ASIC has issued class order relief to ensure that the ASX-traded instalment warrant market can continue to operate appropriately after 1 January 2011 when the new margin lending provisions in the Corporations Act (the Act) commence. This follows industry concern that some ASX-traded instalment warrants might technically be classified as margin loans and therefore included in the new margin lending provisions.
In January 2010, Parliament amended the Act to include margin lending facilities as a financial product. The amendments added a number of new obligations on margin lenders, over and above the existing general obligations in the Act. For margin lenders, the new provisions take effect on 1 January 2011.
In granting relief, ASIC was of the view that Parliament's main focus in enacting the new margin lending provisions was to regulate traditional margin loans, rather than instalment warrants that are bought on a secondary market where timing is critical and involve non-recourse credit with limited investor liability. Additionally, ASIC considers that the ASIC Market Integrity Rules (ASX Market) and the ASX Operating Rules have a number of provisions that protect investors in ASX- traded instalment warrants.
Class Order [CO 10/1034] Margin lending Relief for ASX-Traded Instalment Warrants ensures that ASX-traded instalment warrants continue to be regulated under the Act as either a security or an interest in a managed investment product, while excluding them from the new margin lending provisions.
The Class Order declares that an instalment warrant that is:
- ASX-traded
- issued by a financial services licensee
- a ‘standard margin lending facility’,
is not a margin lending facility.
The Explanatory Statement to [CO 10/1034] explains the Class Order in more detail.
Background
When an investor buys an instalment warrant, they get a beneficial interest in a share or managed investment product (the underlying product). However, they only pay part of the cost of the underlying product initially, with the issuer giving them credit to pay for the balance. The investor must then repay that credit by one or more ‘instalments’. Once the investor has repaid the credit, they receive full title to the underlying product. Some instalment warrants, such as resetting, rolling or barrier-feature instalment warrants may also require the issuer or the investor to reduce the loan, if the loan-to-value ratio rises above a specified limit. Under the Act’s margin loan definition, this might technically be a 'margin call' and thus result in the instalment warrant being caught as a margin loan.