03 April 2017

FMA confirms short-term derivatives to be licensed

Media release
MR No. 2017 – 12
3 April 2017

The Financial Markets Authority has today confirmed that businesses selling short-duration derivatives need to be licensed. The Financial Markets Conduct Act introduced licensing for derivatives issuers in December 2014.

The FMA has been reviewing how it regulates short-duration derivative products such as binary options and contracts-for-difference (CFD), due to concerns about the harm these products pose for investors. This review has included discussions with the sector.

Liam Mason, FMA Director of Regulation, said, “We have been monitoring developments in the market since the introduction of licensing for derivatives issuers. We have also been receiving a steady volume of complaints about short-term FX trading and other derivatives products.”

From December 2017, any company making regulated offers of short-duration derivative products to New Zealanders that settle within 3 days, whether they are based here or abroad will require a licence. The FMA expects all currently unlicensed providers to apply for a licence by 1 August 2017.

The FMA is seeking feedback on whether to use its designation power to declare that spot FX contracts physically settled by delivery of an amount of currency within three working days are not derivatives for the purposes of the Financial Markets Conduct Act.

The consultation is to ensure that actual exchanges of foreign currency, settled within three working days, are not classified as derivatives.

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

“We believe this approach provides certainty to the industry about the scope of derivatives’ regulation. We also want to ensure that ordinary spot FX contracts are not unintentionally captured by this change. So we are consulting on a class designation for these contracts to ensure issuers of these products do not require a license.”