Response to Australian Financial Review article, ‘BBY collapse an ASIC black mark’
Tony Boyd's commentary that clients expect moneys held by a financial services licensee to be held in trust for them (BBY collapse an ASIC black mark, AFR, 1 September 2015) reflects a misunderstanding about how client moneys rules in the Corporations Act apply to over the counter derivatives contracts like those involving margin foreign exchange and contracts for difference. The way these rules work was canvassed in the article speculating on whether government may be contemplating changes to these rules.
The current rules allow client money relating to derivatives to be used to meet obligations of the licensee in connection with margining, guaranteeing, securing, transferring, adjusting or settling dealings in derivatives by the licensee including dealings on behalf of people other than the client. As a result the client is exposed should there be a deficit in the account operated by a licensee in which client money is held and the licensee is unable to pay this deficiency. ASIC has been concerned that in many cases retail clients do not understand that the client money rules for over the counter derivative transactions work this way. ASIC has also been concerned that in many cases retail clients also do not understand that they have given a general direction in their client agreements to allow the licensee holder to use their moneys for a wide range of other purposes not associated with their trading, such as permitting the licensee to use the money for the licensee's own activities. ASIC issued Regulatory Guide, RG 212 Client money relating to dealing in OTC derivatives in July 2010 which sets out its expectations for disclosure to retail clients about the way these rules work.
Whether or not the current rules should change was the subject of a Treasury discussion paper issued in 2011 which generated more than 100 responses. One option canvassed in that discussion paper was in fact the possibility of adopting an approach that a licensee would be required to act as a trustee for each individual client for their client money. But to be clear, that is not the current client money rule for over the counter derivatives.
ASIC