In the matter of Macquarie Securities (Australia) Limited

1. [1]

   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.

2. [2]

   MSAL admits that it contravened each of ss 798H(1)(b), 912A(1)(h) and 1041H(1) of the Corporations Act.

3. [3]

   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.

4. [4]

   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.

5. [5]

   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.

6. [6]

   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 Sales – Reporting Obligations and Use of Reported Data

1. [7]

   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:

   1. (1)

      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

   2. (2)

      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.

2. [8]

   Generally, naked short selling is prohibited under the Corporations Act, subject to certain exceptions.

3. [9]

   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.

4. [10]

   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.

5. [11]

   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.

6. [12]

   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.

7. [13]

   The Short Sale Reporting Obligations required that the following information be provided in relation to covered short sale transactions:

   1. (1)

      the number of section 1020B products to be vested in the buyer pursuant to the covered short sale transaction;

   2. (2)

      a description of the product; and

   3. (3)

      the name of the entity that issued the product.

8. [14]

   This information was required to be submitted:

   1. (1)

      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

   2. (2)

      to Cboe, in respect of products that were traded only on the Cboe Australia market.

9. [15]

   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.

10. [16]

    All of the short sale reports generated by MSAL in the Relevant Period were submitted to ASX.

11. [17]

    Australian Financial Services Licensees submitted such reports to ASX by uploading the data to the ASX Online portal.

12. [18]

    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).

13. [19]

    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.

14. [20]

    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:

    1. (1)

       “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;

    2. (2)

       “Corporate Users”, including companies, investment banking advisors, holders of corporate debt and bonds, commercial bankers, and competitors of companies;

    3. (3)

       “Observational Users”, including persons who might acquire the financial products (including those who are themselves short sellers), research analysts and journalists; and

    4. (4)

       “Regulatory Users”, including the Market Operators and ASIC.

15. [21]

    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:

    1. (1)

       may, so far as Transactional Users are concerned, mislead traders executing stock transactions due to potential erroneous timing and price limits;

    2. (2)

       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;

    3. (3)

       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

    4. (4)

       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.

Factual Background to Contraventions

1. [22]

   All of the circumstances set out in this section of the Judgment applied throughout the Relevant Period, unless otherwise stated.

2. [23]

   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.

3. [24]

   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.

4. [25]

   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.

5. [26]

   MSAL is authorised by its AFSL to carry on a financial services business to, among other things, deal in a financial product by:

   1. (1)

      issuing, applying for, acquiring, varying or disposing of a financial product in respect of securities; and

   2. (2)

      applying for, acquiring, varying or disposing of a financial product on behalf of another person in respect of securities,

6. [27]

   MSAL is a participant in the licensed financial markets operated by ASX and by Cboe. During the Relevant Period, MSAL transacted covered short sales (and naked short sales permitted by exception) of financial products (including securities), on its own behalf (Principal Short Sales) and on behalf of clients (Agency Short Sales), on each of the ASX (from around December 2009) and the Cboe Australia market (from around October 2011).

7. [28]

   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.

8. [29]

   The Short Sale Report was calculated in two parts, distinguishing the calculation for Principal Short Sales and for Agency Short Sales.

9. [30]

   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).

10. [31]

    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):

    1. (1)

       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);

    2. (2)

       IT Portal separation: the IT Portal then separated data relating to Principal Short Sales from data relating to Agency Short Sales;

    3. (3)

       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;

    4. (4)

       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;

    5. (5)

       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;

    6. (6)

       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

    7. (7)

       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.

11. [32]

    MSAL had a policy and procedure framework directed to seeking to comply with its Short Sale Reporting Obligations.

12. [33]

    This framework included the following policies and procedures.

    1. (1)

       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.

    2. (2)

       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.

    3. (3)

       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 IT Change Management Standard (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.

    4. (4)

       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.

13. [34]

    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).

14. [35]

    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.

15. [36]

    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.

16. [37]

    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).

17. [38]

    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.

18. [39]

    During the Relevant Period, MSAL conducted certain reviews relevant to its Short Sale Reporting Process or its Short Sale Reporting Controls, namely:

    1. (1)

       a “Risk and Control Self-Assessment” (RCSA) Process;

    2. (2)

       a “Periodic Assurance of Critical Control” review; and

    3. (3)

       an “End-to-End Review of Short Sale Report”.

19. [40]

    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.

20. [41]

    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.

21. [42]

    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.

22. [43]

    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.

23. [44]

    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:

    1. (1)

       an “inherent risk rating”, which referred to the risk that MSAL might breach such reporting requirements in the absence of any controls; and

    2. (2)

       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.

24. [45]

    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.

25. [46]

    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).

26. [47]

    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:

    1. (1)

       the risk of misreporting, given the number of manual processes that were involved in preparing the Short Sale Reports; and

    2. (2)

       the need for improvement in the “control environment”, due to “ongoing short selling transaction issues which persisted for a long period of time”.

27. [48]

    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).

28. [49]

    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:

    1. (1)

       involved any such CDEs being mapped end-to-end;

    2. (2)

       involved a controls assurance review of any of the Short Sale Reporting Controls; or

    3. (3)

       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.

29. [50]

    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.

30. [51]

    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.

31. [52]

    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.

32. [53]

    The parties agree that MSAL submitted incorrect data to ASX in its Short Sale Reports as a result of what were referred to as “Issues 1 to 9”, which are described below.

33. [54]

    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.

34. [55]

    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).

35. [56]

    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.

36. [57]

    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).

37. [58]

    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.

38. [59]

    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.

39. [60]

    Issue 1 resulted in a total of 6,044,016 individual section 1020B products (not distinct trades) being incorrectly reported to the Market Operator.

40. [61]

    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.

41. [62]

    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).

42. [63]

    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.

43. [64]

    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.

44. [65]

    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.

45. [66]

    Issue 2 resulted in a total of 53,323,242 individual section 1020B products (not distinct trades) being incorrectly reported to the Market Operator.

46. [67]

    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.)

47. [68]

    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.

48. [69]

    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.

49. [70]

    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.

50. [71]

    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.

51. [72]

    Issue 3 resulted in a total of 19,310 individual section 1020B products (not distinct trades) being incorrectly reported to the Market Operator.

52. [73]

    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.

53. [74]

    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.

54. [75]

    Issue 4 was identified on 31 October 2022. On 21 December 2022, a logic update was implemented, after testing, to rectify Issue 4.

55. [76]

    In respect of Issue 4 (and also each of Issues 5 to 9), MSAL was unable to provide ASIC with complete data identifying:

    1. (1)

       the total number of inaccurate Short Sale Reports which MSAL submitted to the Market Operator as a result of the relevant Issue;

    2. (2)

       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

    3. (3)

       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.

56. [77]

    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:

    1. (1)

       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

    2. (2)

       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.

57. [78]

    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.

58. [79]

    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.

59. [80]

    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.)

60. [81]

    MSAL has not been able to identify why this logic existed.

61. [82]

    Issue 5 was identified on 10 November 2022. On 21 December 2022, a logic update was implemented, after testing, to rectify Issue 5.

62. [83]

    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.

63. [84]

    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.

64. [85]

    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.

65. [86]

    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.

66. [87]

    Issue 6 arose from the time MSAL connected to the Cboe Australia market as a secondary market in October 2011.

67. [88]

    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.

68. [89]

    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.

69. [90]

    Issue 6 was identified on 7 November 2022. On 21 December 2022, a logic update was implemented, after testing, to rectify Issue 6.

70. [91]

    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.

71. [92]

    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.

72. [93]

    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.

73. [94]

    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).

74. [95]

    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.

75. [96]

    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.

76. [97]

    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.

77. [98]

    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.

78. [99]

    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.)

79. [100]

    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.

80. [101]

    Issue 8 was identified on 2 February 2023. On the following day, MSAL implemented the Intra-day Bookings Report control to rectify the Issue.

81. [102]

    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.

82. [103]

    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.

83. [104]

    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.

84. [105]

    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.

85. [106]

    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.

86. [107]

    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.

87. [108]

    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.

88. [109]

    The root causes of Issues 1 to 9 included at least the following matters:

    1. (1)

       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;

    2. (2)

       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;

    3. (3)

       the underlying system logic used to generate the Short Sale Report or data mapping not being fit for purpose;

    4. (4)

       MSAL’s failure to implement appropriate detective controls to identify errors in its Short Sale Reports; and

    5. (5)

       inadequate process design for the Short Sale Reporting Process.

89. [110]

    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:

    1. (1)

       in each Order transmitted to an Order Book of the Market Operator; and

    2. (2)

       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.

90. [111]

    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:

    1. (1)

       MSAL acted as agent for an “AOP Client” that was an AFSL holder; and

    2. (2)

       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.

91. [112]

    Regulatory Data assists ASIC in performing its functions of supervising, and ensuring the integrity of, Australia’s financial markets. Regulatory Data also assists ASIC to carry out certain regulatory activities, including market surveillance, detecting market misconduct, monitoring market orderliness and integrity, and analysing market structure, trends and confidence.

92. [113]

    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).

93. [114]

    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).

94. [115]

    Client trading account details were then created in a separate system, including the client’s AFSL number.

95. [116]

    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.

96. [117]

    I will refer to the steps outlined in paragraphs [113]-[116] above as the Regulatory Data Reporting Process.

97. [118]

    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.

98. [119]

    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.

99. [120]

    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.

100. [121]

     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.

101. [122]

     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.

102. [123]

     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.

103. [124]

     The root causes of Issue 10 included:

     1. (1)

        MSAL’s failure to follow appropriate change control processes;

     2. (2)

        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

     3. (3)

        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.

104. [125]

     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).

Admitted Contraventions

1. [126]

   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.

2. [127]

   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).

3. [128]

   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.

4. [129]

   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):

   1. (1)

      ASIC Market Integrity Rules (ASX Market) 2010 (ASX Market Rules), during the period from 1 August 2010 to 6 May 2018;

   2. (2)

      ASIC Market Integrity Rules (Chi-X Australia Market) 2011, during the period from 4 May 2011 to 6 May 2018; and

   3. (3)

      the Securities Markets Rules, from 4 December 2017 onwards.

5. [130]

   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.

6. [131]

   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).

7. [132]

   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).

8. [133]

   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).

9. [134]

   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:

   1. (1)

      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:

   2. (2)

      MSAL failed to implement regular or appropriate reviews of the quality of the output of the Short Sale Reporting Process to identify and remediate any errors in the Short Sale Report, including by comparing all of the data included in Short Sale Reports submitted by MSAL against other data held by MSAL and/or the Macquarie Group in relation to MSAL’s covered short sale transactions for the same period to ensure that the data in the Short Sale Reports was accurate;

   3. (3)

      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;

   4. (4)

      MSAL did not have in place appropriate controls directed towards identifying errors in the Short Sale Reports submitted by MSAL to the Market Operator;

   5. (5)

      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;

   6. (6)

      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;

   7. (7)

      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;

   8. (8)

      MSAL did not at all times enforce proper change management controls for changes made to information technology systems and/or logic relied on either to generate the Short Sale Report or to record, where required, the AFSL number in Orders and/or Trade Reports submitted to the Market Operator;

   9. (9)

      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 either to generate the Short Sale Report or to record, where required, the AFSL number in Orders and/or Trade Reports submitted to the Market Operator; and

   10. (10)

       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 either to generate the Short Sale Report or to record, where required, the AFSL number in Orders and/or Trade Reports submitted to the Market Operator.

10. [135]

    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:

    1. (1)

       the matters set out in paragraph [134(1)-(10)] above;

    2. (2)

       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

    3. (3)

       the underlying system logic and data mapping used by the IT Portal to compile the Short Sale Report was not fit for purpose.

11. [136]

    MSAL admits that, during the Contravention Period, it contravened s 798H(1)(b) of the Corporations Act as a result of its breaches of the AFSL Number Duty in failing to provide the AFSL number (Intermediary ID) for the 633,680 Orders submitted to the Market Operator during the period from 16 November 2022 to 21 March 2023.

12. [137]

    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.

13. [138]

    During the Contravention Period, s 912A of the Corporations Act relevantly provided as follows:

14. [139]

    In Australian Securities and Investments Commission v RI Advice Group Pty Ltd [2022] FCA 496 at [54], Rofe J observed that:

    1. (1)

       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

    2. (2)

       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”.

15. [140]

    In the present case, the parties agree that the risks for MSAL included:

    1. (1)

       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:

    2. (2)

       the risk that Trade Reports or Orders submitted by MSAL to a Market Operator might fail to comply with the AFSL Number Duty.

16. [141]

    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.

17. [142]

    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.

18. [143]

    During the Contravention Period, s 1041H(1) of the Corporations Act provided as follows:

19. [144]

    The relevant principles are well-established. It is convenient to refer to the following summary of those principles by O’Bryan J in Australian Securities and Investments Commission v Dover Financial Advisers Pty Ltd [2019] FCA 1932 at [98], upon which the parties relied in their joint submissions (omitting citations):

20. [145]

    Section 1041H(1) only applies in respect of conduct “in relation to a financial product or a financial service”. Section 1041H(2) sets out a non-exhaustive list of examples of conduct that are included in the reference to “conduct in relation to a financial product” in subs (1). In Australian Securities and Investments Commission v Narain (2008) 169 FCR 211; [2008] FCAFC 120 at [75]–[76], Jacobson and Gordon JJ observed that:

21. [146]

    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.

22. [147]

    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.

23. [148]

    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.

24. [149]

    ASIC does not allege that MSAL’s conduct was intentionally or deliberately false or misleading.

Declaratory Relief

1. [150]

   Section 1317E of the Corporations Act relevantly provides as follows:

2. [151]

   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).

3. [152]

   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).

4. [153]

   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.

5. [154]

   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”.

6. [155]

   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:

7. [156]

   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.

8. [157]

   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).

9. [158]

   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.

10. [159]

    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.

11. [160]

    For those reasons, I am satisfied that declarations of contravention should be made in the form proposed by the parties.

Pecuniary Penalty

1. [161]

   The parties proposed that a pecuniary penalty in a total amount of $35m be imposed pursuant to s 1317G(1) of the Corporations Act in respect of MSAL’s three admitted contraventions of s 798H(1) and its one admitted contravention of s 912A.

2. [162]

   Section 1317G(1) of the Corporations Act relevantly provides as follows:

3. [163]

   Section 1317G(6) of the Corporations Act relevantly provides as follows:

4. [164]

   In addition to those mandatory matters for consideration, the authorities have referred to a number of other (or overlapping) factors which may be relevant to the assessment of an appropriate penalty. For example, in an oft-cited passage from Re Trade Practices Commission v CSR Limited [1990] FCA 521, French J identified (at [42]) the following factors as being relevant to the “assessment of a penalty of appropriate deterrent value”:

5. [165]

   In Australian Building and Construction Commissioner v Pattinson (2022) 274 CLR 450; [2022] HCA 13 at [18]–[19], Kiefel CJ, Gageler, Keane, Gordon, Steward and Gleeson JJ quoted this passage from CSR, and commented that:

6. [166]

   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)).

7. [167]

   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:

8. [168]

   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:

   1. (1)

      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]);

   2. (2)

      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]);

   3. (3)

      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]);

   4. (4)

      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]);

   5. (5)

      however, the Court is not bound by the figure suggested by the parties (at [48]);

   6. (6)

      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

   7. (7)

      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]).

9. [169]

   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”.

10. [170]

    Section 1317G(4) of the Corporations Act provides as follows:

11. [171]

    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:

    1. (1)

       $210, in the period from 14 May 2019 to 30 June 2020;

    2. (2)

       $222, in the period from 1 July 2020 to 31 December 2022;

    3. (3)

       $275, in the period from 1 January 2023 to 30 June 2023; and

    4. (4)

       $313, in the period from 1 July 2023 to 14 February 2024.

12. [172]

    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).

13. [173]

    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.

14. [174]

    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).

15. [175]

    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:

    1. (1)

       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;

    2. (2)

       data showing turnover outside Australia is, however, not available; and

    3. (3)

       therefore, a calculation in accordance with s 1317G(4)(c)(i) is not practicable.

16. [176]

    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.

17. [177]

    In Pattinson 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 Australian Competition and Consumer Commission v Reckitt Benckiser (Australia) Pty Ltd [2016] FCAFC 181 at [155]-[156]).

18. [178]

    Further, the plurality in Pattinson observed that:

    1. (1)

       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

    2. (2)

       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]).

19. [179]

    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.

20. [180]

    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.

21. [181]

    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.

22. [182]

    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.

23. [183]

    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.

24. [184]

    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.

25. [185]

    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.

26. [186]

    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.

27. [187]

    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:

28. [188]

    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.)

29. [189]

    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.

30. [190]

    MSAL reported each of these Issues to ASIC following their identification.

31. [191]

    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.

32. [192]

    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.

33. [193]

    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.

34. [194]

    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.

35. [195]

    The Explanatory Memorandum to the Corporations Amendment (Short Selling) Bill 2008 (Cth), by which the Short Sale Reporting Obligations were introduced, stated (at [5.8]) as follows:

36. [196]

    As the parties observed in their joint submissions, inaccurate short sale data runs counter to those benefits, undermines the purpose of the reform, and undermines confidence in Australia’s financial markets.

37. [197]

    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:

    1. (1)

       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

    2. (2)

       ASIC’s market surveillance activities.

38. [198]

    MSAL has not previously been found by a court to have engaged in similar conduct.

39. [199]

    MSAL is a subsidiary of Macquarie Group which had, as at 4 February 2026, a market capitalisation of approximately $82.64 billion.

40. [200]

    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:

41. [201]

    From its publicly available annual reports, Macquarie Group’s figures for those same years were approximately as follows:

42. [202]

    I accept the parties’ joint submission that the size and profitability of MSAL and Macquarie Group are factors in favour of a significant penalty. In Australian Competition and Consumer Commission v Coles Supermarkets Australia Pty Ltd [2015] FCA 330at [92], Allsop CJ observed that the fact that the contravener has significant financial resources is “clearly relevant to considering the size of the penalty required to achieve the end of specific deterrence and can be weighed against the need to impose a sum which will be recognised by the public as significant and proportionate to the seriousness of the contravention for the purposes of achieving general deterrence”.

43. [203]

    ASIC does not allege that any of the contravening conduct was intentional or deliberate. The conduct arose from technical issues and deficiencies in systems and processes which were designed and implemented by MSAL, in circumstances where those systems and processes had been designed and implemented by MSAL with the intention of complying with MSAL’s reporting obligations.

44. [204]

    The conduct giving rise to the Issues occurred at an operational level. ASIC does not allege senior management were involved in any conduct which gave rise to the Issues.

45. [205]

    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.

46. [206]

    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).

47. [207]

    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).

48. [208]

    I accept MSAL’s submission. The agreed facts or joint submissions include, by way of example only, the following statements (emphasis added):

    1. (1)

       “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”;

    2. (2)

       “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”;

    3. (3)

       “MSAL had in place systems, controls and processes aimed at ensuring compliance with its Short Sale Reporting Obligations”; and

    4. (4)

       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”.

49. [209]

    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.

50. [210]

    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.

51. [211]

    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”.

52. [212]

    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.

53. [213]

    ASIC acknowledged that:

    1. (1)

       MSAL fully cooperated with ASIC in relation to its investigation in relation to the matters which are the subject of this proceeding;

    2. (2)

       following the commencement of this proceeding, MSAL engaged openly and transparently with ASIC, including prior to the first directions hearing; and

    3. (3)

       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.

54. [214]

    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.

55. [215]

    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.

56. [216]

    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.

57. [217]

    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].

58. [218]

    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.

59. [219]

    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.

60. [220]

    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.

61. [221]

    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:

62. [222]

    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]).

63. [223]

    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]).

64. [224]

    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.

65. [225]

    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.

66. [226]

    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.

Compliance Program

1. [227]

   Section 1101B(1) of the Corporations Act provides as follows:

2. [228]

   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.

3. [229]

   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:

4. [230]

   Any compliance program ordered by the Court should be no wider than one which is designed to prevent repetition of the contravening conduct: Australian Competition and Consumer Commission v Z-Tek Computer Pty Ltd (1997) 78 FCR 197 at 205; [1997] FCA 871 (Merkel J). In Australian Competition and Consumer Commission v Renegade Gas Pty Ltd (trading as Supagas NSW) [2014] FCA 1135 at [100] Gordon J identified the following factors as relevant to the exercise of the Court’s discretion to make an order for a compliance program (citations omitted):

5. [231]

   In Australian Competition and Consumer Commission v Virgin Mobile Australia Pty Ltd (No 2) [2002] FCA 1548 at [24], French J made the following observations (in respect of a “probation order” under s 86C of the Trade Practices Act 1974 (Cth)) regarding the level of detail required when framing an order in respect of a compliance program:

6. [232]

   The parties have agreed a proposed form of order for a compliance plan.

7. [233]

   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.

Costs

1. [234]

   It is agreed that MSAL should pay ASIC’s costs of the proceeding in a fixed sum. An order will also be made to this effect.

2. [235]

   For the reasons set out above, I make the following orders:

   1. (1)

      During the Contravention Period, MSAL did not have appropriate supervisory policies and procedures to ensure compliance by MSAL and each person involved in its business as a market participant with the Securities Markets Rules, the operating rules of each of the ASX and Cboe Australia markets and the Corporations Act in breach of r 2.1.3 of the Securities Markets Rules, and thereby contravened s 798H(1)(b) of the Corporations Act, by failing to take the steps set out in paragraph [82] of the Statement of Agreed Facts by reason of the following matters:

   2. (2)

      During the Contravention Period, MSAL did not have and maintain the necessary organisational and technical resources to ensure that MSAL complied at all times with the Securities Markets Rules and the operating rules of each of the ASX and Cboe Australia markets in breach of r 5.5.2(b) of the Securities Markets Rules, and thereby contravened s 798H(1)(b) of the Corporations Act, by failing to take the steps set out in paragraph [84] of the Statement of Agreed Facts by reason of the following matters:

   3. (3)

      During the period from 16 November 2022 to 21 March 2023, MSAL failed to include the Intermediary ID, being required Regulatory Data, in each of the 633,680 Orders transmitted by MSAL to an Order Book of either ASX Limited or Cboe in breach of r 7.4.2(1) of the Securities Markets Rules and thereby contravened s 798H(1)(b) of the Corporations Act.

   4. (4)

      During the Contravention Period, MSAL did not have adequate risk management systems, and thereby contravened s 912A(1)(h) of the Corporations Act, by failing to take the steps set out in paragraph [82] of the Statement of Agreed Facts, including by reason of the matters identified in orders 1(a) to 1(j) above.

   5. (5)

      During the Contravention Period, in this jurisdiction, MSAL engaged in conduct in relation to a financial product that was misleading or deceptive or was likely to mislead or deceived, in contravention of s 1041H(1) of the Corporations Act, by submitting 918 Short Sale Reports to ASX Limited, as the Market Operator of the ASX, which incorrectly stated the total number of covered short sales for one or more section 1020B products executed by MSAL on the ASX and/or Cboe Australia on the relevant trading day.

   6. (6)

      Pursuant to s 1317G of the Corporations Act, and in respect of the contraventions identified in orders 1 to 4 above, MSAL is to pay pecuniary penalties in the total sum of $35 million to the Commonwealth of Australia within 28 days of these orders, as follows:

   7. (7)

      Pursuant to s 1101B(1) of the Corporations Act, MSAL must, at its cost, undertake a compliance program which involves the following steps (Compliance Program):

   8. (8)

      To the extent that there is any delay in respect of the period of time within which any step in the Compliance Program is to be completed:

   9. (9)

      MSAL must within a reasonable period of receiving a request from ASIC, provide all documents and information reasonably requested by ASIC from time to time for the purposes of assessing MSAL’s compliance with the Compliance Program, including any correspondence with the Independent Expert, other than any documents or information subject to a claim of legal professional privilege.

   10. (10)

       The appointment and terms of engagement of the Independent Expert are to be approved by ASIC in accordance with the terms set out in the Annexure to these orders, which govern the appointment and terms of engagement of the Independent Expert and ASIC’s public reporting in respect of the Expert Report and the Compliance Program.

   11. (11)

       MSAL must, within 14 days of the date of these orders, pay ASIC’s costs of and incidental to the proceedings in the agreed amount of $1,545,485.17.