ASIC has today released a consultation paper proposing to remake its class order on the financial requirements for issuers of over-the-counter (OTC) derivatives to retail clients. The class order is due to expire (‘sunset’) on 1 October 2022.
The financial requirements in [CO 12/752] Financial requirements for retail OTC derivative issuers aim to ensure AFS licensees have adequate financial resources to operate their business in compliance with the Corporations Act, and to manage the operational risks inherent in the OTC derivatives market.
Under CO 12/752, retail OTC derivative issuers must:
- meet a net tangible asset (NTA) requirement where the licensee must hold the greater of $1,0000,000 or 5% of average revenue;
- prepare, each quarter, projections of cash flows over a 12-month period based on their reasonable estimate of revenues and expenses over that term;
- meet an NTA liquidity requirement where the licensee must hold 50% of the required NTA in cash or cash equivalents and 50% in liquid assets; and
- financial trigger point reporting obligations if licensees fail to hold the required NTA.
Consultation Paper 363 Remaking ASIC class order on financial requirements for retail OTC derivative issuers (CP 363) outlines ASIC’s rationale for proposing to remake the instrument for five years, including that the financial requirements remain appropriate and are operating effectively and efficiently.
Submissions on CP 363 are due by 29 July 2022.
Under the Legislation Act 2003, legislative instruments cease automatically, or ‘sunset’ after a period of time unless action is taken to preserve them. This ensures that instruments are kept up-to-date and only remain in force while they are relevant and fit for purpose.
Where an instrument is operating effectively and efficiently and continues to serve a regulatory purpose, ASIC will consult on remaking it even if there are minimal changes.