What is a derivative

A derivative could include a futures contract or forward; an option or swap; a contract for difference, margin or rolling spot contract or a cap, collar, floor or spread.

Who needs to comply

Under the FMC Act, you must be licensed to make a regulated offer of derivatives. 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.

Your obligations

Licensees have a number of obligations, in addition to the minimum standards and standard conditions as set out in their licence. These obligations include:

• Notifying the FMA of certain events and providing us with information.  
• Financial reporting obligations.
• A requirement to comply with the Product Disclosure Statement (PDS).
• A requirement to meet certain obligations for the handling of handling of investor money and property. 

Licensees are subject to supervision by us. Supervision can range from a full onsite inspection through to information requests and desk-based reviews.

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

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

Derivatives issuers are supervised by the FMA and must comply with the following 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 reequired 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.

Fair dealing

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

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

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.