New client money rules get into effect in Australia
Under the new rules, the circumstances in which an AFS licensee may use client money have been significantly restricted.
A raft of new rules concerning client money come into effect today in Australia, with the requirements affecting Australian financial services (AFS) licensees that hold client money for trading in over-the-counter (OTC) derivatives. The Australian Securities & Investments Commission (ASIC) has published an updated guidance for the entities that are set to comply with the new rules.
In April 2018, the Treasury Laws Amendment (2016 Measures No. 1) Act 2017 and the Corporations Amendment (Client Money) Regulations 2017 commenced. As a result of these reforms, the circumstances in which an AFS licensee may use client money have been significantly restricted.
Let’s note that derivative retail client money is client money which:
- (a) has been paid to the licensee in connection with dealing in a derivative or a financial service relating to a dealing in a derivative; and
- (b) relates to a derivative or financial service provided to a person that:
- (i) is a retail client; or
- (ii) would be a retail client if the person were not a sophisticated investor.
Regarding the restrictions on the use of derivative retail client money, the new rules stipulate that a licensee is not permitted to withdraw derivative retail client money from a client money account to meet obligations incurred by it in connection with margining, guaranteeing, securing, transferring, adjusting or settling dealings in a derivative by the licensee unless:
- (a) the entry into of the derivative was or will be cleared through an authorised clearing and settlement facility; and
- (b) the licensee incurred the obligation in connection with the derivative under the operating rules of the facility (i.e. the obligation is incurred by the licensee as a member of the facility).
In addition, a licensee is not permitted to rely on an entitlement or written direction from clients to use derivative retail client money from a client money account:
- (a) as the licensee’s capital, including working capital; or
- (b) for the purpose of meeting obligations incurred by the licensee other than on behalf of the client; or
- for the purpose of entering into, or meeting obligations under, transactions that the licensee enters into to hedge, counteract or offset the risk to the licensee associated with a transaction between the licensee and the client.
The reforms also impose new record-keeping, reconciliation and reporting requirements on AFS licensees that hold derivative retail client money (unless the client money relates to a derivative that is traded on a fully licensed domestic market, such as ASX 24).
ASIC Commissioner Cathie Armour commented that the rules aim to strengthen the protection of derivative retail client money and to help to increase investor confidence in the Australian financial system.
‘ASIC has engaged with industry and there has been a sufficient transition period to ensure that AFS licensees that hold derivative retail client money are aware of the new regime and understand the obligations it imposes. From 4 April 2018, we expect licensees to know and comply with the new client money regime’, Ms Armour said.
