Derivatives issuers

What is a derivatives issuer?

Under the Financial Markets Conduct Act 2013 (FMC Act) a ‘derivatives issuer’ is a person that is in the business of entering into derivatives. A person is ‘in the business’ of entering into derivatives if they carry on the business of entering into derivatives (whether or not the business is the person’s only business or the person’s principle business).

What is a derivative?

In the FMC Act, a derivative is defined as an agreement in relation to which the following conditions are satisfied:

• under the agreement, a party to the agreement must, or may be required to, provide at some future time consideration of a particular kind or kinds to another person
• that future time is not less than three working days, for a foreign exchange agreement, or one working day in any other case, after the time at which the agreement is entered into
• the amount of the consideration, or the value of the agreement, is ultimately determined, is derived from, or varies by reference to (wholly or in part) the value or amount of something else (of any nature whatsoever and whether or not deliverable), including, for example, one or more of the following:
  - an asset
  - a rate (including an interest rate or exchange rate)
  - an index
  - a commodity.

It also includes any transaction, regardless of duration, that is recurrently entered into* in the financial markets in New Zealand or overseas and is commonly referred to* as:

• a futures contract or forward
• an option (except an option to acquire by way of issue an equity security, debt security, or a managed investment product)
• a swap agreement
• a contract for difference, margin contract or rolling spot contract
• a cap, collar, floor or spread.

* The FMA's view

• “Recurrently entered into” means the product must be regularly traded in the market.
• “Commonly referred to” means issuers cannot rename an existing transaction type to avoid it being defined as a derivative. We believe that if most of the market refers to a transaction as, for example, an option or contract for difference, then it will be a derivative.

The FMA has the power to declare any arrangement used for investment or risk management as a particular kind of financial product. For example, we may use this power if an arrangement has been structured to avoid falling within the definition of a derivative, but in our view still functions like a derivative. 

We can also declare that a derivative is not a financial product. We have used this power to designate certain short-duration forward foreign exchange contracts as not derivatives for the purposes of the FMC Act – see our designation notice for more information.

Who needs to comply

Under the FMC Act, you must be licensed to make a regulated offer of derivatives. See section 388 of the FMC Act.  A derivatives issuer that makes a regulated offer of derivatives must be licensed by the FMA. See section 41 of the FMC Act. A regulated offer means an offer of financial products, including derivatives to one or more investors where at least one of those investors requires disclosure, for example, because the investor is a retail investor. 

Licensing and registration

There are some things you can do to ensure your application runs as smoothly as possible:

1. review the licensing guides and documents below as they contain all the information you need to know so you can complete and submit your application
2. set up your RealMe® login details early 
3. focus on the minimum standards – we will assess your business against them when processing your application
4. Contact the FMA if you have any questions 

Licensing guides

Licensing guide PART A
This guide contains information about the licensing process and includes many FAQs you might have and explains how to use our online application form (currently unavailable); create a RealMe^® identity, if you don't already have one and pay your licensing fee.

Download the licensing guide Part A: How do I apply for a licence?

Licensing guide PART B
This guide contains all the specific questions you’ll be asked and the minimum standards you’ll need to show you meet. It also details the information and supporting documents you’ll need to provide when you submit your application. 

Download the licensing guide Part B: Guide to applying for a derivative issuer licence PDF

Standard conditions for derivatives issuer licences

In your application, you'll need to demonstrate how you can meet the minimum standards and conditions for your licence - or ask us for a limit or variation using the forms below.  This is very important because when a licence is granted, they contain conditions that support your licensee obligations. They include conditions imposed by the FMC Act, the regulations, and any conditions imposed by the FMA.

Download the Standard Conditions for derivatives PDF

Licensing declarations and certificates

Costs

A licensing fee of $10,695 (incl. GST) which includes 70 assessment hours is payable to the FMA.

We may charge an additional fee at the FMA hourly rate where our assessment of an application exceeds the included number of hours stated above. If an additional fee is charged for your application we will let you know in advance and provide you with the reasons for this. We may also invoice you for any costs of external advice or assistance.

Fees for variations to an existing licence

The fee payable to the FMA when you apply to vary an existing licence is $115 (incl. GST). This does not apply to adding a new licence type. Additionally, the FMA will invoice you for time spent assessing the variation application based on the FMA hourly rate $230 per hour for an FMA board member and $178.25 per hour for FMA staff.

Note: We will not issue a new or varied licence until the fee is paid in full. Licence fees are not refundable if an application is rejected.

Levies and waivers

Obligations

A derivatives issuer that makes a regulated offer of derivatives must be licensed by the FMA. A regulated offer means an offer of financial products to one or more investors where at least one of those investors requires disclosure, for example because the investor is a retail investor. SeeA derivatives issuer is required to be licensed when making a regulated offer. A regulated offer includes any offer of derivatives when disclosure must be made to one or more investors. For example, a retail investor. See section 41 of the FMC Act.

Exemptions

The FMA has wide powers to exempt persons or transactions from some financial markets law requirements. These powers enable us to remove rigidities in the law and ensure requirements for businesses are reasonable and cost-effective. Find out more about exemptions you can apply for under the FMC Act and current exemption notices.

Useful resources

• It is helpful to read the Licensing Overview Report alongside the guide to the FMA’s view of conduct. Together, these documents give a good indication of our areas of future focus, our overall approach to monitoring; and what we expect of licensed providers of financial products and services. Download the Licensing overview report (2017) PDF.
• The Derivatives Issuer Sector Risk Assessment identifies key risks in the Derivatives Issuer (DI) sector. The information is useful to help licensed DIs (or those thinking of applying for a licence) understand our focus areas and ensure they comply with our expectations and best practice. Download the Derivatives Issuer Sector Risk Assessment PDF.
• Check your application against our Licensing Checklist prior to submission.
• Good corporate governance supports investor confidence. To enable companies to grow and thrive, directors need to be both risk managers and responsible risk takers. Being a director is more than just a title. The office of a director carries with it a wide range of ethical, legal and commercial duties and obligations. The FMA publishes a range of guidance and resources to assist directors in their duties.