ASIC has reordered the classes [CO 12/752] Financial requirements for issuers of retail OTC derivatives which were due to expire on October 1, 2022.

The new instrument, ASIC Corporations (Financial Requirements for Issuers of Retail OTC Derivatives) Instrument 2022/705, sets out financial requirements for issuers of over-the-counter (OTC) derivatives for retail clients. The financial requirements are intended to ensure that Australian financial services licensees have sufficient financial resources to operate their business in accordance with the Companies Act 2001 and to manage the operational risks inherent in the OTC derivatives market. ASIC has been manufacturing the instrument for five years.

Under the instrument, issuers of OTC retail derivatives must:

  • meet a net tangible asset (NTA) requirement where the licensee must hold the greater of $1,000,000 or 10% of average income
  • prepare quarterly cash flow projections for a 12-month period based on their reasonable estimate of revenues and expenses over that period
  • meet an NTA liquidity requirement where the licensee must hold 50% of the required NTA in cash or near cash and 50% in liquid assets,
  • comply with financial trigger point reporting obligations if licensees do not hold the required NTA.

The instrument was developed following a public consultation under consultation paper 363 Remaking ASIC class order on financial requirements for retail OTC derivatives (CP 363) which was published in June 2022. The ASIC received a submission in response to CP 363 that supported the proposed recommendation redo[CO 12/752]without noticeable changes.

Background

Under the Legislation Act 2003, legislative instruments automatically cease or “lapse” after a certain period of time, unless steps are taken to preserve them. This ensures that the instruments are kept up to date and remain in force only as long as they are relevant and fit for purpose.

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