The corporate watchdog has proposed to tighten financial requirements for OTC (over-the-counter) derivative providers to ensure that are adequately capitalised to satisfy operating costs and that they a vested interest in doing so. The review comes at a time when OTC derivate products such as CFDs and margin foreign exchange are attracting increasing interest from private investors.
ASIC stated given the increased interest from retail investors and growth of the industry it wants to ensure that issuers had sufficient financial resources to manage their operating costs and risks, and that the owners of issuers were committed to the viability of the business.
‘Owners of issuers of complex and risky OTC derivatives, such as CFDs and foreign exchange margin trading should have sufficient skin in the game to commit to the success of the business and its compliance with the applicable laws,’ ASIC commissioner Greg Medcraft said. ‘Increasing numbers of mum and dad investors are trading in these complex and risky products, and it’s important the interests of all parties are aligned.’
The Australian Securities and Investments Commission has issued a 24-page consultation paper on its proposed changes and is requesting feedback from the industry.
The changes, if adopted would include a requirement that OTC issuers release quarterly rolling 12-month cash-flow projections to make sure they have sufficient liquid funds on hand to meet running costs, and demonstrate that they will have sufficient funds to meet liabilities over the upcoming 12 months, including any extra liabilities they might have to absorb over the year.
This would replace the current requirements to hold surplus and adjusted surplus liquid funds with the requirement to hold net tangible assets of at least the greater of $1 million or 10% of average revenue, whichever is greater. They would need to hold the NTA half in cash and half in other liquid assets.
‘We want issuers to be required to address operational risks with good cash-flow forecasting and by holding adequate liquid funds against losses and expenses that could arise from these risks,’ Medcraft said.
Meanwhile, some cfd providers have welcomed the proposed changes, noting that retail investors would ultimately stand to benefit. A managing director of a CFD trading company, Andrew Merry, stated ASIC’s proposals were a step in the right direction as regards the issue of segregated client monies, adding that OTC issuers being adequately capitalised had the added benefit of providing private investors with greater confidence.
‘Presently, under the Corporations Act, Australian financial services licensees dealing in over-the-counter derivatives are legally allowed to use client monies to hedge market positions,’ said Merry. ‘This sends a confusing message to trading clients and we have long advocated for change in the law.’
He added that the proposed changes would create a level playing field among issuers and align Australia with global standards.