The Australian Securities and Investment Commission (ASIC) has released new financial requirements for Australian financial services licensees who issue over-the-counter (OTC) derivatives to retail clients, including contracts for difference and margin foreign exchange.

The changes aim to ensure these AFS licensees have adequate financial resources to operate their business in compliance with the Corporations Act and to carry out supervisory arrangements.

ASIC Commissioner, Greg Tanzer said the new requirements had been developed to help ensure licensees have the financial resources to more adequately manage their operational risks in this growing area and followed a lengthy consultation process with industry.

‘Considering the complex and risky nature of retail OTC derivative businesses, issuers should be subject to enhanced financial requirements’, Mr Tanzer said.

‘In our review of this sector, we have found that poorly resourced issuers of retail OTC derivatives are less likely to carry out adequate supervisory arrangements and are more likely to encounter compliance breaches.

‘We need to raise the bar higher to ensure licensees have adequate financial resources to properly oversee and manage the operational risks inherent in the OTC derivatives market. Ultimately, this goes to our strategic priority of promoting the confident participation of retail investors in financial markets.

‘The increase to the minimum financial requirements for retail OTC derivative issuers also brings Australia in line with comparable jurisdictions, such as the United Kingdom and Singapore’, Mr Tanzer added.

The requirements, implemented through Class Order [CO 12/752] Adequate financial resources for financial services licensees that issue OTC derivatives to retail clients and outlined in Regulatory Guide 239 Retail OTC derivative issuers: Financial requirements (RG 239) build on the general guidance in Regulatory Guide 166 Licensing: Financial requirements (RG 166), by addressing the particular operational risks and characteristics of the retail OTC derivatives sector.

Under the changes, retail OTC derivatives issuers must meet a net tangible asset (NTA) requirement, which will require them to hold NTA the greater of:

From 31 January 2013:
  • $500,000, or
  • 5% of average revenue

From 31 January 2014:
  • $1,000,000, or
  • 10% of average revenue.


Issuers will also be required to, each quarter, prepare projections of cash flows over at least a 12 month period based on their reasonable estimate of revenues and expenses over that term. These projections must be certified as reasonable by the issuer’s directors.

To ensure financial resources can be used effectively to meet unexpected losses and expenses as they arise, there is also an NTA liquidity requirement. Under this requirement, issuers must hold 50% of the required NTA in cash or cash equivalents and 50% in liquid assets.

Financial trigger point reporting obligations will also be modified to enable issuers to temporarily draw down on the required NTA to meet unanticipated costs and contingencies. However, if issuers hold inadequate NTA for more than two months, they will be required to report this to clients. If NTA falls too low, issuers will be forbidden from taking on new client liabilities.

ASIC released Consultation Paper 156 Retail OTC derivative issuers: Financial requirements (CP 156) in 2011 to seek feedback on the financial requirements for issuers of OTC derivatives to retail investors.

The new financial requirements for retail OTC derivative issuers follow ASIC’s enhancement of the financial requirements for responsible entities of managed investment schemes (see Appendix 1 to Report 259 Response to submissions on CP 140 Responsible entities: Financial requirements (REP 259)).