New Zealand’s DirectFX considering canceling its own derivatives issuer license after net assets breach

New Zealand-based FX brokerage DirectFX is considering terminating its own Derivatives Issuer License with the New Zealand authorities following a contravention of compliance rules which relate to the very small amount of forward contracts that the company handles.

Back in March 2015, DirectFX issued financial statements which contained information stating that the company had not met a specific condition of its New Zealand Financial Markets Authority license which stipulates that the company should maintain net tangible assets (NTA) of $1 million at all times.

The statements showed that the company’s net tangible assets amounted to approximately $1.4 million, however when taking into consideration assets that were not eligible to be included, the figure was below $1 million.

During the financial year, DirectFX had $2.68 million of restricted deposits, of which the breach amounted to less than 1% and has since been rectified by the company

Being a relatively new set of regulations, the conditions of this specific license which covered forwards were also new to the company and when DirectFX discovered the error, the company notified the Financial Markets Authority, however at the same time the company highlighted that there was a possible inability for DirectFX to meet its financial obligtions to clients.

In a commercial statement, Andrew Isbister, CEO of DirectFX stated

“The breach was immaterial when considered in the context of our overall business. Most of the firm’s assets are in cash or cash equivalents and some was deposited in a manner that mean they had to be excluded from the “adjusted” assets calculation for NTA purposes.”

In New Zealand, apart from banks, there are only 12 companies, DirectFX being one of them, which hold a Derivatives Issuer license from the Financial Markets Authority.

Banks dominate this particular sector, with seven banks in New Zealand holding such a license and smaller, non-bank firms having to battle it out among large institutions.

Mr. Isbister told the New Zealand Business Desk

“There is a far better story to tell about how companies like us have survived this far, but how many of us are now questioning the ongoing viability of providing services. For us, the issues caused with our non compliance here will most likely see us cancel our derivatives issuer licence shortly. We simply don’t need the added weight. We only sought the licence to help a tiny number of clients hedge their physical FX needs.”

In concluding, Mr. Isbister considers that smaller companies “are ultimately going to be squeezed out of the market, which is ultimately not good for the consumer, especially on forward FX, where rates are not at all transparent.”