International brokers looking to establish a presence in the Asia-Pacific region are now facing yet another hurdle from regulators. New Zealand’s Financial Markets Authority (FMA) has announced that businesses selling short-duration derivatives, such as binary options and contracts-for-difference (CFD), will need to be licensed in the country.

The regulator says that it has been reviewing these products due to potential risks to traders and held discussions with the sector in the process of coming to its decision.

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Liam Mason, FMA Director of Regulation, said: “We have been monitoring developments in the market since the introduction of licensing for derivatives issuers. We have also been receiving a steady volume of complaints about short-term FX trading and other derivatives products.”

Regulatory timeline

From December 2017, any company marketing instruments to New Zealanders that settle within 3 days, whether they are based there or abroad, will require a licence. The FMA expects all currently unlicensed providers to apply for a licence by 1 August 2017.

The FMA is also asking for feedback on whether to use its designation power to declare that spot FX contracts physically settled by delivery of an amount of currency within three working days are not derivatives for the purposes of the Financial Markets Conduct Act.

Mason added: “Short-term derivatives are very high risk products and this risk is exacerbated when they are offered by unlicensed providers. About 40 per cent of the complaints we receive are about unlicensed derivative-issuers, and a common theme is that people have difficulty in getting their money back.

We believe this approach provides certainty to the industry about the scope of derivatives’ regulation. We also want to ensure that ordinary spot FX contracts are not unintentionally captured by this change. So we are consulting on a class designation for these contracts to ensure issuers of these products do not require a license.”

Sophie Gerber, Director of Sophie Grace Pty Ltd, commented: “This development is not surprising. There has been a huge surge in registrations on the Financial Services Provider Register (FSPR) by entities from around the world. The New Zealand regulators have been stepping up their resistance to these registrations over time and narrowing the requirements to succeed in joining the FSPR. We still receive many enquiries about obtaining an FSPR registration and understand that there is thriving secondary market for sale of FSPR registered companies.

This further step today confirms their intention to remove this sector of the market from using New Zealand as a de facto regulatory hub.”