Introduction: Taking the lead
Before I begin, I would like to acknowledge the traditional owners and custodians of the land on which we meet today, and to pay my respects to their elders past, present and emerging. I extend that respect to Aboriginal and Torres Strait Islander people present today.
Benjamin Disraeli, twice Prime Minister of Great Britain, was no stranger to change. In the face of significant and unrelenting social, and political challenges at home, and complex and delicate conflicts abroad, many in his place would have been daunted, to say the least. Some would even try to ‘pass the buck’. But Disraeli’s response is a lesson in proactivity, which rings as loudly to us today as it did two centuries ago. He fearlessly declared that ‘We are not creatures of circumstances, we are creators of circumstance.’
This is a pertinent message for the key players in today’s wholesale financial markets. We are in the midst of an ever-changing economic cycle – and this is often where we see the worst conduct. This is only natural, of course, since volatile markets increase the risk of dropping standards, and exacerbating issues. But it doesn’t make it acceptable.
There is no room for complacency – especially not in the current environment. Looking around us we see market volatility, unpredictability in the global economy, and geopolitical uncertainty. The recent US banking turmoil alone has caused significant waves. Locally, this volatility and uncertainty raise questions about the role of wholesale financial markets in capital allocation – turnover in Australian interest rate derivatives markets has grown by more than five times in the last 15 years to $112 billion US dollars a day.
History shows that poor market conduct repeats. The Financial Markets Standards Board behaviour pattern analysis makes this abundantly clear, examining global financial misconduct from the 1814 UK gilts ‘bull raid’ to benchmark manipulation to the great work of the CFTC in recent commodities spoofing / manipulation and crypto cases. We have to learn from the lessons of the past, building that knowledge into new initiatives and constantly challenging ourselves on where the risks are and how to control for them. Intermediaries are in many ways the gatekeepers of the markets, who are best placed to lead by example.
Today’s joint conference with ISDA and AFMA is a timely one. Drawing on Disraeli’s insistence that we are creators of circumstance, my message today is that we are standing in the face of a great opportunity. This is an opportunity for you as the gatekeepers to Australia’s financial markets to help lead through this change and maintain Australia’s position as a financial centre for the future. We’re doing our bit to seize the opportunity to create the circumstances we want for a healthy, vibrant, and transparent market in the years ahead – and I’m here to encourage you to do the same.
Of course, we need to balance commercial and regulatory settings to ensure integrity and confidence in the system, and support the efficient functioning of financial markets. This is particularly important in times of volatility. But we can only have confidence and integrity when all of us – the regulators and the industry – work together to create the circumstances that foster and support confidence and integrity.
Today I would like to talk about how we can accelerate this collaboration, and seize the opportunity current circumstances present to us, and lead through change into the future. I will do this by looking at two important areas of collaboration: transparency, and tech.
Taking the lead in transparency
Whenever we speak of confidence and integrity, we inevitably come upon the issue of transparency. This is one of the three ‘legs’ supporting a robust, confident market with integrity – the other two being fairness and orderliness.[1] Market transparency includes transparency to ASIC via over-the-counter (OTC) derivative transaction reporting – a critically important element in identifying risk build ups in the financial system and what each firm’s exposures are.
I want to acknowledge the way the market has already worked with us on this. Having direct access to this data enabled ASIC to react quickly and make informed and timely decisions as financial markets experienced volatility coming from a variety of sources such as the US banking turmoil, COVID-19, and geopolitical events like the Russian invasion of Ukraine.
Now, I know this has been a pain point for the industry. I can assure you ASIC is working to streamline this, to align internationally, in order to reduce the reporting burden. The new ASIC Derivative transaction reporting rules will commence in October next year, and the third round of consultation will be done in the second half of this year.
But, as ever, there is more to do. I encourage you to be ever more open and transparent with ASIC. We want to hear about concerns or issues that arise in your firm or in the markets. This is not empty rhetoric, but a genuine and sincere call for further communication on a deeper level. Being more proactive leads to better and more timely outcomes for everyone involved.
But transparency isn’t half-silvered. We don’t sit behind a one-way mirror like a detective watching an interrogation, seeing everything you do, while the market sees only its own reflection. No, true transparency must go both ways. Looking at ASIC’s engagement model with industry, we are committed to being more open and consultative. We will offer more information on context and the why. To put it simply we’re keen to learn from you what the industry is focusing on, and where risks or issues are that we should be prioritising.
Pre-hedging is a good example of this in action. We’ve heard your calls for guidance and we hope to provide some soon. We know it’s a global issue, so we’ve been engaging with ESMA on its call for evidence in Europe, as well as the FMSB and IOSCO, which is considering work in this area.
Of course, there is more work for regulators – both domestic and international – in relation to coordinating and sharing information. These are, after all, global markets. It is only natural that international alignment is an important part of the process. On that note, it’s particularly pleasing that the CFTC Chair is present here today. So let me say it again: we are committed to continuing meaningful engagement with the industry, and I encourage you to be part of that.
Taking the lead in tech
Turning now to technology, I think you’ll agree with me that wholesale markets have been early adopters of new technology, first movers in using technology to increase output and efficiency, and improve processes. While everyone, from consumers to corporates, is talking about AI as a brand new thing, we in this room know that the financial markets have been at the forefront with algorithmic trading and using AI in electronic markets for over a decade. We can expect AI to continue to drive efficiencies in risk management and operations, such as price prediction, hedging, fraud detection, and so on.
But at the same time, AI remains an area of rapid change and expansion. Recent developments, especially in the field of Generative AI, represent a step change, and potentially create new and different risks and issues. The speed at which things are changing also seems to be accelerating. What is clear is that there is as yet no real consensus on how to regulate AI, if at all. The European Commission has led by proposing an AI law. It takes a risk-based approach, while prohibiting some particular forms of AI. In the UK a ‘pro-innovation’ devolved regulatory model is proposed. China and Canada are proposing laws directed at regulating uses of AI. Our own government recently issued a thoughtful discussion paper, ‘Safe and Responsible AI in Australia’, seeking input on how Australia should approach this question. I encourage you to read the paper, and contribute your views.
These are very important questions – some would say existential. They are as yet unanswered. But there is another, very practical, issue concerning explainability with some forms of AI. Put simply, if you can’t explain how a particular system works – and it seems that this is the case with some complex AI systems – how can you justify using it? As early as 1960 Prof Norbert Wiener, one of the architects of cybernetics, observed that ‘If we use, to achieve our purposes, a mechanical agency with whose operation we cannot interfere effectively… we had better be quite sure that the purpose put into the machine is the purpose we really desire.’
To be clear, my and ASIC’s interest is – and will always be – the safety and integrity of the financial ecosystem. As with any new technology, to the extent that AI affects that ecosystem, to that extent we will be involved. As we realise the potential of tech, we have to do all we can to avoid negative disruption, learned market abuse, misinformation, discrimination, and bias – whether intended or unintended. I want to take this opportunity, as an aside, to emphasise that ASIC has AI as a high and important priority. Not just in regards to wholesale markets, but also its role in – and for – the whole economy, including consumers and small business.
But what I want to talk more about here is the danger that the fear of being ‘left behind’ will drive some uses of tech that have unintended consequences. There is a very real danger here that entities may rush too quickly into innovations without applying appropriate controls and proper governance. The recent cyberattack on service provider ION is a good reminder of just how interconnected global markets are, and the implications a bad actor can indirectly have on market intermediaries – and the markets themselves. With this in mind, entities need to focus on robust governance and operational resilience measures. This is nothing new – just because the technology has changed nobody should think that means your existing obligations around good governance have changed with it. They haven’t. But it’s all too easy to forget this in the face of such rapid and unprecedented change. Easy – and dangerous. As Professor Stuart Russell, of UC Berkeley, recently put it, ‘You should not deploy systems whose internal principles of operation you don’t understand, that may or may not have their own internal goals that they are pursuing and that you claim show “sparks of [artificial general intelligence]”.’
There is space here for you as the gatekeepers to set the pace. To set the example by considering the different forms of explainability tools that are available and their implications. By ensuring that every use of AI within your organisation is understood and the reason a particular decision, recommendation or prediction is made can be explained. Of course, we can’t forget information security. This is especially important for building confidence for investors and consumers, alongside strengthening integrity.
ASIC’s technology and operational resilience Market Integrity Rules for exchange markets and participants took effect in March this year. Though these rules are centred around exchange markets, their objectives apply equally for over-the-counter markets. They’re also in alignment with APRA’s cross-industry Prudential Standard CPS 230 on Operational Risk Management released in April this year.
The point is, the fear of missed opportunities cannot be allowed to drive poor decisions, outcomes, or controls. While the potential in this field is enormous, our vigilance must be unwavering. The industry will look to you to lead the way.
To support this, in the next financial year ASIC expects to consult on expanding automated order processing rules to futures markets to reflect developments with AI. We are also planning to update our electronic trading guidance for the same reason.
ASIC will also continue to scan the environment to understand how AI is being applied and the risks and opportunities attached to those methods of application. We will look at other developments in this space as well, such as crypto tech – digitisation of assets, carbon markets, FX, and lending.
There must be an important focus on controls alignment with innovation. Our expectation is for appropriate controls to be part of the design phase and in place before new tech is switched on. It’s important that the whole financial market ecosystem works to uplift controls – just as a convoy must go at the pace of its slowest vessel, so too is the financial ecosystem reduced to the strength of its weakest link.
Conclusion
In conclusion, I’m pleased to see there are many ways ASIC and industry have worked and continue to work together. This is a good start. But I have also identified a number of ways this could be increased, a number of important opportunities for intermediaries to take a leadership role as the gatekeepers of the financial industry. I’m here today to encourage you to take those opportunities.
When it comes to tech, data, and transparency, we can only maintain a market characterised by confidence and integrity if we work together. As Albert Einstein once said, ‘setting an example is not the main means of influencing others – it’s the only means.’ This applies to us regulators – and so ASIC will do our bit. But the best example has to be set by those directly involved in the market. The example has to be set for working with us for greater transparency and better confidence, for integrity and governance, and for risk containment around technology. The example has to be set by you.
