Financial Markets Authority chief executive, Sean Hughes says he has told the NZX what it needs to do to fix possible conflicts of interest, enforcement of listing rules and insufficient staffing in its market surveillance unit.
In its first review of the stock exchange -- which is a listed company on its own main board - the capital markets regulator says that the NZX firm complies with its statutory requirements in all but three areas.
It specifically raises a potential conflict of interest by its corporate counsel acting as its head of market supervision - an arrangement it fears could mean that supervisory decisions might be unfairly influenced by the exchange's own commercial considerations.
The authority is also questioning the NZX's enforcement of listing rules and insufficient staffing in its market surveillance unit.
"Having appointed their corporate counsel to also act as head of market supervision - which is a very important role in terms of NZX's frontline supervision - we thought that having the same person do both jobs gave rise to potential conflicts of interest .. and therefore an perception that their separation of duties was not as robust as it could have been," Mr Hughes says on Checkpoint.
"The second area where we thought there could be improvements related to enforcing compliance ... NZX's own compliance, around documented criteria for decision-making, a low number of referrals to the NZ markets disciplinary tribunal, and slow progress of investigations the NZX itself undertakes," Mr Hughes says.
"The third area ... related to the adequacy and sufficiency of resources in the area of market supervision, as against a very significant workload".
Resolution by year-end
NZX will be reporting back on its remediation plan and has told the authority it expects to have the issues resolved or under way by the end of 2012, Mr Hughes says.
NZX chief executive Tim Bennett on Thursday announced plans to clearly separate its commercial roles from its regulatory ones to avoid any perception of a conflict of interest.
It also plans to invest more in its operations and market regulation.
Market players are tentatively welcoming moves by the stock exchange to clearly separate its commercial roles from its regulatory ones.
Mr Bennett is forming two distinct groups within the company to remove any perception of a conflict of interest between the exchange's operational and regulatory roles.
A new group, called market services, will take responsibility for market, clearing and derivative operations and customer service, and a more tightly-focused regulation team will handle compliance, enforcement and policy development.
Shareholders Association's chairman, John Hawkins, says he's pleased some of the issues the association raised in meetings with Mr Bennett appear to have been taken on board.