New Zealand’s Financial Markets Authority has just published a class designation that is important for all foreign exchange dealers. It comes into effect on 1 December 2017 and confirms that “forward foreign exchange contracts” are not “derivatives” under the Financial Markets Conduct Act (Act). I explain the background and significance of the designation below. The FMA’s report on submissions includes helpful background on the designation.
The starting point is not forward foreign exchange contracts but FMA’s concerns about the activities of issuers of certain types of “short duration derivatives”. FMA received a significant number of complaints from New Zealanders about high risk short duration derivatives such as FX CFDs and binary options, especially those issued by on-line platforms outside New Zealand. “Short duration derivatives” in this context are derivatives (contracts where value is determined at a later date by reference to something else) that are settled within either 1 or 3 working days. In particular, the definition of “derivative” in the Act excludes “foreign exchange agreements” that settle within 3 working days. FMA previously considered that all short duration derivatives were exempted from the definition and so a licence was not required to offer them to retail clients. However, FMA revisited the interpretation following the complaints. After taking into account the wider definition of “derivative” in the Act and the background of the definition, FMA concluded that certain short duration derivatives (including FX CFDs and binary options) are in fact captured by the wider definition of “derivative”. As a result issuers of such short duration derivatives to retail clients in New Zealand require a derivatives issuer licence from FMA (even if they are based outside New Zealand). FMA granted a grace period until 1 December 2017 for issuers to obtain a licence.
A “side effect” of the updated interpretation is that FMA considers that certain deliverable foreign currency transactions that settle within 3 working days (the “forward foreign exchange contracts” defined in the designation), a type of transaction commonly undertaken by foreign exchange dealers for legitimate purposes, are caught as “derivatives”. Under the previous interpretation a licence was not required to offer such forward foreign exchange contracts to retail clients. However, under the updated interpretation a licence is required (registered banks don’t require a licence but still obtain benefits from the designation). The FMA considered that the costs of obtaining a licence in that case outweighed the benefits and, accordingly, used its designation power (a power to, in effect, alter the law) to remove forward foreign exchange contracts from the definition of “derivative”. The designation comes into effect on 1 December 2017, the date when the grace period ends.
The definition of “forward foreign exchange contract” is based on the definition in the Australian Corporations Act but with some changes. In particular, the definition requires that the rate of exchange be determined on the date of the contract. The FMA has also included a definition of “working days” in the designation, consistent with the definition in the Financial Market Conduct Regulations. That definition takes into account public holidays or bank holidays in other countries in some circumstances.
Cygnus Law can advise you on the implications of the designation as well as of the change of interpretation of “derivative”, and can assist you to obtain an FMA licence, if required.
This blog is a brief summary and for information only and should not be relied on as legal advice
