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Australia, Australian Securities and Investments Commission highlights CFD Compliance Issues

The Australian Securities & Investments Commission review of client money practices and reconciliation practices has found out that a number of issuers of OTC contracts for difference and margin FX derivatives are non-compliant.

An investigation by ASIC has established that 8 out of 40 CFD providers and margin forex derivative providers are not complying with client money laws and have failed to properly deposit monies into a segregated trust account. The risk-based review which is still ongoing also found that 6 issuers haven’t deposited client monies into a compliant account on the day the funds were received or within one business day.

The review relating to potential requirements for unlisted, margined derivatives contracts available to private investors was launched by the Australian Securities and Investments Commission last December, one month after the MF Global collapse where it was found that the company was commingling client monies with its own to hedge trading positions instead of using the firm’s capital.

The main objective of the risk review is to help protect the interests of market participants who trade in CFDs and margin forex by requiring market participants to transparently disclose risk while improving credit risk management and permitting investors to be adequately compensated in the event of loss. The review is also intended to ensure that providers are adequately capitalised and are financially stable.

ASIC has followed up with providers to make sure they have a clear understanding of what is expected of them and of their obligations under the law. This would include feedback on effecting daily client monies reconciliations, making sure that there is an appropriate segregation of duties and that the eventual reconciliation is finally signed off by upper management, and recording policies for dealing with variances.

ASIC Commissioner Greg Tanzer emphasised that client money provisions are essential to protect the interests of private investors particularly where leveraged instruments are concerned. The fact that these contracts are not traded through exchanges introduces an element of risk since traders and investors who wish to trade these financial instruments are exposed to the risk of default and also the operational risks undertaken by the party issuing the derivatives contracts. Mr Tanzer said that the announcement should serve as a warning to those providers who aren’t complying with the law and ASIC will be considering strong action against any providers who are found to be breaching the client money rules.

In July 2010, ASIC issued a Regulatory Guide relating to dealing in over-the-counter derivatives (RG 212). The guide provides a basic overview of the statutory client monies provisions in particular those relating to derivatives.

Section 981D of the Corporations Act in Australia specifically states that client monies held by providers can be utilised for the means of satisfying obligations in relation with guaranteeing, margining, securing, transferring, adjusting or settling dealings in derivatives by the operators (which would include dealings on behalf of people other than the client). Some CFD brokers were even surprised by this seemingly lax nature of Australia’s laws on the protection of client monies and at their competitors’ lax attitude to adhering to those rules.

‘When Capital CFDs entered the Australian market, we were shocked to discover that the Corporations Act permitted operators to make use of client funds to finance operational costs, which is without doubt not in the best interests of clients,’ stated managing director of Capital CFDs Andrew Merry. ‘We brought with us the United Kingdom practice of ringfencing client monies and not utilising the monies for any operational purposes at all, including the hedging of client positions.’

Meanwhile, the CEO of Saxo Capital Markets, Anthony Griffin, noted categorically that protecting client monies in segregated accounts was sacrosanct. A number of CFD providers, including CMC, GFT, IG Markets, City Index, Capital CFDs and Saxo, have rallied together to form the Australian CFD Forum earlier this year – a key objective of the body being to push for stricter rules to help protect their industry from unscrupulous providers.

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