The Australian Government has this week signalled their intention to proceed with client money reforms in respect of OTC derivatives.
Some industry players are concerned by the proposed reforms because they appear to have been drafted with scant regard to how margin FX and CFD brokers operate, particularly with respect to generating market competition. The new regulatory regime is likely to favour large market makers over STP brokers and smaller less sophisticated and less capitalised brokers.
However, that said, it is important to bear in mind that Australia’s thorough legislative process means that the reforms are unlikely to become law or to take effect for some time. This will give businesses the opportunity to take advice on the best way to prepare for the changes.
The Minister for Financial Services has not indicated whether she intends to introduce the Bill during the current parliamentary sitting, however as the current sitting only runs for a few more weeks, until 1 December 2016, it is possible the Bill may not be introduced until the next one which will take place from 7 February 2017. This would mean the Bill would not be considered until early next year.
How does Australia’s law-making process work from here?
In Australia the Bill must pass through two houses of Parliament to become law. The Bill must first go through the lower house, the House of Representatives. This involves: • Two readings of the Bill • Referral to a specialised committee for public consultation • debate (often at length) • a third reading; and • Vote. If the Bill is passed by the lower house it must then go through the upper house, the Senate. This involves:
- Two readings of the Bill;
- Referral to a specialised committee for more detailed examination and public consultation;
- a third reading; and
- If the Senate makes any amendments to the Bill it will be returned to the House of Representatives to consider, debate and vote on the amendments.
The Bill cannot be passed into law until both Houses agree on the exact form of the Bill.
What happens if the Bill is passed by Parliament?
If the Bill passes through both houses of Parliament and is signed into law the reforms will be referred to ASIC who are likely to carry out a public and industry consultation before it will drafting processes and rules for the implementation of the reforms.
The Government has also indicated that the reforms will be subject to a one-year grace period providing industry providers a period of transition before all businesses must be in compliance with the new rules.
While Parliament intends to reform this area of the client money regime the new rules are unlikely to become law or be imposed on the industry for some time. This leaves plenty of time for businesses both large and small to take steps to prepare for their eventual implementation over the next few years.
It is also worth noting that the current murmurings in Australian political circles indicate that Malcolm Turnbull may not continue to hold the office of Prime Minister for much longer, if true this may upset significantly any plans by his government to introduce or pass these reforms.
What the reforms are and why people are concerned?
- The reforms would remove the current ability for AFS Licensees to withdraw client money that has been provided by the clients in relation to retail OTC derivatives and use it for a ‘wide range of purposes’ including as working capital. The driver behind these reforms is the government belief that this exception currently places retail derivative client money at greater risk of loss, particularly in the event the licensee becomes insolvent.
- The reforms have concerned many because of potential inability by some businesses to adopt the changes. For example, where they do not have sufficient capital to hedge their client’s position. This may lead to serious insolvency issues which would be ultimately be to the detriment of their clients if they are unable to meet the requirement to put into client money accounts their own money to meet their liabilities owed to clients.