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OTC Derivative Client Money

In addition to the general rules regarding Client Money set out in the Corporations Act, over the counter (“OTC”) derivative issuers are subject to specific requirements when handling OTC Derivative Client Money.

The key regulatory documents, in addition to Part 7.8 of the Corporations Act 2001, for the handling of OTC Derivative Client Money are:

  1. ASIC Regulatory Guide 212: Client Money relating to dealing in OTC derivatives
  2. ASIC Client Money Reporting Rules 2017

 

To ascertain what requirements are applicable to a certain type of Client Money, the starting point is to understand the nature and definitions of the specific type of Client Money you are dealing with.

 

Key Definitions – Derivative Retail Client Money, Reportable Client Money and Others

What is Derivative Retail Client Money?

Derivative Retail Client Money is defined as Client Money which:

  • has been paid to the licensee in connection with dealing in a derivative or a financial service relating to a dealing in a derivative; and
  • relates to a derivative or financial service provided to a person that:
    1. is a retail client; or
    2. would be a retail client if the person were not a sophisticated investor.

 

The key takeaways from the above definition are:

  1. Derivative Client Money from sophisticated investors is classified as Derivative Retail Client Money and therefore are subject to Derivative Retail Client Money Requirements – Read our article here regarding different types of wholesale clients;
  2. Derivative Client Money in relation to exchange traded derivatives (domestic and overseas) and OTC derivatives are both captured. Please note that this article is only about OTC Derivative Client Money.

 

What is Reportable Client Money?

Reportable Client Money is Derivative Retail Client Money that relates to derivatives which are not traded on a licensed domestic exchange. It follows that Derivative Retail Client Money that relates to overseas exchange-traded derivatives and OTC derivatives are both considered as Reportable Client Money, and are therefore subject to the ASIC Client Money Reporting Rules 2017.

 

What about other Client Money relating to derivatives?

The remaining Client Money relating to derivatives which are not captured by the above two definitions are Client Money relating to derivatives from wholesale clients who are not sophisticated investors. Wholesale Client Money is not subject to as many requirements as Derivative Retail Client Money, including not being subject to the ASIC Client Money Reporting Rules 2017.

When categorising the Client Money, OTC derivative issuers should keep in mind that:

  1. Sophisticated investors are considered to be retail clients for the purpose for defining Derivative Retail Client Money;
  2. The “price and value test” is not available to Contracts for Difference (CFD) providers when categorising a client as wholesale client.

 

To read more about the different methods to classify a wholesale client, click here.

Product Type

Type of client from which money is received

 

Retail Clients

Sophisticated Investors

Wholesale Clients

OTC Derivatives

Retail Derivative Client Money

Reportable Client Money

Retail Derivative Client Money

Reportable Client Money

Other

Overseas Exchange-traded Derivatives

Retail Derivative Client Money

Reportable Client Money

Retail Derivative Client Money

Reportable Client Money

Other

Domestic Exchange-trade Derivatives

Retail Derivative Client Money

Retail Derivative Client Money

Other

Below is a short summary of the specific requirements that are applicable to OTC Derivative Issuers in relation to the handling of Client Money relating to OTC derivatives. There are general rules regarding handling of Client Money which are not covered in the table and this article, please refer to our other article and RG212 for more information.

 

Derivative Retail Client Money – OTC Derivatives

Non Derivative Retail Client Money – OTC Derivatives

General rules regarding the handling of Client Money, such as holding the funds in a Client Money Trust Account

Applicable

Applicable

Restriction on the use of Client Money for margining, guaranteeing, securing, transferring, adjusting or settling dealings in a derivative

Applicable  

Not applicable under certain circumstances

Restriction on the use of Client Money as working capital, for the purposes of meeting obligations incurred by the licensee other than on the client, or for hedging purposes

Applicable

Not applicable if certain conditions are met

ASIC Client Money Reporting Rules 2017, which includes the following key requirements:

1. Keep accurate records of the amount of Reportable Client Money for each client and all clients of the licensee;

2. Comply with all written requests from clients in relation to the daily reconciliation of the Client Money belongs to the client within certain timeframe;

3. Comply with all written requests from ASIC in relation to the licensee’s compliance with the ASIC Client Money Reporting Rules 2017 within a certain timeframe;

4. Conduct daily reconciliation at the nominated reconciliation time of the amount of Reportable Client Money the licensee is required to hold for each client and all clients of the licensee. Please note that the daily reconciliation must be completed on the third business day following the business day to which the reconciliation relates.

5. Conduct monthly reconciliation of the amount of Reportable Client Money the licensee is required to hold for each client and all clients of the licensee at the nominated reconciliation time on the last business day of each calendar month, and provide the monthly reconciliation report to ASIC via the ASIC Regulatory Portal within ten (10) business days of the end of the calendar month to which the reconciliation relates;

6. Provide written report via the ASIC Regulatory Portal to ASIC when there is a failure to perform the required reconciliation or there is a difference arising from the required reconciliation; and

7. Engage an auditor to conduct an annual Client Money Audit and submit the result along with a Director Declaration to ASIC. 

Further, if a Licensee would like to change its nominated reconciliation time, a written notification to ASIC is required before doing so.

Applicable

Not Applicable

Sophie Grace published a previous article regarding ASIC Client Money Reporting Rules. You can read the article here.

 

How can we help?

Complying with Client Money rules is essential to OTC derivative issuers. A starting point to ensure compliance is to understand what rules are applicable to your business. Sophie Grace has extensive experience in advising/assisting in the following areas:

  • Advising on the tests/requirements applicable in distinguishing wholesale clients and retail clients;
  • Drafting/reviewing Client Money Reporting Policy and practice;
  • Reviewing and advising on your retail and wholesale disclosure documents to reflect how you will use and handle the relevant Client Money;
  • Reviewing marketing materials to reflect how you will use and handle Client Money; and
  • Assessing and reporting of non-compliance with Client Money rules.

 

This article aims to give you a condensed summary for Client Money relating to OTC derivatives. It should be read in conjunction with our other articles relating to Client Money so you can understand the applicable obligations.

Please reach out to us if you have any questions relating to this article or otherwise relating to Client Money.

Sophie Grace published an article regarding the general rules regarding Client Money. Please click here to read the article.

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