ASIC today released a consultation paper on proposed changes to the financial resource requirements of electricity market participants who hold an Australian financial services (AFS) licence.

ASIC regulates some electricity market participants (or their related bodies corporate) in relation to over-the-counter (OTC) electricity derivatives used for the purpose of managing financial risks.

Some electricity market participants in wholesale electricity markets deal in OTC derivatives, to manage the volatile price in the market for electricity, referred to as the spot or physical market. These participants are generally required to hold an AFS licence with appropriate authorisations and meet AFS licensee obligations including complying with financial requirements.

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

ASIC is not a prudential regulator. Its requirements are not intended to ensure licensees meet financial commitments to counterparties (refer: Regulatory Guide 166 Licensing: Financial requirements (RG 166).

‘However, in releasing our consultation paper we are seeking to support fair and efficient markets by developing financial requirements that promote the orderly operation of the OTC electricity derivative market,’ ASIC Chairman Greg Medcraft said.

‘We want to ensure AFS licensees make adequate provision for expected expenses and carry sufficient financial resources to mitigate against operational risk that could lead to unexpected losses or expenses.’

CP 177 forms part of a more general review of financial requirements that ASIC is undertaking for sectors within the financial services industry. ASIC has already issued revised financial requirements for operators of managed investment schemes (refer 11-242MR) and has consulted on revised requirements for entities providing OTC derivatives for retail clients (refer 11-92MR).

Comments on the consultation paper are due by 29 June 2012.

Download Consultation Paper 177 Electricity derivative market participants: Financial requirements

Background

Trading in OTC electricity derivatives is limited to sophisticated counterparties. There are no retail participants in the OTC electricity derivatives markets.

ASIC is only involved with the regulation of activities in the derivatives market, not in the direct regulation of the physical electricity market. The regulation of that market is the responsibility of the Australian Energy Market Commission and the Australian Energy Regulator.