FMA moves to tighten oversight of short-term derivative products such as binary options and contracts-for-difference (CFDs)

The Financial Markets Authority (FMA) is tightening regulatory oversight over the source of 40% of the complaints it receives.

The regulator says firms selling short-duration derivative products such as binary options and contracts-for-difference (CFD) will need to be licensed.

The Financial Markets Conduct Act introduced licensing for derivatives issuers in December 2014. However, this oversight is not all encompassing. Thus the FMA is now looking to drag in companies offering CFDs and binary options products, but exclude contracts whereby people convert currency for the likes of overseas holidays that settle within three working days.

The FMA says from December this year, any company making regulated offers of short-duration derivative products to New Zealanders that settle within three days, whether they are based in New Zealand or overseas, will require a licence. The FMA expects all unlicensed providers to apply for a licence by August 1. 

“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 [foreign exchange] trading and other derivatives products,” FMA director of regulation Liam Mason says.

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

“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.”

The FMA wants feedback on whether it should use its designation power to declare 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. Mason says this consultation is to ensure actual exchanges of foreign currency, settled within three working days, are not classified as derivatives.

The FMA move will tighten oversight of the likes of controversial Hurricanes sponsor Fullerton Markets. Fullerton offers foreign exchange and CFD products to NZ investors but recently told the regulator their trades do not exceed 72 hours and the products NZ clients use are not deemed derivatives.

Below are some related links provided by the FMA. 

· Consultation on short-duration derivatives. Deadline for submissions is 28 April 2017. 

· Guidance to consumers on binary options.

· Guidance to consumers and foreign exchange trading.