Derivatives issuers

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Page last updated: 2 Jul 2019

What is a derivative

In section 8(4) of the Financial Markets Conduct Act 2013 (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 options to acquire equity security, debt security, or a managed investment product by way of issue)
a swap
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. 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 out of the FMC Act regime – see our designation notice for more information.

Your Obligations

A 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.

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Notifying the FMA

Licensees obligations include notifying the FMA of certain events and providing us with information. For example, when a new director or senior manager is appointed by completing a declaration form.

Standard conditions for derivatives issuer licences

The licence is subject to a condition that the licensee or authorised body may, under the licence, provide only the market services or class of market services to which the licence relates and for which each person is authorised under the licence; and the conditions imposed by the FMA under section 403– these will generally include the standard conditions and/or any specific conditions; and the conditions imposed by regulations (if any).

Financial reporting obligations

Derivative issuers are FMC reporting entities and must comply with the following:

Keep proper accounting records to assist with the preparation of compliant financial statements. Records must be kept in English and a copy must be kept in New Zealand.
Prepare financial statements for the group's operation. Financial statements must comply with generally accepted accounting practices in New Zealand.
Ensure that financial statements are audited by a licensed auditor or registered audit firm.
Lodge financial statements and the auditor’s report with the Companies Office within 4 months of the balance date.

Offer information in a PDS

All issuers have obligations to disclose offer information in a PDS and on the Disclose Register. They also have ongoing obligations under the FMC Act.

Schedule 1 of the FMC Act includes small offer exclusions which would require limited or no disclosure. The FMA must be notified of the use of these exclusions.

The FMA offers a pre-registration review service to help issuers and their directors feel more confident that their offer documents are likely to satisfy our expectations.

AML/CFT obligations

The Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (the Act) imposes several obligations:

You must provide a written risk assessment of the money laundering and financing of terrorism activity you could expect in the course of running your business.
You are required to implement an anti-money laundering and countering financing of terrorism programme that includes procedures to detect, deter, manage and mitigate money laundering and the financing of terrorism.
You are required to appoint a compliance officer to administer and maintain your programme.
You are required to perform due diligence processes on your customers. This includes customer identification and verification of identity.
You are required to report suspicious transactions.

The FMA supervises designated business groups (DBGs) and reporting entities listed in Section 130 of the Act.

Fair dealing obligations

Derivatives are covered under financial products in the FMC Act. Compliance standards prohibit:

Misleading or deceptive conduct.
False, misleading or unsubstantiated representations.
Offers of financial products in the course of an unsolicited meeting.

Derivatives investor money and property handling obligations

Licensed derivatives issuers are required to comply with the new requirements for the handling of derivatives investor money and derivatives investor property. These include:

holding derivatives investor money on trust for the investor
ensuring that derivatives investor money is paid promptly into a specified bank to a trust account
derivatives investor money must be held separate from money held by or for the issuer or offeror on its own account
at least daily, reconciling the derivatives issuer’s records of the amount of derivatives investor money with the amount of money in the trust account
derivatives investor money and derivatives investor property must not be used to satisfy any liability of a derivatives issuer
keeping and maintaining up to date records of derivatives investor money and derivatives investor property held for each investor
obtaining an assurance report, within 4 months after the issuer’s balance date, that states whether, in the auditor’s opinion, the derivatives issuer’s processes, procedures, and controls were suitably designed and operated effectively during the accounting period.

See Financial Markets Conduct Regulations 2014 for more info.

Supervision by us

Licensees are subject to supervision by us. We take a risk-based approach to monitoring, meaning the extent of supervision varies depending upon our priorities and the nature of your business. It can range from a full onsite inspection through to information requests and desk-based reviews. As a minimum, we will seek assurance you are complying with the basics, i.e.:

you are meeting the minimum standards for licensing
you are complying with the conditions attached to your licence.

We will also assess your conduct generally as a licence holder and check you are complying with key legislation such as the Financial Advisers Act 2008, the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 and the fair dealing provisions within the FMC Act.

One of the big shifts for the FMA under the FMC Act is the use of preventative regulation, which aims to identify and anticipate potential causes of harm to New Zealand’s financial markets and investors. Find out more about the seven priority areas of potential harm in our Strategic Risk Outlook.

A key part of our supervision is self-reporting by licensees. If we can see that you can identify and resolve problems it gives us confidence. If you have any significant issues, we encourage you to tell us about them and what you are doing to remedy them.

If you need to contact us at any time during the term of your licence you should email compliance@fma.govt.nz.

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.