ASIC today released a feedback report (REP 320) responding to submissions on our consultation on revised financial requirements for issuers of over-the-counter (OTC) electricity derivatives.

Consultation Paper 177 Electricity derivative market participants: Financial requirements (CP 177), released in May 2012, outlined proposals for replacing the current financial requirements applying to electricity derivative issuers with a simpler net tangible asset measure, and new liquidity and cash forecasting requirements.

Based on feedback we received, and further consideration, ASIC does not intend to implement the changes to financial requirements we proposed in CP 177 at this time.

ASIC Chairman Greg Medcraft said ‘Since we released CP 177, work to implement significant reforms to Australian OTC derivative markets has progressed. This work is being done to meet Australia’s Group of 20 (G20) commitments, and could involve trade reporting, central clearing, transitioning of some OTC markets to platforms, and ultimately margining requirements for non-centrally cleared derivatives.’

‘ASIC remains of the view that market participants could benefit from some enhanced risk management due to the highly concentrated nature of the OTC derivatives electricity market. However, we don’t want to pre-empt the process of implementing the G20 reforms to OTC derivative markets in Australia and have decided to delay our review until this process is completed.’

If electricity derivatives are ultimately not included in these reforms, ASIC will consult on applying similar new requirements through the Australian financial services (AFS) licensee financial requirements.

Background

Many of the participants in wholesale electricity markets deal and make a market in OTC derivatives relating to the wholesale price of electricity as part of the ordinary course of their business, as an essential part of managing their exposure to electricity spot prices. They are required to hold an AFS licence with appropriate authorisations, and meet AFS licensee obligations including complying with financial requirements.

ASIC is responsible for licensing and monitoring the financial services activities of electricity businesses. It has no role in regulating the physical electricity business of electricity derivative market participants.

ASIC sets minimum financial requirements to promote appropriate financial risk management, taking into account the nature, scale and complexity of an AFS licensee’s business. Our requirements are not aimed at preventing licensee failure, they are intended to help ensure that cash shortfalls do not put compliance with the licensee’s obligations at risk.

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Report 320 Response to submissions on CP 177 Electricity derivative market participants: Financial requirements (REP 320)