The Australian Securities and Investments Commission (ASIC) today announced the release of a class order relieving some overseas wholesale financial service providers, which are dealing in foreign exchange contracts and making markets in derivatives and foreign exchange contracts in Australia, from the need to hold an Australian financial service (AFS) licence.

‘This relief means that some foreign counterparties to derivatives and foreign exchange contracts will not be required to hold an AFS licence where they are dealing or making a market’, ASIC Director of Regulatory Policy, Mr Mark Adams, said.

‘The relief has been provided to accommodate the way in which some wholesale counterparties deal with each other on a day-to-day basis, and removes an unintended limitation to the scope of existing licensing relief in the regulations’, Mr Adams said.

The relief, provided under Class Order [CO 04/1570]: Licensing relief for some overseas dealers or market makers in derivatives and foreign exchange contracts applies to foreign companies that meet the equivalent requirements in Regulation 7.6.01(1)(ma) under the Corporations Act 2001, namely:

• the derivative or foreign exchange contract is issued, acquired or disposed of under an agreement that sets out the terms and conditions for future dealing in a derivative or foreign exchange contract between the two parties to the agreement;
• the other party to the agreement:
  • is a wholesale client in Australia;
  • initiated the agreement;
  • holds an Australian financial services licence which permits it to make a market or deal in the financial product;
• the person relying on the exemption is not in this jurisdiction; and
• each party is dealing in the financial product on its own behalf.

Download a copy of Class Order [CO 04/1570] Licensing relief for some overseas dealers or market makers in derivatives and foreign exchange contracts

Background

Regulation 7.6.01(1)(ma) under the Corporations Act (the Act) provides relief for some overseas counterparties from the requirement to hold an AFS licence where they deal in derivatives, to accommodate the problems of compliance with the Act.

The regulation requires that there be an agreement between the parties to regulate their activities. The Australian counterparty has to have both initiated the agreement under which the two parties deal, and must hold an AFS licence to deal, or make a market* in the relevant financial product.

Participants in the derivative and foreign exchange industry have raised concerns about the limited application of an exemption in Corporations Regulations 7.6.01(1)(ma) to wholesale dealing activity. The existing regulation, prior to the granting of this relief, only provides AFS licensing relief for dealings in derivatives.

Further, the regulation does not provide relief for dealing in foreign exchange contracts (which are very similar to dealing in derivatives) and counterparties that make a market in derivatives or foreign exchange contracts. ASIC considers this limitation to the relief in Reg 7.6.01(1)(ma) to be unintended or anomalous.

Under the relief announced by ASIC today, where an Australian dealer or market maker in derivatives or foreign exchange contracts enters into an International Swaps and Derivatives Association (ISDA) master agreement (at their initiation) with an overseas market maker in derivatives or foreign exchange contracts, and subsequently enters into derivatives or foreign exchange contracts with that overseas counterparty, the overseas counterparty will not need an AFS licence for those market-making and dealing activities.

*Market-making is a form of dealing activity where an entity typically may quote buy and sell prices for a financial product at the same time.