IDSX Legal & Regulatory Information | Draft 1.0 | International Digital Securities Exchange

IMPORTANT NOTICE

IDSX is currently a proposed financial product market under development.

This page describes the proposed legal and regulatory framework being considered for the International Digital Securities Exchange (IDSX).

IDSX has not commenced operation as a licensed financial product market.

Nothing on this page should be interpreted as representing that IDSX, its proposed market structure, Digital Securities framework, Market Rules, technology, custody arrangements or settlement arrangements have been approved, authorised or endorsed by the Financial Markets Authority (FMA) or any other regulatory authority.

The proposed framework remains subject to regulatory engagement, legal review, technical development and the applicable licensing process.

1. PROPOSED MARKET

IDSX is being developed as a proposed securities market intended to facilitate the admission and secondary trading of genuine financial products, including equity securities that may be represented, recorded or administered using distributed ledger technology.

The proposed market is intended to support, among others, small and medium-sized enterprises and growth companies seeking access to capital markets.

IDSX is not intended to operate as a cryptocurrency exchange.

Under the proposed model, Digital Securities admitted to IDSX would represent or relate to genuine financial products and would remain subject to the legal and regulatory framework applicable to those financial products.

2. NEW ZEALAND REGULATORY FRAMEWORK

The proposed IDSX market is being developed with reference to New Zealand’s financial markets regulatory framework. The principal legislation currently being considered includes:

(a) the Financial Markets Conduct Act 2013;

(b) the Financial Service Providers (Registration and Dispute Resolution) Act 2008;

(d) applicable companies and securities legislation;

(e) privacy and data protection legislation; and

(f) other laws and regulations relevant to the activities ultimately undertaken by IDSX and its Market Participants.

The precise application of these requirements will depend on the final market structure, financial products, participant model, custody arrangements, settlement architecture and regulatory approvals.

3. PROPOSED FINANCIAL PRODUCT MARKET LICENSING PATH

IDSX is being developed on the basis that the proposed market may fall within the financial product market framework under the Financial Markets Conduct Act 2013.

The proposed regulatory pathway therefore contemplates engagement with the FMA regarding an application for a financial product market licence.

The final licensing pathway remains subject to regulatory discussion and confirmation.

IDSX does not currently represent that a financial product market licence has been granted.

4. PROPOSED MARKET OPERATOR

The proposed IDSX structure contemplates the establishment of a New Zealand body corporate to act as the market operator.

The final legal identity, corporate structure, registration information and regulatory status of the market operator will be disclosed following establishment and completion of the relevant regulatory processes.

The proposed operator would be expected to maintain governance, financial, technological, human and operational resources appropriate to the nature and scale of the proposed market.

5. FINANCIAL SERVICE PROVIDER REGISTRATION

The proposed IDSX structure contemplates registration of the relevant market operator and other relevant entities on the Financial Service Providers Register where required by New Zealand law.

The financial services for which registration may be required will depend on the activities ultimately performed by each entity.

Registration should not be interpreted as equivalent to a financial product market licence or other regulatory authorisation.

6. FAIR, ORDERLY AND TRANSPARENT MARKET

The proposed IDSX regulatory architecture is being designed around the objective of maintaining a fair, orderly and transparent market. The proposed framework includes arrangements addressing:

(a) admission of securities;

(b) Issuer disclosure;

(d) trading rules;

(e) Market Participant obligations;

(f) market surveillance;

(g) unusual trading activity;

(h) market manipulation and prohibited conduct;

(i) trading suspension and resumption;

(j) disciplinary and enforcement measures;

(k) conflicts of interest;

(l) complaints and dispute resolution;

(m) technology and operational resilience; and

(n) recordkeeping and regulatory reporting.

7. PROPOSED MARKET RULES

IDSX is developing a comprehensive proposed Market Rules framework. The proposed rules include requirements relating to:

(a) Issuers;

(b) Brokers;

(d) Underwriters;

(e) Market Makers;

(f) admission and listing;

(g) trading;

(h) continuous disclosure;

(i) Digital Securities;

(j) investor identity and wallet eligibility;

(k) Client Assets;

(l) settlement;

(m) market surveillance;

(n) prohibited market conduct;

(o) corporate actions;

(p) shareholder rights;

(q) disciplinary and enforcement procedures; and

(r) other matters necessary for the proposed operation of the market.

These documents remain drafts and may be materially amended following regulatory consultation and legal review.

8. DIGITAL SECURITIES

IDSX proposes to use distributed ledger technology as part of the infrastructure for certain securities admitted to the market.

The proposed Digital Securities framework is intended to preserve the legal characteristics and investor rights associated with the underlying financial product.

The use of distributed ledger technology would not, by itself, change an equity security into a cryptocurrency or remove the application of securities, corporate or financial markets law.

The final legal relationship between:

(a) the Digital Security;

(b) the blockchain record;

(d) legal ownership;

(e) beneficial ownership; and

(f) shareholder rights

will be determined through the final legal and regulatory architecture.

9. RESTRICTED ON-CHAIN TRANSFERS

The proposed IDSX model does not contemplate unrestricted transfer of Digital Securities to anonymous blockchain addresses. Digital Securities may be subject to controls including:

(a) wallet whitelisting;

(b) investor identity verification;

(d) jurisdictional restrictions;

(e) sanctions controls;

(f) AML/CFT controls;

(g) security-specific transfer restrictions; and

(h) regulatory or legal restrictions.

The proposed architecture is intended to maintain an identifiable relationship between investors, eligible wallets and legally recognised securities holdings.

10. INVESTOR ACCESS

Under the proposed model, investors would ordinarily access the IDSX market through approved Brokers rather than through unrestricted direct access to the market. Brokers would be expected to perform responsibilities including, where applicable:

(a) Client onboarding;

(b) KYC and identity verification;

(d) sanctions screening;

(e) investor eligibility assessment;

(f) jurisdictional assessment;

(g) order submission;

(h) Client communications; and

(i) other obligations applicable to the services provided by the Broker.

The final allocation of responsibilities will depend on applicable law and the approved IDSX market structure.

11. ISSUER RESPONSIBILITIES

Issuers admitted to the proposed IDSX market would be expected to comply with applicable admission, disclosure and ongoing obligations. These may include requirements relating to:

(a) admission information;

(b) financial information;

(d) continuous disclosure;

(e) corporate governance;

(f) shareholder rights;

(g) corporate actions;

(h) periodic reporting;

(i) ownership and control information; and

(j) other information required under applicable law and IDSX Rules.

12. SPONSORS AND OTHER MARKET PARTICIPANTS

The proposed IDSX framework contemplates distinct roles for Sponsors, Brokers, Underwriters, Market Makers, Custodians, Settlement Providers and other Market Participants.

Each role would be subject to eligibility requirements, obligations and oversight appropriate to the activities performed.

Participation in IDSX would not, by itself, authorise a person to provide a regulated financial service for which a separate licence, registration or authorisation is required.

13. CUSTODY AND CLIENT ASSETS

IDSX proposes to structure the market so that the market operator would not unnecessarily hold or control investor money or securities.

Client Assets may instead be held or controlled through Brokers, Custodians or other approved arrangements, depending on the final market structure.

The regulatory classification of particular custody arrangements will depend on matters including:

(a) legal ownership;

(b) beneficial ownership;

(d) wallet control;

(e) private key control;

(f) authority to initiate transfers; and

(g) the applicable legal framework.

The final custody architecture remains subject to regulatory and legal review.

14. CLEARING AND SETTLEMENT

IDSX is evaluating settlement models appropriate for Digital Securities. Potential arrangements may include:

(a) Broker-based settlement;

(b) independent custody arrangements;

(d) distributed-ledger-assisted settlement;

(e) securities-for-securities settlement; and

(f) other structures permitted under applicable law.

No final settlement model should be inferred from this page. The final architecture will be determined following regulatory engagement, legal analysis and technical assessment.

15. AML/CFT AND FINANCIAL CRIME CONTROLS

The proposed IDSX framework includes controls intended to address:

(a) customer identification;

(b) beneficial ownership;

(d) sanctions;

(e) suspicious activity;

(f) wallet screening;

(g) transaction monitoring; and

(h) other financial crime risks.

The precise allocation of statutory AML/CFT responsibilities between IDSX and individual Market Participants will depend on the activities performed by each entity and applicable law.

16. MARKET SURVEILLANCE

IDSX proposes to maintain market surveillance arrangements designed to identify conduct including:

(a) market manipulation;

(b) wash trading;

(d) misleading orders;

(e) unusual trading;

(f) coordinated trading;

(g) suspicious account relationships;

(h) potentially improper use of information; and

(i) other conduct affecting market integrity.

The proposed framework includes escalation, investigation and enforcement procedures.

17. TECHNOLOGY AND OPERATIONAL RESILIENCE

Technology forms a material part of the proposed IDSX market architecture. The proposed framework therefore includes controls relating to:

(a) system availability;

(b) cybersecurity;

(d) transaction integrity;

(e) blockchain infrastructure;

(f) smart contracts;

(g) private key management where applicable;

(h) disaster recovery;

(i) business continuity;

(j) incident management; and

(k) recordkeeping.

Technology used in the proposed market will remain subject to technical, legal and regulatory review.

18. CROSS-BORDER PARTICIPATION

IDSX is intended to support participation by eligible Issuers, investors and Market Participants from multiple jurisdictions.

Cross-border participation would remain subject to applicable legal and regulatory requirements.

Availability of an IDSX security or service would not mean that the security or service is legally available in every jurisdiction.

IDSX may impose jurisdictional restrictions where required.

19. REGULATORY COOPERATION

The proposed IDSX framework is intended to support appropriate cooperation with competent regulatory, judicial and law enforcement authorities. Subject to applicable law, this may include:

(a) regulatory reporting;

(b) provision of market records;

(d) ownership information;

(e) investigation support;

(f) preservation of records; and

(g) other information reasonably required for lawful regulatory purposes.

20. CURRENT REGULATORY STATUS

IDSX remains a proposed market. At this stage:

(a) IDSX has not commenced operation as a licensed financial product market;

(b) the proposed IDSX Market Rules remain draft documents;

(d) custody and settlement arrangements remain under development;

(e) participant eligibility requirements remain subject to review; and

(f) the proposed market structure may change following regulatory engagement.

No person should rely on draft IDSX materials as evidence that regulatory approval has been granted.

21. REGULATORY ENGAGEMENT

IDSX intends to engage with the Financial Markets Authority and other relevant authorities as the proposed market framework develops. Key matters for regulatory discussion include:

(a) regulatory classification of the proposed market;

(b) treatment of Digital Securities representing genuine financial products;

(d) custody and Client Asset responsibilities;

(e) clearing and settlement architecture;

(f) cross-border Issuer and Market Participant participation;

(g) wallet eligibility and transfer controls;

(h) market surveillance;

(i) technology and operational resilience; and

(j) the proposed Market Rules framework.

The final IDSX structure will take into account regulatory feedback received through that process.

22. CHANGES TO THE PROPOSED FRAMEWORK

The information on this page represents the current proposed IDSX framework. The framework may change materially as a result of:

(a) FMA engagement;

(b) regulatory guidance;

(d) licence conditions;

(e) changes in applicable law;

(f) technical development;

(g) market consultation; or

(h) further development of the IDSX operating model.

Updated information will be incorporated as the proposed market progresses through the regulatory development process.

23. NO REGULATORY ENDORSEMENT

Nothing published by IDSX should be interpreted as suggesting that the FMA or any other regulatory authority:

(a) endorses IDSX;

(b) recommends IDSX;

(d) guarantees any investment;

(e) has approved the proposed Digital Securities model; or

(f) has approved any particular custody, settlement or technology arrangement,

unless and to the extent that such approval has actually been granted and may lawfully be described in that manner.

24. FURTHER INFORMATION

The IDSX website will be updated as the proposed regulatory and legal framework develops.

Formal regulatory status, market operator information, licence information, registration information and applicable regulatory disclosures will be published only when they have been formally established and may lawfully be represented as such.

Until that time, IDSX regulatory materials should be understood as part of a proposed market framework prepared for regulatory discussion, legal review and market design.