Final derivatives retail client money reporting rules
On 10 October 2017, ASIC released the final form of the ASIC Client Money Reporting Rules 2017 (Client Money Rules). The new rules will take effect from 4 April 2018. ASIC also published Information Sheet 226 Complying with the ASIC Client Money Reporting Rules 2017 (INFO 226) which provides further information on ASIC's expectations on compliance with these new rules.
The publication of the Client Money Rules followed the public consultation process that was conducted under Consultation Paper 291 Reporting rules: Derivative retail client money (CP 291) in July 2017. We previously provided a briefing in our Financial Services Update on 21 July 2017.
In this briefing, we provide an overview of the amendments that ASIC has made in response to industry feedback.
Summary of the scope of the Client Money Rules
Before we get into the details of the changes that had been made, it is helpful to set out the key elements of the Client Money Rules.
| Scope |
The rules apply to "reportable client money", which is money that is:
In other words, it applies to OTC derivatives and exchange traded derivatives on foreign financial markets. "Derivative retail client money" is money paid to a licensee in connection with a dealing in derivative provided to, or a derivative held by, a retail client (including sophisticated investors). |
| Record keeping |
A licensee is required to keep records of:
Such records must be provided to a client or ASIC upon request. |
| Reconciliation |
A licensee is required to perform daily and monthly reconciliations of the amount of reportable client money held in a client money account and the amount recorded in the licensee's records (both on the individual client basis and on the total client money basis). The monthly reconciliation must also include a statement signed by a director or authorised person, stating that the person believes, and has no reason not to believe, that the reconciliation is accurate in all respect. |
| Reporting |
A licensee must provide a written report to ASIC if it:
The licensee must also prepare and give to ASIC, on an annual basis:
|
| Policies and procedures | A licensee must establish and implement policies and procedures designed to ensure compliance with the rules, and keep those policies and procedures up to date. |
Practical compliance
The key elements of the Client Money Rules referred to above have not changed through the consultation process. However, the process of industry consultation has led to some changes to address practical compliance issues – in particular, to address concerns regarding the timing of the reconciliation, and the period of time that the licensee has to produce documents on request by ASIC or a client.
The key changes are:
| Draft Rules | Final Rules | |
|---|---|---|
| Complying with requests for records by ASIC or clients | A licensee must comply with requests for records required to be kept under the Rules within 2 business days. | The request must be complied with within 5 business days (or such longer period as agreed between the licensee and the requesting party). |
| Timing of reconciliation | A licensee must perform reconciliations of the money held as at 7 pm Sydney time. | Reconciliation may be performed as at a time determined by the licensee (provided it is the same time each business day) – i.e., the "Nominated Reconciliation Time". |
| Completion of daily reconciliation | A licensee must perform the daily reconciliation by 7 pm on the business day following the day to which the reconciliation relates (i.e. within 1 business day). | Daily reconciliation must be completed within 3 business days of the end of the business day to which the reconciliation relates. |
| Auditor's report | The auditor's report must be provided to ASIC 3 months after the end of the licensee's financial year. |
The auditor's report must be provided to ASIC 4 months after the end of the licensee's financial year. |
ASIC also released INFO 226 to provide additional detail on its expectation as to the information that is required to be contained in the reconciliations performed under the Client Money Rules, as well as the process for making the relevant reports to ASIC.
Application to ASX24 participants
As mentioned above, "reportable client money" is derivatives retail client money that is or relates to a derivative that is not traded on an Australian domestic licensed financial market. In other words, it includes both OTC derivatives and derivatives traded on a foreign exchange.
ASX 24 participants have been subject to reconciliation and reporting requirements for many years, with the requirements set out in the ASIC Market Integrity Rules (MIRs). The reconciliation requirements under the MIRs have not created separate reconciliation requirements for domestic and offshore market activity. Applying the new Client Money Rule requirements to ASX24 participants would have led to duplication of reconciliations, and separate processes for reconciliations of money relating to offshore and domestic markets.
In response to industry feedback, the final Client Money Rules now include two important carve outs. First, if client money is already included in a reconciliation performed by an ASX24 participant under the MIRs, then separate reconciliations under the new Client Money Rules do not need to be undertaken for that money. Secondly, if the only reportable client money money which an ASX24 participant receives is money which is reconciled under the MIRs, then the entirety of the new Client Money Rules do not apply.
Conclusion
The final Client Money Rules address certain practical concerns raised by the industry, but we anticipate that there would still be challenges to licensees achieving full compliance with the obligations by the commencement date of April 2018. The two particular areas we identify as potentially pitfalls are the reconciliation requirement and reporting requirement.
The reconciliation requirement requires licensees to identify specific funds as "reportable client money". Developing operational processes to capture this particular category of money may prove challenging, particularly in circumstances where licensees receive payments which include reportable client money, as well as other money. Also, the requirement to report to ASIC any difference or discrepancy identified through the reconciliation without any significance or materiality threshold may also result in a number of reports being made to ASIC of matters that arise from minor operational or inadvertent errors that may otherwise be immediately rectified.
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