Is There a Loophole Excluding CFDs and Forex from OTC Trade Reporting?

Through TRAction Fintech’s ongoing interaction with the FX and CFD industry in Australia, it has come to our attention that a handful of brokers are of the opinion that CFDs and margin FX are not covered in the OTC Trade Reporting Rules, therefore meaning that they do not need to report to an Australia Derivative Trade Repository (ADTR). Brokers have either received this advice or have come to their own conclusion that CFDs and margin FX are not subject to reporting requirements.

While the handful of brokers that have decided not to report are understandably quiet on their reasons for not reporting, we have learnt that this view likely stems from omissions in the description of products covered in ASIC Regulatory Guide (RG) 251. On page 28 of ‘RG251: Derivative Transacting Reporting’ there is a table headed ‘Products that must be reported’.

The table for foreign exchange derivatives lists:

Swaps Swaps Swaps can be defined as a derivate contact composed of two parties that exchange to cash flow between two separate financial instruments.They are generally divided into two categories. This includes contingent claims (options) and forward claims, where forward contracts, swaps, and exchange-traded funds (ETFs) are exchanged. Commodity price, equity price, interest rate, and foreign exchange rate are common variables used as one of the cash flows in swaps upon initiation. Different Types of Swaps Swaps can be defined as a derivate contact composed of two parties that exchange to cash flow between two separate financial instruments.They are generally divided into two categories. This includes contingent claims (options) and forward claims, where forward contracts, swaps, and exchange-traded funds (ETFs) are exchanged. Commodity price, equity price, interest rate, and foreign exchange rate are common variables used as one of the cash flows in swaps upon initiation. Different Types of Swaps Read this Term

Forwards

Non-deliverable forwards

Non-deliverable options

Options

Exotic options

Precious metals swaps

The table for equity derivatives lists:

Equity swaps

Equity index swaps

Equity options

As you can see from the above list, there is no specific mention of either margin FX or CFDs. We took this issue up with ASIC’s OTC Derivatives team back in June 2015 and they advised us that FX and CFDs were caught by the more general clauses in other parts of the overall legislation.

TRAction has heard that AFMA, on behalf of the industry, has also investigated this exclusion further with ASIC and wasn’t able to resolve the issue in favor of brokers not having to report.

We also hear through the licensed trade repositories that their discussions with ASIC around the issue have been unambiguous.

ASIC expects CFDs and margin FX to be reported and will use their enforcement powers over those that choose not to.

Sophie Gerber is the co-CEO of TRAction Fintech, a regulatory technology firm providing compliance solutions for brokers, including Best Execution Execution Execution is the process during which a client submits an order to the brokerage, which consequently executes it resulting in an open position in a given asset. The execution of the order occurs only when it is filled. There is typically a time delay between the placement of the order and the execution which is called latency.In the retail FX space, reliable brokers always strive to deliver best execution to their clients in order to maintain a solid business relationship with them. This is a co Execution is the process during which a client submits an order to the brokerage, which consequently executes it resulting in an open position in a given asset. The execution of the order occurs only when it is filled. There is typically a time delay between the placement of the order and the execution which is called latency.In the retail FX space, reliable brokers always strive to deliver best execution to their clients in order to maintain a solid business relationship with them. This is a co Read this Term and Derivative Trade Reporting and principal of legal firm, Sophie Grace which provides legal and compliance advice to financial service firms including FX and CFD brokers.