ASIC remakes requirements for OTC derivatives issuers

Rick Steves

Retail OTC derivative issuers will have to continue to meet a net tangible asset (NTA) requirement where the licensee must hold 50% of the required NTA in cash or cash equivalents and 50% in liquid assets,

The Australian Securities and Investments Commission has remade class order [CO 12/752] Financial requirements for retail OTC derivative issuers which was due to sunset on 1 October 2022.

The new instrument sets out the financial requirements for issuers of over-the-counter (OTC) derivatives to retail clients. These aim to ensure AFS licensees have adequate financial resources to operate their business and to manage the operational risks inherent in the OTC derivatives market.

AFS licensee must hold the greater of $1,000,000 or 10% of average revenue

ASIC has made the instrument for five years. Retail OTC derivative issuers must:

  • meet a net tangible asset (NTA) requirement where the licensee must hold the greater of $1,000,000 or 10% of average revenue
  • prepare, each quarter, projections of cash flows over a 12-month period based on their reasonable estimate of revenues and expenses over that term
  • meet an NTA liquidity requirement where the licensee must hold 50% of the required NTA in cash or cash equivalents and 50% in liquid assets,
  • comply with financial trigger point reporting obligations if licensees fail to hold the required NTA.

The news follows a public consultation which was issued in June 2022 and only one AFS licensee submitted a response, which was supportive of the proposed recommendation to remake without significant changes.

ASIC concerned with Crypto, ‘fake’ low-cost brokerage, and securities lending

Australia’s financial watchdog has recently asked brokers to be careful about or reconsider offering high-risk products and services to retail investors, such as securities lending, crypto-assets and offers of ‘zero’ or ‘low-cost’ brokerage with a hidden true cost.

Securities lending involves one party (the lender) transferring title of their securities to another party (the borrower) who provides collateral in the form of shares, bonds or cash. The borrower pays the lender a fee and is required to return the securities, or equivalent securities, to the lender on demand or at the end of the loan term.

As to crypto trading, ASIC noted that brokers are increasingly offering these products which are unregulated alongside shares and other regulated financial products through their trading apps.

That is concerning for the government agency as it may give investors a false sense of security, leading them to believe crypto-assets have the same protections as regulated financial products or they may underestimate the risks.

Australia’s financial watchdog has also shown concerns about brokers’ marketing of products and services to retail investors with headline rates of ‘zero’ or ‘low-cost’ brokerage. The regulator reminded brokers that misleading or deceptive conduct is against the law. Brokers that claim to offer zero or low-cost brokerage should carefully consider whether they may be in breach of the law, ASIC warned.

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