New Zealand Law Society - Licensing to be required for short-term derivatives

Licensing to be required for short-term derivatives

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The Financial Markets Authority has confirmed that businesses selling short-term derivatives need to be licensed.

From December 2017, any company making regulated offers of short-duration derivative products to New Zealanders that settle within 3 days, whether they are based here or abroard, will require a licence.

The FMA says it expects all currenly unlicensed providers to apply for a licence by 1 August 2017.

Licensing for derviatives issuers was introduced by the Financial Markets Conduct Act 2013 in December 2014. The FMA says it has been reviewing how it regulates short-duration derivative products such as binary options and contracts-for-difference, due to concerns about the harm these products pose for investors.

The FMA says it is seeking 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.

The consultation is to ensure that actual exchanges of foreign currency, settled within three working days, are not classified as derivatives.

“Short-term derivatives are very high risk products and this risk is exacerbated when they are offered by unlicensed providers,"  FMA Director of Regulation Liam Mason says.

"About 40% of the complaints we receive are about unlicensed derivative-issuers, and a common theme is that people have difficulty in getting their money back."

Mr Mason says the FMA believes 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.”