ASIC Further Clarifies its Reporting Rules for OTC Derivatives Issuers

ASIC sent a questionnaire to licensees requesting additional information .

In October 2017, ASIC released Information Sheet 226 Complying with the ASIC Client Money Reporting Rules (Info Sheet 226) which included fields pertaining to client monies held with brokers as per the ASIC reconciliation template. This caused confusion for many in the OTC derivatives industry and prompted some to seek clarification regarding the intention behind the included data fields.

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This past week, ASIC sent a questionnaire to licensees requesting information in relation to the performance of ASIC’s function of monitoring and promoting consumer protection in relation to the Australian financial system as set out in s12A (2) of the ASIC Act 2001.

The questionnaire contains ten questions including a combination of yes or no answers and short responses, which must be completed and returned to ASIC by 12 February 2018.

The questionnaire covers all aspects of the licensee’s businesses including management’s understanding of Client Money Reporting Rules, the implementation of monitoring programs regarding the licensee’s compliance with Client Money Reforms and any training or systems which the licensee is planning to implement in order to comply with the client money reforms and new requirements outlined in Info Sheet 226.

ASIC states in Info Sheet 226 that the following information should be provided in an AFS licensee’s reconciliation of client money: “The total amount of reportable client money which is being held, or has otherwise been permissibly withdrawn or invested, by the licensee, including:

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  • Client money held in the licensee’s client money account(s);
  • Client money held with other brokers (including balances held with each individual broker);
  • Client money which has been invested in accordance with section 981C(a) of the Corporations Act; and
  • Client money, which has been used in accordance with section 981D of the Corporations Act.”

Point (c) above caused confusion amongst the OTC derivatives industry as it requires AFS licensees to reconcile all reportable “client money held with other brokers”. Ahead of the new client money rules coming into effect in April 2018, AFS licensees will request a return of all funds held with hedging counterparties where the funds are derivative retail client money.

As a result, this would mean that a record of ‘zero’ would be required for the specific data field included in point (c) above. The reconciliation process as described above is required for all “reportable client money” as defined under section 1.3.2 of the ASIC Client Money Reporting Rules 2017.

The inclusion of points (b) to (d) above relate to the need for increased transparency in relation to an AFS licensee’s use of reportable client money. There may be circumstances where AFS licensees could record an amount other than ‘zero’ in each of the data fields that does not contravene their obligations under the Client Money rules.

Consider the following example: AFS licensees, which engage in overseas exchange traded derivative transactions may receive client money for the transaction. The AFS licensee therefore may be paying reportable client money to a broker overseas prior to the acquisition of the derivative traded on the exchange in the overseas jurisdiction.

In this scenario, the AFS licensee is required to comply with the new client money rules and as such a figure other than ‘zero’ would need to be included in the data field.

For many AFS licensees, especially those that only deal in OTC derivatives, this will not be relevant and a figure of ‘zero’ will be recorded.

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