the ability of the Market Operators properly to scrutinise activity on their platform, and in turn risk them not fulfilling their obligations to ensure there is a fully informed market in all securities being transacted on their platform.
MSAL is a wholly owned subsidiary of Macquarie Group Limited. It is the holder of an Australian Financial Services Licence numbered 238947 (AFSL) and accordingly is a “financial services licensee” within the meaning of s 9 of the Corporations Act.
MSAL’s operations were conducted through various teams, including, a Market Operations Division (MOD), of which the Middle Office Team formed part; a Technology Team; a Business Compliance Team; a Business Management Team; and a Business Operations Risk Management Team.
In the period from 1 April 2013 to 31 March 2024, which includes the Contravention Period, MSAL employed between 102 and 130 full-time equivalent employees.
MSAL is authorised by its AFSL to carry on a financial services business to, among other things, deal in a financial product by:
issuing, applying for, acquiring, varying or disposing of a financial product in respect of securities; and
applying for, acquiring, varying or disposing of a financial product on behalf of another person in respect of securities,
to retail and wholesale clients.
MSAL collected data in relation to short sale transactions in section 1020B products and, on each trading day during the Relevant Period, compiled that data into a report (Short Sale Report), which it submitted to ASX by uploading the data to the ASX Online portal.
The Short Sale Report was calculated in two parts, distinguishing the calculation for Principal Short Sales and for Agency Short Sales.
The Middle Office Team was responsible for submitting the Short Sale Report to the Market Operator. From 4 May 2015, an individual within the Middle Office Team was designated as the “owner” of the Short Sale Report (Report Owner).
MSAL used various internal IT systems to prepare and submit the Short Sale Reports. By way of overview, the process implemented by MSAL, using those systems, involved the following steps (Short Sale Reporting Process):
Data collection: at or around 5:00pm and 8:00pm on each trading day, details of all trades executed by MSAL on that trading day were automatically collected and imported into the IT Portal web application from other systems (being iBroker prior to around 14 June 2022, and SYNANG thereafter);
IT Portal separation: the IT Portal then separated data relating to Principal Short Sales from data relating to Agency Short Sales;
Agency Adjustments and Reconciliation: the total volume of separated Agency Short Sales was automatically reconciled in the IT Portal against information recorded in the Fidessa system (a front-office order management and execution platform) and, if necessary, the total volume of Agency Short Sales was automatically adjusted;
Principal Replay Function: the IT Portal then deployed a “Principal Replay Function”, which was intended to collate and sort the data for all principal trades, including Principal Short Sales, into chronological, sequential order, and then to “replay” the trades in chronological order, commencing with the start-of-day trading positions collected from other systems, in order to calculate the gross Principal Short Sales for the relevant trading day;
Manual adjustments: the Middle Office Team then made manual adjustments in the IT Portal, as required, to account for any other trading circumstances that had occurred during the trading day and had not been captured through the previous steps outlined above;
Trade Volume Check: a further check was then undertaken which compared the total quantity of short sales calculated by the steps outlined above for each given security against all sales for each security executed by MSAL on a given day (see further at paragraph [36] below); and
MSAL had a policy and procedure framework directed to seeking to comply with its Short Sale Reporting Obligations.
This framework included the following policies and procedures.
The Regulatory Reporting Policy was approved on 23 August 2017. It relevantly applied to all Macquarie Group businesses and functions that were involved in the production of regulatory reporting, and set out various principles applicable to regulatory reporting, including the standard of controls that were required to be in place for the production of Short Sale Reports. The Regulatory Reporting Policy relevantly included requirements for Report Owners to take reasonable steps to satisfy themselves that the reports they were submitting were complete, accurate and timely; to have adequate oversight of the effectiveness of processes, systems and controls within their team to ensure that regulatory reporting obligations were being managed; and, where they relied on processes and data from sources outside their control, to seek and obtain information and assurances as to the fitness for purpose of the data being relied upon and the adequacy of controls, and to assess the impact on the regulatory report of identified changes to business or regulatory requirements. The Regulatory Reporting Policy also required the Technology Team to ensure that there were adequate controls in place surrounding systems within their responsibility, and to notify the Report Owner of any system or process changes which supported regulatory reporting or the underlying data. In addition, the Regulatory Reporting Policy required an assessment of the adequacy of the design of the reports on a periodic basis – having regard to the risk associated with the respective report – and that change management processes be in place to manage changes that may have an impact on the integrity of regulatory reports, including changes to processes and controls, rules and filters, systems and any other points of dependency and risk.
The Regulatory Reporting Policy Guidance was in place from December 2018 onwards, and was to be read in conjunction with the Regulatory Reporting Policy. The Regulatory Reporting Policy Guidance relevantly required the allocation of a “risk rating” to each regulatory report. From at least July 2020, the risk rating was described as a rating which reflected the inherent risk of the report, taking into account the operational complexity of producing the report, the level of known issues with the report, and any other factors that may account for the underlying risk of producing that report. Under the Regulatory Reporting Policy Guidance, from at least August 2019, Report Owners of those reports which were allocated a “Very High” or “High” risk rating were required to conduct reviews and mapping of reporting activities, controls and outputs.
The IT Change Management Policy was in place since at least 2008, and relevantly applied to all Macquarie Group information technology, systems and data, and to changes made to technology, systems and infrastructure where the changes impacted one or more key systems controls, system generated reports relied upon to control the business, or system calculations. From at least 2012, the (which was to be read in conjunction with the IT Change Management Policy) required certain minimal controls for IT changes, including the documentation of change requests, and the implementation of risk assessments, testing, verification and approvals for IT changes. From 2016, the IT Change Management Policy stressed the risk of regulatory breaches in the absence of proper IT change management controls and required that the documenting of IT changes also include information about the nature of the change, the risks of the change and potential impacts associated with that risk, and the approval of the change.
Prior to the issues which are the subject of this proceeding being identified, MSAL had four controls in place that were intended to ensure the accuracy of the information recorded in the Short Sale Report, and a further four controls intended to ensure that the Short Sale Report was submitted to the Market Operator in the timeframes required (Short Sale Reporting Controls).
Although MSAL had systems, controls and processes in place which were aimed at ensuring compliance with its Short Sale Reporting Obligations, MSAL admits that those systems, controls and processes were deficient and failed to ensure the accuracy of the information in the Short Sale Report during the Contravention Period.
For approximately nine years from October 2009 until August 2018, the Trade Volume Check was the only control that MSAL had in place which was directed towards ensuring the accuracy of the information included in the Short Sale Report. This was a rudimentary check which compared the total quantity of short sales to be reported for each security against the total quantity of all sales executed by MSAL for that security on the relevant day and generated a warning alert if the total short sales for a particular security exceeded the total quantity of all sales for that security.
Neither the Trade Volume Check nor the further controls subsequently implemented by MSAL after August 2018 identified any of the nine Issues with MSAL’s Short Sale Reports, which are the subject of this proceeding (and are summarised below).
Following MSAL’s identification, between 5 October 2022 and 15 February 2024, of the issues with respect to its Short Sale Reports which are the subject of this proceeding, MSAL implemented additional controls in relation to the preparation and submission of its Short Sale Reports to address those issues, and generally to strengthen the framework supporting MSAL’s Short Sale Reporting Process in response to identification of those issues.
During the Relevant Period, MSAL conducted certain reviews relevant to its Short Sale Reporting Process or its Short Sale Reporting Controls, namely:
a “Risk and Control Self-Assessment” (RCSA) Process;
a “Periodic Assurance of Critical Control” review; and
an “End-to-End Review of Short Sale Report”.
Only one of these review processes was conducted in respect of the Short Sale Reporting Controls more than once during the Relevant Period: namely, the RCSA process, which was conducted on at least 34 occasions.
The parties agree that none of the reviews conducted involved an appropriate review of the design of the Short Sale Reporting Process for the purposes of identifying any errors in the logic relied on to generate the Short Sale Report or identifying the frequency and nature of manual adjustments or interventions made during the Short Sale Reporting Process.
Further, the parties agree that the reviews did not involve reviewing the quality of the output of the Short Sale Reporting Process, including by comparing all of the data included in a sample of Short Sale Reports submitted by MSAL against other data held by MSAL or Macquarie Group in relation to MSAL’s short sale transactions in section 1020B products.
The RCSA process was conducted on a semi-annual basis, in April and October, from 2014 to 2023. The RCSA involved various teams within MSAL’s business conducting a self-assessment of material risks arising in relation to their business activities and how those risks were being managed, including through any relevant controls, and the design and operating effectiveness of certain controls implemented in relation to MSAL’s regulatory reporting.
The RCSAs which were conducted in that period identified the risk that MSAL might breach regulatory or exchange reporting requirements, including in relation to its Short Sale Reports, as a material risk. The RCSAs assessed this risk by reference to:
an “inherent risk rating”, which referred to the risk that MSAL might breach such reporting requirements in the absence of any controls; and
a “residual risk rating”, which referred to the remaining risk that MSAL might breach such reporting requirements after considering any controls implemented to mitigate the likelihood of that risk occurring.
The risk that MSAL might breach regulatory or exchange reporting requirements in relation to the Short Sale Reports was allocated, in the RCSAs, an inherent risk rating of “very high”, “medium”, “low” or “very low”, and a residual risk rating of “high”, “medium” or “very low”.
The parties agree that, in light of the complexity of the design of MSAL’s Short Sale Reporting Process, and the potential regulatory impact of MSAL failing to comply with its Short Sale Reporting Obligations, there was no basis for MSAL to assess the inherent risk rating of its Short Sale Reports as either “medium” or “very low” in the RCSAs conducted in the period between April 2014 and April 2019.
Following April 2019, the residual risk rating for the Short Sale Reporting Process was assessed as either “medium” or “high” in accordance with criteria set out in the Regulatory Reporting Policy Guidance (see paragraph [33] above).
MSAL accepts that it ought to have assessed the risk rating as either “high” or “very high”, in light of the complexity of the design of the Short Sale Reporting Process; the number of manual interventions involved; the potential regulatory impact of MSAL failing to comply with its Short Sale Reporting Obligations; and the fact that a number of the RCSAs conducted during the Relevant Period identified issues with the Short Sale Reporting Process. The issues that were identified included:
the risk of misreporting, given the number of manual processes that were involved in preparing the Short Sale Reports; and
the need for improvement in the “control environment”, due to “ongoing short selling transaction issues which persisted for a long period of time”.
Notwithstanding those identified risks, MSAL did not conduct any detailed end-to-end review of the Short Sale Reporting Process, nor implement any changes to the Short Sale Reporting Process or the Short Sale Reporting Controls to address those issues, prior to October 2022 (when the issues which are described below as Issues 1 to 6 were identified).
Further, from at least July 2020, MSAL’s Regulatory Reporting Policy Guidance relevantly provided that, where the residual risk rating of a report was assessed as either “high” or “very high”, the Critical Design Elements (CDEs) of those reports were required to be mapped on an end-to-end basis. However, none of the RCSAs completed in the period from April 2014 to October 2023:
involved any such CDEs being mapped end-to-end;
involved a controls assurance review of any of the Short Sale Reporting Controls; or
resulted in any changes being made to the Short Sale Reporting Controls or the Short Sale Reporting Process prior to the identification, in October 2022, of Issues 1 to 6.
In addition to the review processes referred to in paragraph [39] above, MSAL conducted two further stand-alone review processes, which were designed to ensure that MSAL was complying with its statutory obligations and which were directed at ensuring the accuracy of the information contained in the Short Sale Report.
Issue 1 is that the logic used by MSAL to generate the Short Sale Report incorrectly included duplicate “dummy fills” (used to update clients) as actual covered short sales in the Short Sale Report.
Issue 1 arose following the implementation, in around May 2022, of the STORM system (which was a front-office order management and hedge generation system for Macquarie Bank Limited synthetic products).
The testing conducted by MSAL, prior to or after the implementation of the STORM system, did not test for all relevant scenarios, including whether the logic used to generate the Short Sale Report recorded dummy fills as actual short sale transactions.
MSAL’s failure to ensure that appropriate testing was undertaken in connection with the implementation of the STORM system was contrary to the requirements of MSAL’s IT Change Enablement Standard (see paragraph [33(3)] above).
Issue 1 was identified on 5 October 2022. On the same day, MSAL implemented the Manual Storm Booking Check in order to manually address Issue 1. On 21 December 2022, a logic update was implemented, after testing, to rectify Issue 1.
Issue 1 resulted in MSAL submitting 22 inaccurate Short Sale Reports to the Market Operator in the period from 17 June 2022 to 3 October 2022, which contained 25 identified instances of MSAL overreporting the number of short sales for a particular section 1020B product on the relevant trading day.
Issue 1 resulted in a total of 6,044,016 individual section 1020B products (not distinct trades) being incorrectly reported to the Market Operator.
Issue 2 is that the logic used by MSAL to generate the Short Sale Report incorrectly truncated trade references used to calculate the total volume of short sales, which meant that trades with cross-references of four or more characters were excluded from the total volume calculation.
Issue 2 arose following a change made to the logic used to generate the Short Sale Report using the IT Portal on 11 December 2020. That change did not go through the change management process required by MSAL’s IT Change Enablement Standard and, accordingly, no testing was performed prior to implementing the change (contrary to the requirements of the policies referred to in paragraphs [33(3)] and [33(4)] above).
Issue 2 was identified on 27 October 2022 and a tactical, manual solution was immediately deployed. On 21 December 2022, a logic update was implemented, after testing, to rectify Issue 2.
Issue 2 resulted in MSAL submitting 138 inaccurate Short Sale Reports to the Market Operator in the period from 6 January 2021 to 28 October 2022, which contained 560 identified instances of MSAL overreporting or underreporting the number of short sales for a particular section 1020B product on the relevant trading day.
Issue 2 subsisted for a significant period of time due to the Short Sale Reporting Process not being fit for purpose and because MSAL did not have adequate controls in place to ensure the accuracy of the data included in the Short Sale Report.
Issue 2 resulted in a total of 53,323,242 individual section 1020B products (not distinct trades) being incorrectly reported to the Market Operator.
Issue 3 is that the logic used by MSAL to generate the Short Sale Report incorrectly included “booking purpose trades” executed on the Cboe Australia market in the calculation of the total volume of short sales. (A “booking purpose trade” was used by MSAL’s back office for internal accounting and book-keeping purposes.)
Issue 3 arose following the transition from the iBroker to SYNANG back office system on 14 June 2022. The testing conducted by MSAL prior to the transition to the SYNANG system did not test for certain relevant scenarios, including failing to test for the inclusion of booking purpose trade crossings executed on the Cboe Australia market, and as a result did not identify Issue 3.
MSAL’s failure to ensure that appropriate testing was performed was contrary to the requirements of the IT Change Enablement Standard referred to in paragraph [33(4)] above.
Issue 3 was identified on 2 November 2022. On identifying this issue, MSAL implemented an additional reconciliation report to identify potential issues with the process, and engaged with the vendor of SYNANG to develop a fix, which was released after market on 29 November 2022.
Issue 3 resulted in MSAL submitting 71 inaccurate Short Sale Reports to the Market Operator in the period from 14 June 2022 to 9 August 2023, which contained 118 identified instances of MSAL overreporting the correct number of short sales for a particular section 1020B product on the relevant trading day.
Issue 3 resulted in a total of 19,310 individual section 1020B products (not distinct trades) being incorrectly reported to the Market Operator.
Issue 4 is that the logic used by MSAL to generate the Short Sale Report incorrectly excluded “unbooked principal positions” from the calculation of the total volume of Principal Short Sales. An “unbooked principal position” is a trade which has been executed on a licenced exchange, but not fully entered or agreed on MSAL’s downstream trading, risk or booking systems.
As with Issue 3, Issue 4 arose following the transition from the iBroker to SYNANG back office system on 14 June 2022. The testing conducted by MSAL prior to this transition did not test certain relevant scenarios, contrary to the requirements of the IT Change Enablement Standard, and as a result did not identify Issue 4.
Issue 4 was identified on 31 October 2022. On 21 December 2022, a logic update was implemented, after testing, to rectify Issue 4.
In respect of Issue 4 (and also each of Issues 5 to 9), MSAL was unable to provide ASIC with complete data identifying:
the total number of inaccurate Short Sale Reports which MSAL submitted to the Market Operator as a result of the relevant Issue;
the total number of instances in which MSAL failed to report to the Market Operator the correct number of covered short sales for a particular section 1020B product on the relevant trading days as a result of the relevant Issue; or
the total number of covered short sales incorrectly reported to the Market Operator on the relevant trading days on which inaccurate Short Sale Reports were submitted.
Instead, MSAL produced data in relation to a subset of trading days (selected by ASIC) across the period for which each of Issues 4 to 9 subsisted. For each such subset:
the parties have calculated the number of inaccurate Short Sale Reports submitted, the number of instances of MSAL failing to report to the Market Operator the correct number of covered short sales for a particular section 1020B product, and the number of covered short sales incorrectly reported to the Market Operator; and
based on those calculations, ASIC has estimated the total volume of individual section 1020B products incorrectly reported to the Market Operator for each of Issues 4 to 9.
Over a subset of five trading days analysed across the Relevant Period, Issue 4 resulted in MSAL submitting 65 inaccurate Short Sale Reports to the Market Operator in the period from 14 June 2022 to 15 December 2022, which contained at least 43 identified instances of MSAL failing to report the correct number of short sales for a particular section 1020B product. Issue 4 resulted in a total of 334,725 individual section 1020B products being incorrectly reported to the Market Operator over the subset of trading days analysed.
Based upon that subset, ASIC estimates that a total volume of between 2,610,855 and 4,351,425 individual section 1020B products (not distinct trades) were incorrectly reported to the Market Operator due to Issue 4.
Issue 5 is that the logic used by MSAL to generate the Short Sale Report incorrectly excluded principal buy trades in the execution of the Principal Replay Function, in circumstances where a “crossing” was executed on the ASX in which the buy-side related to a principal account and the sell-side was an agency client account that was not a short sale. (A “crossing” is a transaction in respect of which a trading participant acts on behalf of both the buying and selling clients to that transaction, or on behalf of a buying or selling client on one side of that transaction and as Principal on the other side.)
MSAL has not been able to identify why this logic existed.
Issue 5 was identified on 10 November 2022. On 21 December 2022, a logic update was implemented, after testing, to rectify Issue 5.
Issue 5 subsisted for a significant period of time because the Short Sale Reporting Process was not fit for purpose and no adequate controls were in place to ensure the accuracy of the data included in the Short Sale Report, contrary to the requirements of the Regulatory Reporting Policy.
Over a subset of 32 trading days analysed across the Relevant Period, Issue 5 resulted in MSAL submitting approximately 2,819 inaccurate Short Sale Reports to the Market Operator in the period from approximately October 2011 to 21 December 2022, which contained at least 34 identified instances of MSAL failing to report the correct number of short sales for a particular section 1020B product. Issue 5 resulted in a total of 645,159 individual section 1020B products being incorrectly reported to the Market Operator over the subset of trading days analysed.
Based upon that subset, ASIC estimates that a total volume of between 28,417,238 and 56,834,476 individual section 1020B products (not distinct trades) were incorrectly reported to the Market Operator due to Issue 5.
Issue 6 is that the logic used by MSAL to generate the Short Sale Report incorrectly replayed, as part of the Principal Replay Function, all principal trades on the ASX first, and then all principal trades on the Cboe Australia market, rather than replaying all principal trades executed on either market in chronological order.
Issue 6 arose from the time MSAL connected to the Cboe Australia market as a secondary market in October 2011.
The causes of Issue 6 included that MSAL failed to account for certain differences in the ASX and Cboe Australia formats, and a coding error introduced to the IT Portal as a result of inadequate testing and change management relating to the introduction of the Cboe Australia market.
Issue 6 subsisted for a significant period of time because the Short Sale Reporting Process was not fit for purpose and no adequate controls were in place to ensure the accuracy of the data included in the Short Sale Report, contrary to the requirements of MSAL’s Regulatory Reporting Policy.
Issue 6 was identified on 7 November 2022. On 21 December 2022, a logic update was implemented, after testing, to rectify Issue 6.
Over a subset of 32 trading days analysed across the Relevant Period, Issue 6 resulted in MSAL submitting approximately 2,819 inaccurate Short Sale Reports to the Market Operator in the period from approximately October 2011 to 21 December 2022, which contained at least 123 identified instances of MSAL failing to report the correct number of short sales for a particular section 1020B product. Issue 6 resulted in a total of 1,692,008 individual section 1020B products being incorrectly reported to the Market Operator over the subset of trading days analysed.
Based upon that subset, ASIC estimates that a total volume of between 107,133,518 and 149,055,330 individual section 1020B products (not distinct trades) were incorrectly reported to the Market Operator due to Issue 6.
Issue 7 is that the Short Sale Reports submitted by MSAL during the period from 11 December 2009 to 14 February 2024 did not always include principal market crossing trades completed after 5:00pm, agency short sale market crossing trades completed after 5:00pm, or amendments made to agency trades after 5:00pm.
The cause of Issue 7 included MSAL’s Short Sale Reporting Process relying only on data extracted from relevant systems at 5:00pm, and not also relying on data extracted from those systems at 8:00pm (which would have captured late trades or changes to trades that occurred after 5:00pm).
Issue 7 subsisted for a significant period of time because the Short Sale Reporting Process was not fit for purpose and no adequate controls were in place to ensure the accuracy of the data included in the Short Sale Report, contrary to the requirements of MSAL’s Regulatory Reporting Policy.
Issue 7 was identified on 8 February 2023 as a result of additional controls implemented by MSAL in order to remediate Issues 1 to 6. On 4 April 2023, a tactical solution was deployed; on 23 August 2023, a control (referred as the “Late Trade Alert”) was implemented; and from 15 February 2024, the B-feed aggregator process was completed twice a day so as to account for any late principal market crossing trades in SYNANG.
Over a subset of 32 trading days analysed across the Relevant Period, Issue 7 resulted in MSAL submitting four inaccurate Short Sale Reports to the Market Operator, which contained 71 identified instances of MSAL failing to report the correct number of short sales for a particular section 1020B product. Issue 7 resulted in a total of 5,634,621 individual section 1020B products being incorrectly reported to the Market Operator over the subset of trading days analysed.
Based upon that subset, ASIC estimates that a total volume of between 79,633,042 and 637,064,337 individual section 1020B products (not distinct trades) were incorrectly reported to the Market Operator due to Issue 7.
Issue 8 is that Short Sale Reports submitted by MSAL during the period from 11 December 2009 to 2 February 2023 were affected by an incorrect automatic adjustment process that was applied in the IT Portal when manual intraday bookings were made for short sell “direct market access” trades. This adjustment involved the total reported short sale volume being incorrectly adjusted downward. (A “direct market access” trade is where an order is entered on the exchange directly via a broker’s system, without the assistance of a sales trader.)
Issue 8 subsisted for a significant period of time because the Short Sale Reporting Process was not fit for purpose and no adequate controls were in place to ensure the accuracy of the data included in the Short Sale Report, contrary to the requirements of MSAL’s Regulatory Reporting Policy.
Issue 8 was identified on 2 February 2023. On the following day, MSAL implemented the Intra-day Bookings Report control to rectify the Issue.
Over a subset of 35 trading days analysed across the Relevant Period, Issue 8 resulted in MSAL submitting three inaccurate Short Sale Reports to the Market Operator, which contained three identified instances of MSAL failing to report the correct number of short sales for a particular section 1020B product. Issue 8 resulted in a total of 159,628 individual section 1020B products being incorrectly reported to the Market Operator over the subset of trading days analysed.
Based upon that subset, ASIC estimates that a total volume of between 1,311,947 and 15,306,045 individual section 1020B products (not distinct trades) were incorrectly reported to the Market Operator due to Issue 8.
Issue 9 is that some Short Sale Reports submitted by MSAL during the period from 11 December 2009 to 15 May 2023 were incomplete because the Reports were extracted prior to the completion of the steps in the Short Sale Reporting Process.
Issue 9 subsisted for a significant period of time because the Short Sale Reporting Process was not fit for purpose and no adequate controls were in place to ensure the accuracy of the data included in the Short Sale Report, contrary to the requirements of the Regulatory Reporting Policy.
Issue 9 was identified on 16 May 2023, as a result of additional controls being implemented in order to remediate Issues 1 to 6. On the same day, a manual solution was implemented; and on 1 June 2023, a control described as the “IT Portal Report Extraction Time Alert” was implemented.
Over a subset of 32 trading days analysed across the Relevant Period, Issue 9 resulted in MSAL submitting one inaccurate Short Sale Report to the Market Operator, which contained 182 identified instances of MSAL failing to report the correct number of short sales for a particular section 1020B product. Issue 9 resulted in a total of 5,942,129 short sales being incorrectly reported to the Market Operator over the subset of trading days analysed.
Based upon that subset, ASIC estimates that a total volume of between 19,874,797 and 635,993,495 individual section 1020B products (not distinct trades) were incorrectly reported to the Market Operator due to Issue 9.
The root causes of Issues 1 to 9 included at least the following matters:
MSAL’s failure to follow appropriate change management processes, and its failure appropriately to document relevant changes impacting the Short Sale Report or the logic used to generate the Short Sale Report;
MSAL’s failure to conduct adequate pre-implementation testing for changes impacting the Short Sale Report or the logic relied on to generate the Short Sale Report;
the underlying system logic used to generate the Short Sale Report or data mapping not being fit for purpose;
MSAL’s failure to implement appropriate detective controls to identify errors in its Short Sale Reports; and
inadequate process design for the Short Sale Reporting Process.
Pursuant to r 7.4.2 of the ASIC Market Integrity Rules (Securities Markets) 2017 made under s 798G(1) of the Corporations Act (Securities Markets Rules), MSAL was, as a participant in each of the ASX and the Cboe Australia market, required, during the period from 4 December 2017 until the end of the Relevant Period (Securities Markets Period), to report certain Regulatory Data to the Market Operator:
in each Order transmitted to an Order Book of the Market Operator; and
in each Trade Report made to the Market Operator, for each side of the transaction for which MSAL acted as agent on behalf of a client, or as principal.
(Capitalised terms are defined in the Securities Markets Rules).
The Regulatory Data required to be reported included the Intermediary ID, being the AFSL number of the AFSL holder for each side (buy and/or sell) of an order or transaction on which:
MSAL acted as agent for an “AOP Client” that was an AFSL holder; and
MSAL had an arrangement with the AFSL holder under which the AFSL holder was permitted to submit Trading Messages into MSAL’s system as intermediary for its own clients.
(AFSL Number Duty)
During the Securities Markets Period, the setting up of new client trading accounts, and any changes made to existing client trading accounts, were managed through Macquarie Group’s Document Approval System (DAS).
Set-up requests for approval in DAS contained a summary of information, which included the requester’s name; the relevant Macquarie Group booking entity; the capacity of the client; and whether the client was an intermediary and, if so, its AFSL number. Certain teams were then required to verify that relevant Regulatory Data details had been accurately recorded in MSAL’s static data system (being, prior to 12 September 2022, the “CDB” static data system and, from 12 September 2022, the SYNREF static data system).
Client trading account details were then created in a separate system, including the client’s AFSL number.
Once the client’s account was switched to active, MSAL’s market gateway system then populated the required Regulatory Data on its Orders and Trade Reports using static data obtained from a file which contained data extracted from the static data system.
I will refer to the steps outlined in paragraphs [113]-[116] above as the Regulatory Data Reporting Process.
MSAL had a number of controls which were directed towards various parts of the Regulatory Data Reporting Process, including automatically generated alerts, checks and reports designed to identify certain changes to particular data fields, periodic manual reviews, and daily reports. In addition, there were three further checks directed at data approvals and files which set out the parameters, permission values and rules for field validation approvals.
However, none of those controls was designed to ensure that the logic used to populate the Regulatory Data in Orders and Trade Reports had correctly identified whether or not the client had an AFSL number which was required to be included in Orders and Trade Reports and, if so, had correctly populated the client’s AFSL number.
Issue 10, which relates to the AFSL Number Duty, is that MSAL failed to provide the AFSL number (Intermediary ID) of the relevant AFSL holder for a number of Orders provided to the relevant Market Operator during the period from 16 November 2022 to 21 March 2023.
Issue 10 arose following changes made in relation to the extraction of data from the SYNREF system, which involved incorrect logic being applied when extracting from SYNREF the Regulatory Data field used by MSAL’s market gateway system to populate MSAL’s Orders and Trade Reports. That logic did not require the identity of the booking entity to be confirmed, including by checking and populating the client’s AFSL number.
This issue was identified by MSAL in March 2023 and was reported to ASIC. By June 2023, MSAL had implemented additional controls and further testing in relation to the Regulatory Data Reporting Process.
Issue 10 affected three accounts for two of MSAL’s clients, and resulted in MSAL’s failure to provide the AFSL number of the relevant AFSL holder for a total of 633,680 Orders provided to the relevant Market Operator.
The root causes of Issue 10 included:
MSAL’s failure to follow appropriate change control processes;
MSAL’s failure to conduct appropriate testing prior to implementing changes impacting systems or the logic relied on to generate its Orders and Trade Reports (including the Regulatory Data required to be included in those Orders and Trade Reports); and
MSAL’s failure to implement appropriate detective controls to identify errors in its Trade Reports or Orders as part of the Regulatory Data Reporting Process.
Those failures were contrary to the requirements of the IT Change Management Policy, IT Change Management Standard and IT Change Enablement Standard (see paragraph [33] above).
MSAL admits that, in the Contravention Period, it contravened s 798H(1) of the Corporations Act by reason of its breaches of each of rr 2.1.3, 5.5.2(b) and 7.4.2 of the Securities Markets Rules.
The parties have agreed that a single contravention arises in respect of the breach of each of those three rules, such that there were, in total, three separate contraventions of s 798H(1).
On 1 August 2010, Pt 7.2A of the Corporations Act, titled “Supervision of financial markets”, commenced. Part 7.2A relevantly includes ss 798G and 798H. Pursuant to s 798G(1), ASIC may, by legislative instrument, make market integrity rules that deal with the activities or conduct of licensed markets, persons in relation to licensed markets, and persons in relation to financial products traded on licensed markets.
As a participant in the licensed markets operated by ASX and Cboe, MSAL was required, pursuant to s 798H(1)(b) of the Corporations Act, to comply with the following market integrity rules made by ASIC (together, the Market Integrity Rules):
ASIC Market Integrity Rules (ASX Market) 2010 (ASX Market Rules), during the period from 1 August 2010 to 6 May 2018;
ASIC Market Integrity Rules (Chi-X Australia Market) 2011, during the period from 4 May 2011 to 6 May 2018; and
the Securities Markets Rules, from 4 December 2017 onwards.
During the Relevant Period, MSAL was required, pursuant to r 19.6.1 of the ASX Market Rules (up to and including 31 July 2010) and r 3501 of the ASX Operating Rules (on and from 1 August 2010), to provide to ASX a Short Sale Report containing the information required in the ASX Operating Rules Procedures and to provide such report by the time specified in the ASX Operating Rules Procedures.
Pursuant to r 2.1.3 of the Securities Markets Rules, MSAL was required, throughout the Contravening Period, to have appropriate supervisory policies and procedures in place to ensure compliance, by MSAL and each person involved in its business as a market participant, with the Market Integrity Rules, the operating rules of each relevant market, and the Corporations Act (Supervision Duty).
Pursuant to r 5.5.2(b) of the Securities Markets Rules, MSAL was required, throughout the Contravening Period, to have and maintain the necessary organisational and technical resources to ensure that MSAL complied at all times with the Market Integrity Rules and the operating rules of all markets in which it was a participant (Resourcing Duty).
Further, as set out at paragraphs [110]-[111] above, pursuant to r 7.4.2 of the Securities Markets Rules, MSAL was, during the Securities Markets Period, required to report to the Market Operators certain Regulatory Data, including the Intermediary ID of AFSL holders (where required), in each Order transmitted to an Order Book of the Market Operator and each Trade Report made to the Market Operator (being the AFSL Number Duty referred to in paragraph [111] above).
MSAL admits that, during the Contravention Period, it contravened s 798H(1)(b) of the Corporations Act by failing to take the steps it was required to take in order to comply with the Supervision Duty, by reason of the following matters:
MSAL failed to conduct appropriate reviews of the design of the Short Sale Reporting Process, including the logic relied on to generate the Short Sale Report, for the purpose of:
(a) identifying any errors in the logic relied on to generate the Short Sale Report; (b) identifying the frequency and nature of manual adjustments or interventions made for Short Sale Reports generated through the Short Sale Reporting Process; (c) assessing the suitability and efficacy of the Short Sale Reporting Controls; (d) identifying whether further controls directed towards identifying any errors in the Short Sale Reports submitted by MSAL to the Market Operator should be implemented; and (e) identifying any changes required to be made to the design of the Short Sale Reporting Process to address the matters referred to in sub-paragraphs (a)-(d) above;
MSAL admits that, during the Contravention Period, it contravened s 798H(1)(b) of the Corporations Act by failing to take the steps it was required to take in order to comply with the Resourcing Duty, by reason of the following matters:
the matters set out in paragraph [134(1)-(10)] above;
the design of the Short Sale Reporting Process and the systems used to prepare and submit the Short Sale Report relied too heavily on manual intervention and changes; and
the underlying system logic and data mapping used by the IT Portal to compile the Short Sale Report was not fit for purpose.
MSAL admits that, in the Contravention Period, it contravened s 912A(1)(h) of the Corporations Act. The parties have agreed that a single contravention arises in respect of MSAL’s breach of that provision.
During the Contravention Period, s 912A of the Corporations Act relevantly provided as follows:
General obligations
(1) A financial services licensee must:
…
(h) … have adequate risk management systems;
…
Civil penalty provision
(5A) A person contravenes this subsection if the person contravenes paragraph (1)(a), (aa), (ca), (cc), (d), (e), (f), (g), (h) or (j).
Note: This subsection is a civil penalty provision (see section 1317E).
In Australian Securities and Investments Commission v RI Advice Group Pty Ltd [2022] FCA 496 at [54], Rofe J observed that:
the notion of “adequacy” in s 912A(1)(h) “imports a normative standard of conduct against which the licensee’s performance can be judged”; and
the particular focus of s 912A(1)(h) is risk management systems and this necessarily placed focus, in the circumstances of that case, on the risks attaching to the means by which the financial services licensee operated its business and the necessity for the financial services licensee “to have ‘adequate’ systems to manage those risks”.
In the present case, the parties agree that the risks for MSAL included:
the risk that Short Sale Reports submitted by MSAL to a Market Operator might fail to meet the requirements of the Short Sale Reporting Obligations, including by:
(a) including incorrect data in the Short Sale Report; or (b) omitting data required to be included in the Short Sale Report; and
the risk that Trade Reports or Orders submitted by MSAL to a Market Operator might fail to comply with the AFSL Number Duty.
MSAL admits that, during the Contravention Period, it contravened s 912A(1)(h) of the Corporations Act by failing to take the measures identified in paragraph [134134(1)-(10)] above.
MSAL admits that, in the Contravention Period, it contravened s 1041H(1) of the Corporations Act. The parties have agreed that a single contravention arises in respect of MSAL’s breach of that provision.
During the Contravention Period, s 1041H(1) of the Corporations Act provided as follows:
Misleading or deceptive conduct (civil liability only)
(1) A person must not, in this jurisdiction, engage in conduct, in relation to a financial product or a financial service, that is misleading or deceptive or is likely to mislead or deceive.
“The central question is whether the impugned conduct, viewed as a whole, has a sufficient tendency to lead a person exposed to the conduct into error (that is, to form an erroneous assumption or conclusion about some fact or matter) … A number of subsidiary principles, directed to the central question, have been developed:
(a) First, conduct is likely to mislead or deceive if there is a real or not remote chance or possibility of it doing so …
(b) Second, it is not necessary to prove an intention to mislead or deceive …
(c) Third, it is unnecessary to prove that the conduct in question actually deceived or misled anyone … Evidence that a person has in fact formed an erroneous conclusion is admissible and may be persuasive but is not essential. Such evidence does not itself establish that conduct is misleading or deceptive within the meaning of the statute. The question whether conduct is misleading or deceptive is objective and the Court must determine the question for itself …
(d) Fourth, it is not sufficient if the conduct merely causes confusion …”
“Misleading and deceptive conduct takes many forms. The degree of the relationship between the financial product and the proscribed conduct is informed by the examples set out in s 1041H(2). They range from issuing a financial product (s 1041(2)(b)(i)) to carrying on negotiations or making arrangements or doing any other act preparatory to ‘or in any way related to’ an activity referred to in the nine earlier examples listed in that subsection: see s 1041H(2)(b)(x).
In our view this indicates that the relationship which is contemplated by s 1041H(1) is at the lower end of the spectrum so that an indirect or less than substantial connection is sufficient.”
The relevant conduct in this case was MSAL’s submission, during the Contravention Period, of 918 Short Sale Reports to ASX which incorrectly stated the total number of covered short sales for one or more section 1020B products executed on the ASX and/or the Cboe Australia market on the relevant trading day.
MSAL admits that a section 1020B product was a “financial product” within the meaning of s 763A of the Corporations Act, and that the conduct described above was “in relation to” a financial product.
MSAL further admits that the conduct described in paragraph [146] above was conduct that was misleading or deceptive, or which was likely to mislead or deceive, as to the number of covered short sales for a particular section 1020B product executed on the ASX and/or Cboe Australia markets on the relevant trading day during the Contravention Period.
ASIC does not allege that MSAL’s conduct was intentionally or deliberately false or misleading.
(1) If a Court is satisfied that a person has contravened a civil penalty provision, the Court must make a declaration of contravention.
(2) The declaration must specify the following:
(a) the Court that made the declaration;
(b) the civil penalty provision that was contravened;
(c) the person who contravened the provision;
(d) the conduct that constituted the contravention;
…
(3) In this Act:
(a) a provision specified in column 1 of the following table is a civil penalty provision; …
Section 798H(1) of the Corporations Act is, and has been at all times since its commencement on 1 August 2010, a civil penalty provision: s 1317E(3).
Since 13 March 2019 (when s 912A(5A) was inserted into the Corporations Act), and therefore throughout the Contravention Period, a contravention of s 912A(1)(h) has been a contravention of s 912A(5A), which is a civil penalty provision: s 1317E(3).
Section 1041H(1) is not a civil penalty provision, and therefore s 1317E does not apply in respect of MSAL’s contravention of that provision.
Section 75 of the Supreme Court Act 1970 (NSW) gives the Court a broad discretionary power to “make binding declarations of right whether any consequential relief is or could be claimed or not”.
In addition, the Court has inherent power to grant declaratory relief. In Ainsworth v Criminal Justice Commission (1992) 175 CLR 564 at 581-582; [1992] HCA 10, Mason CJ, Dawson, Toohey and Gaudron JJ described this as “a discretionary power which ‘[i]t is neither possible nor desirable to fetter … by laying down rules as to the manner of its exercise’”. Their Honours observed (at 582) that this power is, however, “confined by the considerations which mark out the boundaries of judicial power”, continuing as follows:
“Hence, declaratory relief must be directed to the determination of legal controversies and not to answering abstract or hypothetical questions. The person seeking relief must have ‘a real interest’ and relief will not be granted if the question ‘is purely hypothetical’, if relief is ‘claimed in relation to circumstances that [have] not occurred and might never happen’ or if ‘the Court's declaration will produce no foreseeable consequences for the parties’.”
The proposed declarations in the present case are not directed to answering abstract or hypothetical questions, but are directed to the determination of a legal controversy which, had MSAL not made admissions following the commencement of this proceeding, it would have been necessary for the Court to resolve.
As a public body responsible for monitoring and promoting market integrity and consumer protection in relation to the Australian financial system, with powers to investigate and enforce, inter alia, compliance by financial services licensees with their obligations under the Corporations Act and with the Securities Markets Rules, ASIC has a genuine interest in seeking the declaratory relief. Further, MSAL is a proper contradictor, because it is the subject of the declarations and therefore had an interest in opposing the declaratory relief sought: Australian Competition and Consumer Commission v MSY Technology Pty Ltd (2012) 201 FCR 378; [2012] FCAFC 56 at [30] (Greenwood, Logan and Yates JJ).
It cannot be said, in the circumstances of this case, that the proposed declaratory relief would not have any consequences for the parties. In Australian Building and Construction Commissioner v Construction, Forestry, Mining and Energy Union (2017) 254 FCR 68; [2017] FCAFC 113 (ABCC v CFMEU) at [93], the Full Court of the Federal Court (Dowsett, Greenwood and Wigney JJ) observed that declarations relating to contraventions of legislative provisions are likely to be appropriate where they serve to record the Court’s disapproval of the contravening conduct, vindicate the regulator’s claim that the respondent contravened the provisions, assist the regulator to carry out its duties, and deter other persons from contravening the provisions. I am satisfied that the declaratory relief sought in this case serves those purposes.
Finally, I am satisfied that the proposed declarations are in an appropriate form, as they are not bare statements that a provision of the Corporations Act has been contravened, but instead “specifically and succinctly identify the gist of the relevant conduct and its relationship to contravention”: Carbone v Fowler Homes Pty Ltd [2024] NSWCA 192 at [29]-[30] per Leeming JA (Ward P and Mitchelmore JA agreeing), referring to Australian Securities and Investments Commission v Youi Pty Ltd [2020] FCA 1701 at [69] per Allsop CJ.
For those reasons, I am satisfied that declarations of contravention should be made in the form proposed by the parties.
Court may order person to pay pecuniary penalty
(1) A Court may order a person to pay to the Commonwealth a pecuniary penalty in relation to the contravention of a civil penalty provision if:
(a) a declaration of contravention of the civil penalty provision by the person has been made under section 1317E; …
In determining the pecuniary penalty, the Court must take into account all relevant matters, including:
(a) the nature and extent of the contravention; and
(b) the nature and extent of any loss or damage suffered because of the contravention; and
(c) the circumstances in which the contravention took place; and
(d) whether the person has previously been found by a court (including a court in foreign country) to have engaged in similar conduct; …
“1. The nature and extent of the contravening conduct.
- The amount of loss or damage caused.
- The circumstances in which the conduct took place.
- The size of the contravening company.
- The degree of power it has, as evidenced by its market share and ease of entry into the market.
- The deliberateness of the contravention and the period over which it extended.
- Whether the contravention arose out of the conduct of senior management or at a lower level.
- Whether the company has a corporate culture conducive to compliance with the Act, as evidenced by educational programs and disciplinary or other corrective measures in response to an acknowledged contravention.
- Whether the company has shown a disposition to co-operate with the authorities responsible for the enforcement of the Act in relation to the contravention.”
“It may readily be seen that this list of factors includes matters pertaining both to the character of the contravening conduct (such as factors 1 to 3) and to the character of the contravenor (such as factors 4, 5, 8 and 9). It is important, however, not to regard the list of possible relevant considerations as a ‘rigid catalogue of matters for attention’ as if it were a legal checklist. The court’s task remains to determine what is an ‘appropriate’ penalty in the circumstances of the particular case.”
In Australian Competition and Consumer Commission (ACCC) v Employsure Pty Ltd [2023] FCAFC 5 at [42], the Full Court of the Federal Court (Rares, Stewart and Abraham JJ) observed that the process of determining an appropriate penalty involves “an intuitive or instinctive synthesis of all of the relevant factors”, adding that: “[i]nstinctive synthesis is the method by which the judge identifies all the factors that are relevant to the penalty and, after weighing all of those factors, reaches a conclusion that a particular penalty is the one that should be imposed” (see also Public Service Association and Professional Officers' Association Amalgamated Union of New South Wales v Industrial Relations Secretary (2018) 96 NSWLR 762; [2018] NSWCA 39 at [150] per Bathurst CJ (with whom Gleeson and Simpson JJA agreed)).
In Australian Building and Construction Commissioner v Construction, Forestry, Mining and Energy Union (2018) 262 CLR 157; [2018] HCA 3 at [116], Keane, Nettle and Gordon JJ observed that, in considering whether a penalty achieves the object of “specific deterrence of the contravener and, by his or her example, general deterrence of other would-be contraveners”, it is necessary to consider the extent of the “sting or burden” which the penalty imposes on the contravener. Their Honours said that:
“Other things being equal, it is assumed that the greater the sting or burden of the penalty, the more likely it will be that the contravener will seek to avoid the risk of subjection to further penalties and thus the more likely it will be that the contravener is deterred from further contraventions; likewise, the more potent will be the example that the penalty sets for other would-be contraveners and therefore the greater the penalty’s general deterrent effect. Conversely, the less the sting or burden that a penalty imposes on a contravener, the less likely it will be that the contravener is deterred from further contraventions and the less the general deterrent effect of the penalty. Ultimately, if a penalty is devoid of sting or burden, it may not have much, if any, specific or general deterrent effect, and so it will be unlikely, or at least less likely, to achieve the specific and general deterrent effects that are the raison d’être of its imposition.”
In Commonwealth v Director, Fair Work Building Industry Inspectorate (2015) 258 CLR 482; [2015] HCA 46 (Cth v Fair Work Building), French CJ, Kiefel, Bell, Nettle and Gordon JJ summarised the principles that apply in circumstances where the parties to a civil penalty proceeding have settled that proceeding, and have agreed, and have jointly proposed, a penalty to the Court. Those principles include that:
there is an important public policy involved in promoting predictability of outcome in civil penalty proceedings, and the practice of receiving and, if appropriate, accepting agreed penalty submissions increases the predictability of outcome for regulators and wrongdoers (at [46]);
such predictability of outcome encourages corporations to acknowledge contraventions, which, in turn, assists in avoiding lengthy and complex litigation and thus tends to free the courts to deal with other matters and to free investigating officers to turn to other areas of investigation that await their attention (at [46]);
because fixing the quantum of a civil penalty is not an exact science, there is a permissible range in which “courts have acknowledged that a particular figure cannot necessarily be said to be more appropriate than another” (at [47]);
accordingly, the Court will not depart from the submitted figure “merely because it might otherwise have been disposed to select some other figure” (at [47]);
however, the Court is not bound by the figure suggested by the parties (at [48]);
the question for the Court is “whether their proposal can be accepted as fixing an appropriate amount” and, for that purpose, the Court must satisfy itself that the submitted penalty is appropriate (at [48]); and
subject to the Court being sufficiently persuaded of the accuracy of the parties’ agreement as to facts and consequences, and that the penalty which the parties propose is an appropriate remedy in the circumstances thus revealed, it is consistent with principle and highly desirable in practice for the Court to accept the parties’ proposal and therefore impose the proposed penalty (at [58]).
Their Honours added (at [60]) that “it is the function of the relevant regulator to regulate the industry in order to achieve compliance and, accordingly, it is to be expected that the regulator will be in a position to offer informed submissions as to the effects of contravention on the industry and the level of penalty necessary to achieve compliance”. Similarly, Keane J observed (at [109]) that the regulator’s decision that a particular remedy is appropriate “can be expected to reflect a pragmatic assessment by the authority charged by the legislature with the effective investigation and enforcement of the regulatory regime that the public interest is best served by bringing the proceedings to a conclusion on agreed terms as to penalty”, and that such a decision “may be informed by a perceived need to conserve resources for the pursuit of other wrongdoing and wrongdoers, and to avoid the risks and uncertainties usually associated with litigation”.
(4) The pecuniary penalty applicable to the contravention of a civil penalty provision by a body corporate is the greatest of:
(a) 50,000 penalty units; and
(b) if the Court can determine the benefit derived and detriment avoided because of the contravention—that amount multiplied by 3; and
(c) either:
(i) 10% of the annual turnover of the body corporate for the 12‑month period ending at the end of the month in which the body corporate contravened, or began to contravene, the civil penalty provision; or
(ii) if the amount worked out under subparagraph (i) is greater than an amount equal to 2.5 million penalty units—2.5 million penalty units.
As regards s 1317G(4)(a), the value of a penalty unit is set by s 4AA of the Crimes Act 1914 (Cth). During the Contravening Period, the value of a penalty unit was:
$210, in the period from 14 May 2019 to 30 June 2020;
$222, in the period from 1 July 2020 to 31 December 2022;
$275, in the period from 1 January 2023 to 30 June 2023; and
$313, in the period from 1 July 2023 to 14 February 2024.
As the parties noted in their joint submissions, it is not a straightforward exercise to calculate the amount of 50,000 penalty units per contravention in the present case, given the parties’ agreement that the conduct during the course of the Contravening Period by which MSAL breached the Supervising Duty, the Resourcing Duty, the AFSL Number Duty, and its obligations under s 912A(1)(h) of the Corporations Act constituted, in each case, a single contravention of the relevant provision. However, the maximum penalty per contravention, based upon 50,000 penalty units, would range from $10.5 million (based upon $210 per penalty unit) to $15.65 million (based upon $313 per penalty unit).
As regards s 1317G(4)(b), the parties agree that there is no evidence of any benefit derived or detriment avoided because of any of the contraventions. This paragraph can therefore be put to one side.
As regards s 1317G(4)(c)(i), the “annual turnover” of a body corporate is defined in s 9 of the Corporations Act to include “the sum of the values of all the supplies that the body corporate, and any body corporate related to the body corporate, have made, or are likely to make, during the 12-month period” (excluding certain specified supplies such as supplies outside of Australia).
It follows that, in order to determine “annual turnover” for the purposes of s 1317G(4)(c)(i), it is necessary to have regard to the annual turnover of Macquarie Group (other than turnover arising from supplies outside Australia). In this regard, the parties agree that:
between 2019 and 2024, Macquarie Group’s total annual turnover (total fee and commission income including from supplies outside Australia) ranged between $5.17 billion and $6.89 billion;
data showing turnover outside Australia is, however, not available; and
therefore, a calculation in accordance with s 1317G(4)(c)(i) is not practicable.
Nonetheless, the parties agree that the Court may proceed on the basis that the 10% turnover figure would be greater than 50,000 penalty units, and therefore it applies as the maximum penalty per contravention.
In at [54], the plurality emphasised that “the maximum penalty is ‘but one yardstick that ordinarily must be applied’ and must be treated ‘as one of a number of relevant factors’” (quoting from the decision of the Full Court of the Federal Court (Jagot, Yates and Bromwich JJ) in [2016] FCAFC 181 at [155]-[156]).
The contraventions concern deficiencies in the systems, processes and controls on which MSAL relied to comply with the Short Sale Reporting Obligations and the AFSL Number Duty.
The agreed facts establish that although, at all times since the introduction of those obligations, MSAL had in place systems, processes and controls which were directed to complying with those obligations, there were serious deficiencies in those systems, processes and controls, and those deficiencies gave rise to the admitted contraventions.
As has been outlined above, MSAL failed to put in place appropriate controls directed towards identifying errors in its Short Sale Reporting Process and its Regulatory Data Reporting Process, and failed to conduct appropriate testing in connection with changes to systems relied on to comply with its Short Sale Reporting Obligations. Further, the underlying system logic and mapping used by the IT Portal to compile the Short Sale Reports were not fit for purpose.
Further, MSAL admits that its Short Sale Reporting Process as a whole, which involved multiple information technology systems, was not fit for purpose during the Contravention Period.
This was a serious deficiency. MSAL relied on its Short Sale Reporting Process for the purpose of complying with its statutory reporting obligations. MSAL’s failure to ensure that this Process was fit for purpose was contrary to the requirements of its own Regulatory Reporting Policy.
A number of the internal reviews conducted by MSAL pursuant to the RCSA process, both before and during the Contravening Period, had identified that there was a risk of misreporting in respect of short sales, given the number of manual processes involved in the Short Sale Reporting Process, and that there was a need to improve the control environment due to “ongoing short selling transaction issues which persisted for a long period of time”. Despite those matters being raised in the RCSA reviews, no changes were made to the Short Sale Reporting Process or Short Sale Reporting Controls, nor was any detailed end-to-end review of the Short Sale Reporting Process conducted, prior to Issues 1 to 6 being identified in October 2022.
The following table, which is adopted from the parties’ joint written submissions, sets out the time at which each of the Issues commenced; the time when it was identified; the time when steps were taken to remediate the Issue; the period within which the Issue had an impact; and the period between its identification and remediation:
| Issue | Commencement | Identification | Steps taken to remediate issue | Duration of Impact | Period from identification to remediation | | Short Sale Reporting Issues | | Issue 1 | 23 May 2022 | 5 October 2022 | 5 October 2022 (Manual Storm Booking Check control) | ~4.5 months | <1 day | | 21 December 2022 (update to IT Portal logic) | 77 days | | Issue 2 | 11 December 2020 | 27 October 2022 | 27 October 2022 (tactical, manual solution) | 1 year, 10 months | <1 day | | 21 December 2022 (update to IT Portal logic) | 55 days | | Issue 3 | 14 June 2022 | 2 November 2022 | 29 November 2022 (implementation of a fix on the Cboe adaptor) | 5.5 months | 27 days | | Issue 4 | 14 June 2022 | 31 October 2022 | 21 December 2022 (update to IT Portal logic) | 6 months | 51 days | | Issue 5 | ~October 2011 | 10 November 2022 | 21 December 2022 (update to IT Portal logic) | ~11 years, 2 months | 41 days | | Issue 6 | 31 October 2011 | 7 November 2022 | 21 December 2022 (update to IT Portal logic) | ~11 years, 2 months | 44 days | | Issue 7 | 11 December 2009 | 8 February 2023 | 4 April 2023 (tactical solution, where an email was automatically generated in the event a late short sell occurred) | 14 years 2 months | 55 days | | 23 August 2023 (Late Trade Alert control) | 6.5 months | | 15 February 2024 (change to B-feed aggregator process) | 1 year | | Issue 8 | 11 December 2009 | 2 February 2023 | 3 February 2023 (Intra-Day Manual Bookings Report control) | 13 years 2 months | 1 day | | August 2023 (automation of Intra-Day Manual Bookings Report control) | 6 months | | Issue 9 | 11 December 2009 | 16 May 2023 | 16 May 2023 (manual solution) | 13 years 5 months | <1 day | | 1 June 2023 (IT Portal Report Extraction Time Alert control) | 16 days |
As set out in this table, MSAL’s Short Sale Reports were affected by one or more of Issues 1 to 9 for a total period of more than fourteen years. (However, as noted above, the Contravening Period is a period of around four and a half years, from 14 May 2019 to 14 February 2024.)
Issue 1 was identified by MSAL following an investigation commenced on 5 October 2022 in relation to a potential error in the Short Sale Reports. Issues 2 to 6 were only identified by MSAL while conducting a review of the logic used to generate the Short Sale Report after MSAL had identified Issue 1. Issues 7 to 9 were only identified by MSAL in 2023, as a result of additional controls implemented by MSAL to remediate Issues 1 to 6.
MSAL reported each of these Issues to ASIC following their identification.
As the above table shows, this was not a case where issues were known, or suspected, but being deliberately ignored. In each case, MSAL took action designed to remediate the Issues immediately after they were identified, including by implementing manual fixes, logic updates and automated controls. In the case of half of the Issues, steps were taken to begin remediation within one day of identification, with only Issues 3 to 7 taking a number of weeks or months to develop, test, and implement a remediative logic update.
In a number of cases, the steps taken by MSAL in response to the identification of an Issue were aimed not only at addressing the particular Issue but also at strengthening MSAL’s Short Sale Reporting Process and systems more broadly, in order to ensure the accuracy of its Short Sale Reports going forward.
I have referred, in paragraphs [54]-[108] above, to the extent (or estimated extent) to which MSAL’s Short Sale Reports to the Market Operator were impacted by each of the Issues, and the total volume (or estimated total volume) of individual section 1020B products (not distinct trades) which were incorrectly reported to the Market Operator due to each of the Issues. In addition, I have referred at paragraph [123] above to the extent to which Issue 10 resulted in MSAL’s failure to provide the AFSL number of the relevant AFSL holder in respect of Orders provided to the relevant Market Operator.
The seriousness of the contravening conduct is established not only by reference to the extent to which MSAL failed to provide the Market Operator with accurate data with respect to its short sales, but also by reference to the potential effects of its failure to do so. As noted at paragraphs [18]-[21] above, accurate short sale data is important for the efficient operation of the ASX and the Cboe Australia market, and may be used and relied upon by several categories of individuals and entities, who make decisions on the assumption that the data is accurate and reliable.
The Explanatory Memorandum to the Corporations (Cth), by which the Short Sale Reporting Obligations were introduced, stated (at [5.8]) as follows:
“The objective of Government action in this area is to increase transparency surrounding the activity of covered short sellers in Australian securities. This would provide useful information to investors and regulators and also contribute to confidence and market integrity. In particular, disclosure of covered short selling activity:
will provide an early signal that individual securities may be overvalued;
will indicate that a proportion of the sales in an individual security will need to be reversed by new purchases (to cover the short seller’s settlement obligations);
will enhance investors’ willingness to participate in the market by removing uncertainty surrounding the level of short selling; and
may deter market abuse or reduce the opportunities for market abuse.”
The parties are not aware of any financial loss suffered by any market participant by reason of MSAL’s inaccurate reporting. Nonetheless, MSAL acknowledged that its contravening conduct did result in harm, insofar as it may have impacted both:
the effective operation of the ASX and the Cboe Australia market, given the various ways in which Short Sale Reports may be used, and the potential for traders, investors, companies, regulators and the general public to be misled by inaccurate data; and
ASIC’s market surveillance activities.
MSAL is a subsidiary of Macquarie Group which had, as at 4 February 2026, a market capitalisation of approximately $82.64 billion.
MSAL’s total fee and commission income, non-salary technology expenses, operating profits and losses before income tax, and net profits and losses after income tax for each year ended 31 March 2019 to 31 March 2024 were approximately as follows:
| Year | Total fee and commission income ($m) | Net operating income ($m) | Non-salary technology expenses ($m) | Operating losses and profits before income tax ($m) | Losses and profits after income tax ($m) | | 2019 | $107.7 | $105.9 | $3.2 | $35.6 | $22.7 | | 2020 | $105.3 | $95.9 | $3.9 | $23 | $16.3 | | 2021 | $228.6 | $109.5 | $3.9 | $26.1 | $18.5 | | 2022 | $335.8 | $101.5 | $5.8 | ($4.4) | ($2.7) | | 2023 | $317 | $86.9 | $5.3 | ($28.2) | ($19.4) | | 2024 | $316.1 | $76.1 | $7.5 | ($36.4) | ($25.2) |
| Year | Total fee and commission income ($m) | Net operating income ($m) | Non-salary technology expenses ($m) | Operating losses and profits before income tax ($m) | Losses and profits after income tax ($m) | | 2019 | $5,526 | $12,754 | $684 | $3,867 | $2,988 | | 2020 | $5,837 | $12,325 | $749 | $3,454 | $2,726 | | 2021 | $5,176 | $12,774 | $781 | $3,907 | $3,008 | | 2022 | $6,887 | $17,324 | $926 | $6,539 | $4,953 | | 2023 | $6,588 | $19,122 | $1,092 | $6,992 | $5,168 | | 2024 | $6,249 | $16,887 | $1,163 | $4,826 | $3,535 |
ASIC did not, in the joint written submissions, advance any contention that MSAL does not have a corporate culture conducive to compliance with its obligations under the Corporations Act.
However, in oral address, Senior Counsel for ASIC submitted that “[MSAL’s] longstanding failures in its systems, processes and controls are consistent with a corporate culture that, historically speaking, had not prioritised compliance for regulatory reporting” (emphasis added).
As noted above, MSAL has admitted that there were failures in its systems, processes and controls during the Relevant Period. However, Senior Counsel for MSAL submitted that the Court should not make any adverse finding about MSAL’s historical corporate culture, as any such finding would be inconsistent with a number of agreed facts or joint submissions to the effect that MSAL sought to comply with its obligations throughout the Relevant Period (albeit that it failed to achieve, or to take adequate measures to achieve, this objective).
I accept MSAL’s submission. The agreed facts or joint submissions include, by way of example only, the following statements (emphasis added):
“At all relevant times MSAL had in place systems, controls and processes directed to ensuring its compliance with its regulatory obligations, but those systems, controls and processes included serious deficiencies and fell short of the requisite standard”;
“During the Relevant Period, MSAL had a policy and procedure framework which was directed to seeking to comply with its Short Sale Reporting Obligations and the AFSL Number Duty”;
“MSAL had in place systems, controls and processes aimed at ensuring compliance with its Short Sale Reporting Obligations”; and
the various reviews conducted by MSAL during the Relevant Period “were designed to ensure MSAL was complying with its statutory obligations and were directed at ensuring the accuracy of the information contained in the Short Sale Report”.
For those reasons, I do not make any finding to the effect that MSAL had, in the Relevant Period, a corporate culture which did not prioritise compliance with its reporting obligations.
MSAL acknowledges and accepts responsibility for the conduct that gave rise to the agreed contraventions, and accepts that there were errors in its Regulatory Data and Short Sale Reports.
At the commencement of the hearing, Senior Counsel for MSAL stated that her client “unreservedly” apologised to market participants (including all users reliant on accurate short sale data), to ASIC and to the Court “for the shortcomings in Macquarie Securities systems and process which gave rise to inaccuracies in its short sale and regulatory data reporting”, acknowledging that that the relevant conduct was significant; that “the conduct ought not have occurred”; and that “when it did occur, it ought not to have occurred for as long as it did in those instances where it went on for quite some time”.
MSAL’s contrition is further demonstrated by the fact that it has already commenced work on the proposed compliance program that is referred to below, and by its co-operation with ASIC in relation to both its investigation and this proceeding.
ASIC acknowledged that:
MSAL fully cooperated with ASIC in relation to its investigation in relation to the matters which are the subject of this proceeding;
following the commencement of this proceeding, MSAL engaged openly and transparently with ASIC, including prior to the first directions hearing; and
MSAL provided voluntary assistance during the settlement process, including by making admissions in relation to the conduct very early in the proceeding and prior to filing any defence, meeting with ASIC to discuss the subject matter of the contravening conduct on multiple occasions, and assisting ASIC with the preparation of the SOAF.
This conduct on the part of MSAL has avoided the need for a contested proceeding on liability and relief and has facilitated the efficient and cost-effective resolution of the proceeding.
I accept the parties’ joint submission that, in light of MSAL’s early acceptance of wrongdoing after the commencement of the proceeding, its sustained cooperation during the proceeding, and its contrition, MSAL is entitled to a discount on penalty.
In circumstances where there are multiple contraventions, the assessment of an appropriate total penalty requires consideration of the “course of conduct” principle and the “totality” principle. Each of these principles is “concerned to ensure that an offender or contravener is not punished more than the law requires that they deserve in all of the circumstances of their past conduct”; in other words, each is “concerned with the reasonableness, appropriateness, or proportionality of the penalty in relation to the seriousness of the contravention in light of all the circumstances”: Pattinson at [97] per Edelman J.
In an appropriate case involving multiple contraventions, the Court should consider whether those multiple contraventions arose from a course or separate courses of conduct. If the contraventions arose out of a course of conduct, the penalties imposed in relation to the contraventions should generally reflect that fact, otherwise there is a risk that the respondent will be doubly punished in respect of the relevant acts or omissions that make up the multiple contraventions: ABCC v CFMEU at [148].
In the present case, there is, as the parties jointly submitted, an overlap between the factual elements of the contraventions of s 798H(1)(b) in respect of MSAL’s breaches of each of the Supervision Duty and the Resourcing Duty and its contravention of s 912A(1)(h). In particular, the same set of failures on MSAL’s part, across the same period of time, are admitted to give rise to each of those contraventions: see paragraphs [134], [135] and [141] above. I have taken the extent of this relationship between the contraventions into account in determining whether the proposed total penalty figure is appropriate.
In cases where there are multiple contraventions, the totality principle is applied as a “final check”. This is to ensure that, overall, the penalty is appropriate and that the sum of the penalties imposed for several contraventions does not result in the total of the penalties exceeding what is proper having regard to the totality of the contravening conduct involved: Australian Securities and Investments Commission v Wooldridge [2019] FCAFC 172 at [26] (Greenwood, Middleton and Foster JJ). This principle has been repeatedly applied in relation to civil penalties to ensure that the penalty is proportionate to the gravity of the contraventions, and is just and appropriate: Pattinson at [94] per Edelman J. I have also had regard to this principle, and have considered the appropriateness of the proposed penalty of $35m in light of the seriousness of the contravention, including the nature, the duration, and the potential effects of the contravening conduct.
MSAL submitted in oral address, and ASIC did not dispute, that the civil penalty case which was “the closest in facts to this case” was Australian Securities and Investments Commission v Commonwealth Securities Limited [2022] FCA 1253. The defendants in that case were two subsidiaries of the Commonwealth Bank of Australia – namely, Commonwealth Securities Limited (CommSec) and Australian Investment Exchange Limited (AUSIEX). Each of those entities was a financial services licensee and a market participant in the ASX and Chi-X financial markets and, as such, was subject to the Market Integrity Rules.
Each of CommSec and AUSIEX admitted that it had contravened ss 798H and 912A(1)(a) of the Corporations Act. In addition, CommSec admitted that it had contravened s 12DB of the Australian Securities and Investments Commission Act 2001 (Cth). The contravening conduct spanned a period of around four-and-a-half years and arose from failures such as information technology system coding or systems issues, human error or data entry errors. Abraham J stated (at [8]) that:
“The number, breadth and duration of the Reported Conduct when viewed in totality is significant and indicates the entities did not have adequate systems and processes in place to ensure compliance with their relevant obligations under their AFSLs and pursuant to the Market Integrity Rules and consequently, the Corporations Act (and additionally for CommSec, the ASIC Act).”
In Commonwealth Securities, as in the present case, ASIC did not allege that any of the contraventions was deliberate, or that the conduct involved senior management of CommSec or AUSIEX. Again, as in the present case, both entities had co-operated with ASIC, had expressed contrition for the contravening conduct, had taken steps to address the issues the subject of the conduct, and had also agreed to an ongoing compliance program (at [10]).
In the circumstances of that case, Abraham J determined that the pecuniary penalties proposed by the parties in respect of the admitted contraventions were appropriate, being a penalty of $20m in respect of CommSec, and a penalty of $7.12m in respect of AUSIEX (at [120]).
I am satisfied that a pecuniary penalty in the total amount of $35m will provide the necessary sting or burden to achieve the objects of specific deterrence and general deterrence. It is a very substantial sum of money that will not be regarded by MSAL or by others as a cost of doing business. It reflects the seriousness of the contravening conduct, having regard to the important objectives of the Short Sales Reporting Obligations; the extent of the deficiencies in MSAL’s systems, processes and controls over a number of years; the failures by MSAL to follow its own policies and to address issues identified in the course of reviews; the duration of the contravening conduct; and the potential adverse effects of the inaccurate reporting of short sales data on the efficient operation of the market over an extended period of time.
I am also satisfied that the level of penalty takes into account that the contravening conduct was not deliberate, and did not involve senior management; that MSAL reported the Issues to ASIC and took steps to remediate them upon their being identified; and that MSAL is entitled to a discount on penalty by reason of its co-operation with ASIC, both during the investigation stage and throughout the course of this proceeding.
Having regard to all the circumstances of this case, I am satisfied that a pecuniary penalty in a total amount of $35m is proportionate to the gravity of MSAL’s contraventions, and is just and appropriate.
(1) The Court may make such order, or orders, as it thinks fit if:
(a) on the application of ASIC, it appears to the Court that a person:
(i) has contravened a provision of this Chapter, or any other law relating to dealing in financial products or providing financial services; or
(ii) has contravened a condition of an Australian market licence, Australian CS facility licence, Australian derivative trade repository licence or Australian financial services licence; or
(iii) has contravened a provision of the operating rules, or the compensation rules (if any), of a licensed market; or
(v) has contravened a condition on an exemption from the requirement to hold an Australian market licence or an Australian CS facility licence; or
(vi) is about to do an act with respect to dealing in financial products or providing a financial service that, if done, would be such a contravention…”
Although s 1101B grants the Court broad discretionary power, it does not operate “at large” but rather must be exercised judicially having regard to the text, context and purpose of the Corporations Act: Australian Securities and Investments Commission v Westpac Banking Corporation (No 3) [2018] FCA 1701 at [183] (Beach J). Given that this is a power that must relate to a contravention, a compliance program can be readily accommodated within its scope as an order designed to ensure that a contravention of a similar kind does not occur again: ibid.
An order pursuant to s 1101B may be both backward-looking and forward looking. In Australian Securities and Investments Commission v AMP Financial Planning Pty Ltd (No 2) [2020] FCA 69 at [236], Lee J observed that:
“The backward-looking orders attempt to go some way to repair the harm that has been done by ensuring affected clients have been adequately compensated. The forward-looking orders are aimed at supplementing the penalties and ensuring specific deterrence in guarding against the possibility of the contravening conduct happening again.”
“1. Whether it is necessary in light of the particular circumstances of the contravention, other relief proposed to be granted, and in particular in light of any existing compliance program and steps taken since the contravention occurred…;
- Whether a clear benefit will be delivered, in relation to the respondent’s future conduct. Where there is evidence of a compliance program or training in place, in the face of prolonged and deliberate violation of trade practices laws, such an order may be entirely appropriate to safeguard against future violations…;
- Whether the scope of the proposed order is focussed on the particular contravening conduct…;
- That the scope of the order be adequately defined to enable it to be easily ascertained whether the order has not been complied with…;
- That the scope of the order be within the court’s powers.”
“As a general rule, mandatory orders should be expressed with sufficient precision to enable a breach of the order to be readily ascertained and effectively punished. Neither the parties nor the Court should be left, as a general rule, with uncertainty as to the scope and limits of the obligations imposed by the order. On the other hand, the Court must respect the legislative intention reflected in the definition of ‘probation order’ in s 86C which plainly contemplates that the Court will make directions for the undertaking of compliance programs where it will be neither practicable nor useful to prescribe with minute particularity the content of such programs.”
The parties have agreed a proposed form of order for a compliance plan.
I am satisfied that the proposed order is designed to prevent repetition of the contravening conduct. It is directed at an assessment of MSAL’s systems, policies, procedures and controls, with the aim of addressing the root causes of the Issues that are the subject of this proceeding and thereby preventing a future contravention of s 798H(1) or s 912A(1)(h) of the Corporations Act. Further, I am satisfied that the scope of the order sought is adequately defined and particularised, so as to balance prescription and workability.
In these orders, the following definitions apply:
ASIC means the plaintiff, the Australian Securities and Investments Commission.
ASX means the financial market known as “ASX” operated by ASX Limited ACN 008 624 691.
ASX Limited means ASX Limited ACN 008 624 691.
Cboe means Cboe Australia Pty Limited ACN 129 584 667 (formerly known as Chi-X Limited).
Cboe Australia means the financial market known as “Cboe Australia” and operated by Cboe.
Contravention Period means the period from 14 May 2019 to 14 February 2024.
Corporations Act means Corporations Act 2001 (Cth).
Corporations Regulations means Corporations Regulations 2001 (Cth).
Intermediary ID has the meaning provided by r 7.4.4 of the Securities Markets Rules.
Logic means the sequence of operations encoded within MSAL or the Macquarie Group’s computer software that determines the data inputs and flow of operations applied to that data.
Market Operator means:
ASX Limited, in respect of the financial market known as the ASX; and
Cboe, in respect of the financial market known as Cboe Australia.
MSAL means the defendant, Macquarie Securities (Australia) Limited ACN 002 832 126.
Order has the meaning given to that term in r 1.4.3 of the Securities Markets Rules.
Order Book has the meaning given to that term in r 1.4.3 of the Securities Markets Rules.
Regulatory Data has the meaning given to that term in r 7.4.4 of the Securities Markets Rules.
section 1020B product has the meaning set out in s 1020B(1) of the Corporations Act.
Securities Markets Rules means ASIC Market Integrity Rules (Securities Markets) 2017 made under s 798G(1) of the Corporations Act.
Short Sale Report has the meaning set out in paragraph [85] of the Statement of Agreed Facts.
Short Sale Reporting Controls has the meaning set out in paragraph [110] of the Statement of Agreed Facts.
Short Sale Reporting Process has the meaning set out in paragraph [102] of the Statement of Agreed Facts.
Statement of Agreed Facts means the Statement of Agreed Facts filed in this proceeding.
Trade Report has the meaning given to that term in r 7.4.4 of the Securities Markets Rules.
(a) MSAL failed to conduct appropriate reviews of the design of the Short Sale Reporting Process for the purpose of identifying and/or assessing the matters set out in paragraph [82.1] of the Statement of Agreed Facts; (b) MSAL failed to implement regular or appropriate reviews of the quality of the output of the Short Sale Reporting Process, including reviews of the kind identified in paragraph [82.2] of the Statement of Agreed Facts; (c) MSAL failed to implement regular or appropriate reviews of the quality of the output of the Regulatory Data included in Orders and Trade Reports submitted by MSAL to the Market Operator; (d) MSAL did not have in place appropriate controls directed towards identifying errors in the Short Sale Reports submitted by MSAL to the Market Operator; (e) MSAL did not have in place appropriate controls directed towards identifying errors in the Regulatory Data required to be included in Orders and Trade Reports submitted by MSAL to the Market Operator; (f) MSAL failed to conduct regular or appropriate reviews of relevant controls applied to the Short Sale Reporting Process, including the Short Sale Reporting Controls, to assess the efficacy and sufficiency of those controls; (g) MSAL failed to conduct appropriate reviews of controls applied in relation to generating the Regulatory Data included in Orders and Trade Reports submitted by MSAL to the Market Operator to assess the efficacy and sufficiency of those controls; (h) MSAL did not, at all times, enforce proper change management controls for changes made to information technology systems and/or logic relied on by MSAL:
(i) to generate the Short Sale Report, including the systems identified in paragraph [101] of the Statement of Agreed Facts; and (ii) to record, where required, the AFSL number in Orders and/or Trade Reports submitted to the Market Operator, including the systems identified in paragraphs [149] to [151] of the Statement of Agreed Facts;
(i) MSAL failed to implement appropriate testing or reviews, including failing to undertake appropriate preventative control testing as part of user acceptance testing, prior to deploying changes to information technology systems relied on by MSAL:
(i) to generate the Short Sale Report, including the systems identified in paragraph [101] of the Statement of Agreed Facts; and (ii) to record, where required, the AFSL number in Orders and/or Trade Reports submitted to the Market Operator, including the systems identified in paragraphs [149] to [151] of the Statement of Agreed Facts;
(j) MSAL failed to implement appropriate testing or reviews, including appropriate detective control testing, following the implementation of changes made to information technology systems relied on by MSAL:
(i) to generate the Short Sale Report, including the systems identified in paragraph [101] of the Statement of Agreed Facts; and (ii) to record, where required, the AFSL number in Orders and/or Trade Reports submitted to the Market Operator, including the systems identified in paragraphs [149] to [151] of the Statement of Agreed Facts.
Resourcing Duty Contravention
(a) each of the matters identified in orders 1(a) to 1(j) above; (b) the design of the Short Sale Reporting Process and the systems identified in paragraph [101] of the Statement of Agreed Facts relied too heavily on manual intervention and changes; and (c) the underlying system logic and data mapping used by MSAL’s “IT Portal” application to compile the Short Sale Report was not fit for purpose.
AFSL Number Duty Contravention
MSAL’s contravention of s 912A(1)(h) of the Corporations Act
**MSAL’s contravention of s 1041****H(**1) of the Corporations Act
THE COURT ORDERS THAT:
Pecuniary Penalty
(a) a pecuniary penalty of $8.75 million in respect of MSAL’s contravention of s 798H(1)(b) of the Corporations Act referred to in order 1 above; (b) a pecuniary penalty of $8.75 million in respect of MSAL’s contravention of s 798H(1)(b) of the Corporations Act referred to in order 2 above; (c) a pecuniary penalty of $8.75 million in respect of MSAL’s contravention of s 798H(1)(b) of the Corporations Act referred to in order 3 above; and (d) a pecuniary penalty of $8.75 million in respect of MSAL’s contravention of s 912A(1)(h) of the Corporations Act referred to in order 4 above.
Compliance Program
(a) Within 18 months of the date of these orders, or such other time as agreed between MSAL and ASIC in writing, MSAL will complete a review and implement changes to its governance, systems, controls, policies and procedures for the purposes of preventing, detecting and responding to future breaches by MSAL of the kind identified in orders 1 to 5 above, as well as in respect of its obligation to report to ASIC its short position in section 1020B products pursuant to s 1020AB of the Corporations Act and reg 7.9.100(1)(d) of the Corporations Regulations (Short Sale Position Reporting Obligation). (b) MSAL must notify ASIC in writing within 10 business days of completing the implementation of the changes identified in order 7(a) above. (c) Within six months of completing the implementation of the changes identified in order 7(a) above and having received approval from ASIC for their appointment, or such other time as agreed in writing between ASIC and MSAL, MSAL will instruct an independent expert, to be appointed in accordance with the Annexure to these orders (Independent Expert or IE), to within that 6 month period:
(i) independently assess the adequacy and effectiveness of MSAL’s governance, systems, controls, policies and procedures for the purposes of preventing, detecting and responding to future breaches by MSAL of the kind identified in orders 1 to 5 above, as well as in respect of its Short Sale Position Reporting Obligation; (ii) provide a written report (Expert Report) to ASIC and MSAL which:
(a) sets out the results of the assessment identified in order 7(c)(i) above; (b) identifies any deficiencies (including any gaps, weaknesses, risks or defects) in MSAL’s governance, systems, controls, policies and procedures for the purposes of preventing, detecting and responding to future breaches by MSAL of the kind identified in orders 1 to 5 above, as well as in respect of its Short Sale Position Reporting Obligation; and (c) either:
makes recommendations to address any deficiencies identified pursuant to order 7(c)(ii)(B) above; or
where no such deficiencies are identified, includes a statement that, in the expert’s opinion, MSAL’s governance, systems, controls, policies and procedures are adequate for the purposes of preventing, detecting and responding to future breaches by MSAL of the kind identified in orders 1 to 5 above, as well as in respect of its Short Sale Position Reporting Obligation; and
(iii) at the same time as providing the Expert Report, to provide a summary of the Expert Report to ASIC and MSAL.
(d) Following the appointment of the Independent Expert in accordance with the Annexure to these orders and subject to notifying ASIC in writing, MSAL may notify the Independent Expert of the completion of any interim steps in the review and change implementation process identified in order 7(a), in order for the Independent Expert to perform interim, independent assessment(s), and provide feedback to MSAL, of the adequacy and effectiveness of the changes implemented for the purposes of preventing, detecting and responding to future breaches by MSAL of the kind identified in orders 1 to 5 above (Interim Independent Assessment). (e) Upon written request by ASIC, MSAL must request that the Independent Expert provide to MSAL and ASIC one or more interim report(s) in relation to any Interim Independent Assessment under order 7(d). (f) In relation to any deficiencies identified in the Expert Report, and subject to any written agreement between ASIC and MSAL to exclude or vary any recommendation made by the independent expert, MSAL will:
(i) within three months of receiving the Expert Report, provide ASIC with a written plan (Remedial Action Plan) setting out the action MSAL proposes to take to ensure that the recommendations of the Independent Expert to address any deficiencies identified in the Expert Report are implemented and the specific timeframe(s) within which such action will be taken; and (ii) within twelve months of providing the Remedial Plan to ASIC:
(a) implement the Remedial Plan and/or where applicable, explain why any aspect of the Remedial Plan has not been implemented; and (b) provide ASIC with a statement signed by an appropriate executive of MSAL confirming that the Remedial Plan has been implemented.
(a) MSAL is to promptly notify ASIC of the delay; (b) following such notification, the parties are to confer for the purposes of seeking to agree any reasonable extension of the time for completing the relevant step; and (c) failing such agreement, or upon failing to complete any step in accordance with any extended period agreed for the purposes of order 8(b) above, ASIC has liberty to apply to the Court to seek orders fixing the time within which the relevant step is to be completed.
Costs
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In this annexure:
Compliance Program means the orders made pursuant to s 1101B(1) of the Corporations Act.
Expert Report means the written report/assessment required pursuant to the Compliance Program.
Terms of appointment
a. the proposed appointment of the IE required for the purposes of the Compliance Program which meets the criteria in paragraph 2 below;
b. the terms of engagement for that IE that meet the requirements of the Compliance Program; and
c. if ASIC approves the nominated IE and terms of engagement following a request by MSAL under paragraph 1(a) above, MSAL undertakes to appoint the approved IE on the terms approved by ASIC, within 10 Business Days of receiving ASIC’s approval, or within such longer period as may be agreed by ASIC and MSAL.
a. must have the necessary expertise, experience and operational capacity to perform the role contemplated by the Compliance Program; and
b. must be independent of MSAL, its related bodies corporate and its officers and will at all material times be capable of exercising objective and impartial judgement.
The appointment of the IE must be approved by ASIC in writing before the appointment takes effect (such approval not to be unreasonably withheld).
MSAL will provide ASIC with any information, explanation or documents it requests for the purposes of determining whether to approve the appointment of the IE, subject to a claim of legal professional privilege.
MSAL must advise ASIC of the expertise and any prior association of the proposed IE with MSAL, its related bodies corporate and officers at the time approval is sought from ASIC.
Appointing a new independent expert
Terms of Engagement
The terms of engagement for the IE will be approved by ASIC in writing before the engagement takes effect (such approval not to be unreasonably withheld) and, once ASIC has provided its approval, the terms of engagement may only be varied with the agreement of ASIC in writing (acting reasonably).
MSAL must ensure that the terms of engagement provided to ASIC for approval under paragraph 1(a) of this annexure above:
a. require MSAL to engage the IE to perform the tasks necessary to fulfil MSAL’s obligations under the Compliance Program;
b. require MSAL to reasonably assist the IE in conducting the work required for the purposes of the Compliance Program, including the provision of any documents or information, and access to relevant employees, systems and premises;
c. include a statement to the effect that the work of the IE is being carried out for MSAL and ASIC, and acknowledging that ASIC is relying on the work of the IE;
d. permit the IE to consult with ASIC and disclose to ASIC any information obtained by the IE in the course of carrying out the engagement for the purposes of the Compliance Program (other than any documents or information subject to a claim of legal professional privilege).
e. include a statement that, if requested by ASIC, ASIC is to be copied into all or some communications between MSAL and the IE in relation to the Compliance Program (other than any documents or information subject to a claim of legal professional privilege);
f. require that the IE provide ASIC with a copy of the draft and final version of the Expert Report at the same time as the draft and final version of the Expert Report is provided to MSAL;
g. include a statement to the effect that any draft report provided by the IE to MSAL is provided only for the purposes of checking the factual accuracy of the report.
ASIC public reporting
a. may issue a media release referring to the outcome of, the content of, or compliance with, any aspect of the Expert Report; and
b. may, from time to time, publicly refer to the content of the Expert Report and may make available for public inspection a summary of the content of the Expert Report or a statement that refers to the content of that report.
a. may issue a media release on the Compliance Program ordered by the Court, and may refer to the concerns of ASIC which led to the court-ordered Compliance Program; and
b. may, from time to time, publicly refer to the Compliance Program.
a. is personal information (as defined in the Privacy Act 1988 (Cth));
b. should not publicly be disclosed because it would be against the public interest to do so; or
c. contains information that would be unreasonable to release to the public because the release of the information would unreasonably affect the business, commercial or financial affairs of MSAL.
Interpretation of Compliance Program
(1992) 175 CLR 564
(2018) 262 CLR 157
(2017) 254 FCR 68
(2012) 201 FCR 378
(1997) 78 FCR 197
(2008) 169 FCR 211
(2015) 258 CLR 482
(2018) 96 NSWLR 762
(2022) 274 CLR 450
This information was required to be submitted:
to ASX, in respect of any section 1020B products that were traded on the ASX (including products that were also traded on the Cboe Australia market); and
to Cboe, in respect of products that were traded only on the Cboe Australia market.
During the Relevant Period, MSAL did not execute any reportable short sale transactions in respect of section 1020B products traded only on the Cboe Australia market, and therefore was not required to, and did not, submit any such data to Cboe.
All of the short sale reports generated by MSAL in the Relevant Period were submitted to ASX.
Australian Financial Services Licensees submitted such reports to ASX by uploading the data to the ASX Online portal.
Final report submission: after any manual adjustments had been made and the Trade Volume Check had been completed, the Middle Office Team then extracted the final Short Sale Report from the IT Portal and uploaded and submitted it to ASX.
The IT Change Enablement Standard applied, from at least July 2021, to all types of changes made to Macquarie-owned IT assets. Similar to the IT Change Management Policy and IT Change Management Standard, it relevantly required that all IT changes be documented by a change request; be risk assessed; undergo adequate testing; and be supported by the implementation of preventative and/or detective controls.
The first, the “Australian CGM Short Sale and Short Positioning Review”, was conducted in July 2017 for the purpose of validating the documentation, governance and accuracy of CGM Cash Equities’ short sale reporting process and CGM’s short position reporting processes. Despite the review having been conducted at a time when the issues which are described below as Issues 5 to 9 were subsisting, this review did not result in any findings being raised in relation to MSAL’s Short Sale Reporting Process, and no modifications or enhancements were made in relation to the Short Sale Reporting Process as a result of this review.
The second, the “2019 Review”, was commenced in May 2019 in response to an issue with MSAL’s Short Sale Reporting Process that was discovered in 2019, and was reported to ASIC and ASX. This review did not identify Issues 5 to 9, which also subsisted at the time the 2019 Review was completed.
Further, the plurality in Pattinson observed that:
the Court should not proceed on the basis that the maximum penalty is reserved exclusively for the worst category of contravening conduct (at [49]); and
the maximum penalty does not constrain the exercise of the Court’s discretion, beyond requiring “some reasonable relationship between the theoretical maximum and the final penalty imposed”, and this relationship of “reasonableness” may be established by reference to the circumstances of the contravener as well as by the circumstances of the conduct involved in the contravention (because these circumstances may overlap, and either set of circumstances may have a bearing upon the extent of the need for deterrence in the penalty to be imposed) (at [55]).
The parties jointly submitted that, having regard to the number of contraventions, this case is one where the theoretical maximum penalty is vastly greater than is necessary to secure deterrence. I accept that submission.
Nonetheless, as the parties also submitted, while the theoretical maximum penalty is not of assistance in arriving at the total penalty in this case, it does assist in understanding the seriousness with which Parliament views contraventions of these provisions.