ASIC to Retail OTC Derivatives Issuers: Be Vigilant Amidst Coronavirus

The regulator has asked retail firms to check their systems and risk mitigation measures.

With the number of confirmed cases of coronavirus rising across the world, the Australian Securities and Investments Commission (ASIC) has reached out to retail over the counter (OTC) derivative issuers urging them to be vigilant.

In particular, in an email seen by Finance Magnates, the Australian regulator has stressed the importance of having a number of measures in place to hedge against increased volatility, which is likely to result in higher than normal volume of trades.

ASIC has emphasized the importance of having business continuity plans. Specifically, the watchdog asked firms to: “review, update and test your plans regularly, incorporating new information and addressing emerging challenges.”

In addition, back-up arrangements, stress testing, and reviewing current risk management systems were all part of the authority’s suggestions in the email, which came from its Market Supervision, OTC Intermediary Compliance team.

“Back-up arrangements – ensure your arrangements operate as planned with your allocated resources. Consider your human and technological resources (e.g. location, capacity and internet load),” the regulator said in the email.

In addition to the email, ASIC has also sent out a survey to some retail OTC derivative issuers, asking them to provide information on how they are dealing with COVID-19 and whether they have recently reviewed their risk mitigation measures, among other questions that address the content provided in the email.

Sophie Gerber of Sophie Grace and TRAction Fintech
Sophie Gerber, a Director at Sophie Grace and TRAction Fintech

Speaking to Finance Magnates, Sophie Gerber, a Director at Sophie Grace and TRAction Fintech, said: “For a properly run AFSL, there shouldn’t be anything too difficult or tricky in the questions being posed by ASIC.  It is a good opportunity to review systems and processes, such as remote access and stress testing of resources.”

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FX markets rocked by high volatility

ASIC’s email comes at a time when the financial markets are experiencing a lot of volatility. As Finance Magnates reported, on Monday coronavirus and oil prices all contributed to an eventful start of the week, with commodity-linked currencies, such as the Australian dollar (AUD), New Zealand dollar (NZD) and the Canadian dollar (CAD) all posting sharp declines in the early morning hours.

Large swings in the price of major currencies can be problematic for brokers and traders alike. Back in June of 2016, following the big Brexit vote, many brokers struggled to meet their customers’ demand as there was a squeeze on liquidity.

Flash crash events can cause financial harm to forex brokers. Historically, these types of situations have led to clients receiving margin calls and having positions closed out at a negative balance.

Furthermore, large changes in major currencies can cause hundreds of millions in losses, as was the case when the Swiss National Bank loosened its grip of the Swiss franc (CHF) back in 2015 and removed its peg against the Euro.

“It would not be a positive outcome to have an Australian provider fail as a result of pressures associated with the virus, especially while we await the outcome of the product intervention enquiries,” Gerber outlined.

“Hopefully the responses to the survey give ASIC comfort that there are many businesses in Australia being prudently operated and a focus placed on those that are not meeting this standard.”

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