FMA casts regulatory net out to short-term derivatives

The Financial Markets Authority wants to license all short-term derivatives firms before the year is out, with the sector accounting for about 40 percent of complaints to the regulator over the past 18 months.

The market watchdog wants all unlicensed sellers of short-duration derivatives, such as binary options and contracts-for-difference, to apply for a licence by Aug. 1 and be fully compliant from December after a review raised concerns about the risk posed to investors by the products. The FMA is seeking feedback on whether it needs to formally exclude transactions where there's an actual exchange of physical currency within three days, but might inadvertently get caught by the new rules.

"Short-term derivatives are very high risk products and this risk is exacerbated when they are offered by unlicensed providers," FMA regulation director Liam Mason said in a statement. "About 40 percent of the complaints we receive are about unlicensed derivative-issuers, and a common theme is that people have difficulty in getting their money back."

The market watchdog has been cracking down on foreign exchange firms, some of which have been kicked off the Financial Services Provider Register for not providing local services. At the same time, it's been examining its perimeter - those financial services that don't fall under its regulatory remit but may have an indirect effect on areas that do - with a view to ensure its oversight remains robust.

The regulator reviewed how derivatives are defined due to the volume of complaints about online FX and other short-term trading services, and also that it "observed the emergence of online trading platforms, often based in overseas jurisdictions, targeting New Zealand investors with offers of short-duration derivative products".

The FMA's previous stance was that FX-related derivatives settling within three days and other derivatives with a one-day settlement weren't caught by the law's definition. However, a Ministry of Business, Innovation and Employment discussion document in 2012 intended the securities to be captured and the FMA said it changed its position after the review.

Mason said the new approach offers certainty about the scope of regulation and will aim to ensure ordinary spot FX contracts aren't captured by the change.

Submissions on the consultation are due by April 28.

(BusinessDesk)