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:
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.
Derivative Retail Client Money is defined as Client Money which:
The key takeaways from the above definition are:
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.
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:
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.
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:
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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