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New Zealand’s Regulator Expands Licensing Requirements to Capture Short Term Derivatives

Posted on April 19th, 2017 by Sophie Gerber in Licensing

The increase in demand for financial services entities seeking to be registered on the New Zealand Financial Services Provider Register (FSPR) has not been deterred by more onerous registration requirements. Much of the demand for FSP registrations has been from overseas entities (or entities backed by overseas entities) to provide short term derivatives to clients.

Historically, financial services entities could offer short term derivative contracts (including carefully constructed binary options and contracts for difference) to retail clients based in New Zealand or abroad by obtaining an FSP registration but without the need to be formally licensed. This meant financial services entities could operate a trading platform (such as MetaTrader 4 or MetaTrader 5) with limited regulation in a respected jurisdiction.

In April 2017, the Financial Markets Authority (FMA) announced new licensing requirements for financial services entities offering short term derivative contracts to New Zealand resident retail clients.  These will commence in December 2017.

Liam Mason, FMA Director of Regulation, stated that the new licensing requirement stemmed from the monitoring of financial market behaviours, but most from the “steady volume of complaints about short-term FX trading and other derivative products.” He went on to note that about 40% of complaints received were attributed to short term derivatives contracts and clients not being able to receive their money back from providers listed on the FSPR. The volume of complaints could be attributed to the somewhat ease of registration on the FSPR relative to other top tier jurisdictions.

Any financial services entity offering short term derivative contracts to New Zealanders that settle within three (3) days, whether based in New Zealand or internationally, will need to be licensed. The FMA has suggested that existing FSP registrants offering such services to clients should seek to commence the licensing process by 1 August 2017 to ensure they are fully compliant by December 2017.

The FMA is currently in a consultation phase surrounding spot FX contracts. This consultation is seeking to exclude deliverable spot FX contracts, settled within three (3) working days, as derivatives for the purposes of the Financial Markets Conduct Act. Consultations closed on 28 April 2017.

Sophie Grace can assist with licensing in New Zealand, please contact us for further information.

Sarah Murray

Sarah works with the Compliance Team with a particular focus on compliance and legal services. Sarah also works with the Legal Team providing ongoing assistance in drafting and reviewing documentation as well as legal research. Sarah assists clients with AFSL and ACL applications, variations and also assists in the implementation of compliance reviews. She provides ongoing compliance support in the form of compliance program implementation and reviews.