The two opposing camps in the contracts for difference (CFDs) stoush have - unbeknown to each other - both supported ASIC's increased financial reserves for issuers of over-the-counter (OTC) derivatives.
Both the foreign-dominated (and ironically named) Australian CFD Forum and the as-yet unnamed group of three Australian-owned companies said ASIC's higher financial hurdles specified in RG239 were to be commended and, if anything, were not high enough.
Australian CFD Forum chair Louis Cooper said the net tangible asset (NTA) requirements were "a good initiative from ASIC and a step forward in raising the barriers for entry for those providers who are not well capitalised or well governed".
Cooper, who is also CMC Markets head of Australia, added that "the new requirements don't go far enough".
On the other side of the debate, Sophie Grace PL director Sophie Gerber spoke for the Australian-owned OTC derivative providers: AxiTrader, Pepperstone and FP Markets. As the group's compliance and legal provider, Gerber congratulated ASIC on raising the bar, but said she expected to see "significant moves by ASIC to target not only inappropriate advertising, but also lax client-appropriateness screening".
ASIC's just-published RG239 requires retail OTC derivatives issuers to hold NTA the greater of $500,000 or 5 per cent of average revenue from January 31 next year, and then from January 31 2014, the NTA will rise to $1,000,000 or 10 per cent of average revenue.
(The foreign-owned Australian CFD Forum's members use the market maker business model that comes from a spread-betting origin and which requires market-making to cover duty payable to UK tax office Her Majesty's Revenue & Customs. In contrast, Australian-owned companies have broking origins and use a direct market access business model.)
Speaking as one of the Australian-owned providers AxiCorp Financial Services chief executive Goran Drapac (which owns AxiTrader) said AxiCorp would have supported a higher requirement than ASIC's initial $1 million.
"Other more appropriate measures which should be applied to OTC derivatives providers would include restrictions on firms taking speculative positions using client monies, stricter legislation regarding approval processes for making transfers out of client money accounts, improved hedging counterparty requirements (applying also to overseas parent entities of Australian-regulated OTC derivative providers) and guaranteed stop losses so that the losses of one client do not erode another client's gains," Drapac said.
Pepperstone Financial chief executive Joe Davenport, said ASIC's new financial requirements went "a long way to enhance investor trust in Australian firms offering OTC derivatives, an area that has recently been effected by the failing of firms such as MF Global".
"Operation of an OTC derivatives firm is a complex and capital intensive task. Setting a minimum NTA requirement goes a long way towards ensuring the adequacy of firms offering such services," he said.
ASIC's increased regulatory activity surrounding client money was a cornerstone to investor confidence. "We do consider that as per what is required of our overseas counterparts, the NTA threshold should be much, much higher," Davenport said.
CMC Market's Cooper, speaking for the Australian CFD Forum, said forum members had to have a minimum of $2 million in NTA. "Even with a small book of clients you need to have at least $2 million to be a well-governed and well-capitalised business, which is why the Forum has doubled ASIC's requirement," he said.
From a legal viewpoint, Gerber said that understanding and implementing an AFSL in Australia was "onerous" and firms which were not appropriately resourced "really struggle and are being increasingly targeted by ASIC".
She emphasised to clients that advertising must be appropriate, in content, location and medium. "So it has been disheartening for our clients to see some of the largest providers in the marketplace advertise inappropriately - including at airports, on billboards and on the bottoms of riders in the Tour De France," Gerber said.
RG239 showed that ASIC's enforcement actions would focus on OTC derivatives providers holistically. With financials dealt with, she expected to see "some significant moves by ASIC to target not only inappropriate advertising, but also lax client appropriateness screening - which was meant to be implemented by providers on 1 April 2012 with the advent of Benchmark 1 in RG227, but has been done less than genuinely by many OTC derivatives firms".
