19 November 2011

Protecting client money in Over-the-Counter derivatives

The collapse of MF Global has underscored the need to investigate options for strengthening client money protections for over-the-counter (OTC) derivative transactions, Assistant Treasurer and Minister for Financial Services and Superannuation, Bill Shorten, said today.

The comments were made while launching a discussion paper on the Handling and use of client money in relation to over-the-counter derivatives transactions.

The discussion paper considers various aspects of Australia's current regulatory regime for the keeping and handling of client monies, in particular the regulation of OTC derivatives.

Minister Shorten said, "The recent collapse of MF Global throws these issues into sharp relief. This discussion paper was being drafted before the MF Global collapse, but the Government is moving more quickly to consider these issues in light of recent events."

The Government is consulting with retail clients and industry stakeholders to gain a greater understanding about how they are using client money accounts in relation to OTC derivatives transactions and whether retail investors are protected appropriately.

Government has been working with the Australian Securities and Investments Commission (ASIC) for some time on these issues. In particular, ASIC has recently extended its "if not, why not" comply-or-explain guidance on client money protections in the OTC contract for difference (CFD) space.

"These markets are less heavily regulated than on-exchange derivatives markets, which have also seen ongoing strengthening of applicable reporting and reconciliation rules by ASIC in recent times," Mr Shorten said.

An OTC derivative is a financial contract negotiated bilaterally between the buyer and seller and is not traded on a market. They typically incorporate terms that allow the contracting parties either to hedge specific risks or generate tailored exposures such as swaps, CFDs, margin foreign exchange and OTC options.

Formal submissions are invited over the next ten week period. Retail investors, brokers and other stakeholders are invited to participate in the consultation process. The paper is available on the Treasury website.