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12-298MR ASIC calls for improved compliance in CFD and margin FX client money handling practices
ASIC has today issued a warning to the contracts for difference (CFD) and margin foreign exchange (FX) sectors following the release of a report highlighting weaknesses in client money handling practices.
Report 316 Review of client money handling practices in the CFD and margin FX sector (REP 316), follows a risk-based surveillance of 40 issuers of OTC CFDs and margin FX contracts.
The review focused on issuers’ client money handling and reconciliation practices. It also gathered information about the amount of client money issuers hold and how they use this money. The 40 issuers ASIC reviewed represent the overwhelming majority of market share in the sector.
ASIC identified a number of contraventions of client money rules as part of its review, including:
- 18 issuers (45%) failed to properly designate client accounts as trust accounts; and
- 11 issuers (28%) failed to pay client money into a compliant account by the next business day following receipt.
In addition, ASIC’s review identified further weaknesses, including:
- six issuers (15%) did not perform client money reconciliations on a daily basis;
- five issuers (13%) had inadequate segregation of duties in their back office; and
- 19 issuers (48%) had no formal escalation process for resolving variances in the reconciliation.
ASIC Commissioner, Greg Tanzer, said, ‘ASIC is concerned about the number of breaches of basic client money handling provisions. The client money provisions are an important safeguard to protect the interests of retail investors. We expect issuers to know and comply with their obligations under the law and to put in place effective measures and supervisory arrangements to ensure these obligations are met.
‘ASIC has taken a facilitative approach to rectifying these breaches and strengthening issuers’ client money handling and reconciliation practices to better protect client money. Issuers have been highly responsive to our concerns and addressed them in a timely manner.
‘The release of this report however, which follows guidance published in 2010, marks the end of this facilitative approach. These findings should serve as a wakeup call to CFD issuers to continually improve their compliance processes and procedures’, Mr Tanzer said.
REP 316 also contains observations about how issuers use client money, industry size and scale as well as providing insights into emerging industry trends that were identified during the review.
Client money is money paid by investors to an Australian financial services licensee in connection with a financial product or the provision of a financial service, in this case, trading in derivatives in the over-the-counter market.
Client money held in a compliant account receives statutory protection in the event of the issuer’s insolvency or ceasing to carry on business.
In July 2010, ASIC released Regulatory Guide 212 Client money relating to dealing in OTC derivatives (RG 212). The guide provides an overview of the statutory client money provisions and in particular, the specific provisions that relate to derivatives.
ASIC released a media release at the mid-point of its review, ASIC highlights compliance concerns in client money handling (12-108MR), that set out similar concerns to those included in the final report.
In November 2011, Treasury issued its Discussion Paper Handling and use of client money in relation to over-the-counter derivatives transactions. The discussion paper sought submissions on a number of issues relating to whether the client money provisions of the Corporations Act provide sufficient protections for investors. Treasury received 105 submissions to this Discussion Paper, including a confidential submission from ASIC. ASIC continues to assist Treasury in its consideration of the submissions and its development of a law reform proposal.