A recent case example released by FOS highlights the importance of making sure your PDS and Client Agreement (T&Cs) cover material errors in pricing and the ability for providers to cancel trades when they arise.
The determination related to foreign exchange trading and the reversal by the Financial Services Provider (FSP) of $125,000 of USD/CNH trades placed over a seven (7) day period.
FOS referred to the client agreement of the FSP which permitted the FSP to void a margin FX contract or CFD if there had been a material error. This is a common clause in the client agreements of OTC derivative issuers. This client agreement defined “material error” as where the pricing by the FSP was materially incorrect when taking into account market conditions and quotes in the underlying instruments which prevailed at the time.
The FSP argued that there was a material error in the swap rates applied to the client’s trades and that the error was apparent, given the rate was significantly different from the market swap rate. FOS took into consideration the FSP’s history of volatility in its swap rates compared with market rates and determined that the fact that the FSP’s rate deviated from the market rate was not persuasive that there was a material error.
FOS also noted:
- the FSP highlighted in their disclosure documents that foreign exchange markets trade continuously; and
- the FSP chose to quote prices and accept orders over the Chinese New Year when they did not have an obligation to do so.
FSPs should ensure the content of their disclosure documents provides for the ability to close trades out where there has been a material error and review the circumstances which would give rise to the FSP taking such action. It is imperative that disclosure documents are drafted well, to ensure the client understands the action FSPs may take and reduce the likelihood of client complaints.
This article is based on FOS’s July 2017 “Circular” newsletter which outlines a key determination specifically relevant to OTC derivative issuers. The FOS Circular provides practical information and explains FOS’s approach on substantive issues when making their determinations.
Sophie Grace can assist you in the preparation of your legal disclosure documents, including your Product Disclosure Statement, Financial Services Guide, and Client Agreement. Please contact us for further information.