Compliance: Theory and Practice in the Financial Services Industry
12D. Foreign Exchange
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|CA s761A - Definition of Foreign Exchange Contract|
|Foreign exchange contract means a contract:|
|(a)||to buy or sell currency (whether Australian or not); or|
|(b)||to exchange one currency (whether Australian or not) for another (whether Australian or not).|
Under CR r7.1.04G, each party to the foreign exchange contract that is not entered into, or traded, on a financial market is taken to be an issuer of the product.
|CA s764A(1) - Things that are Financial Products|
|Subject to subdivision D (s765A), the following are financial products for the purposes of Chapter 7: ...|
|(k)||a foreign exchange contract that is not:|
|(i)||a derivative (derivatives are covered by s764A(1)(c)); or|
|(ii)||a contract to exchange one currency (whether Australian or not) for another that is to be settled immediately.|
In 2016-17, ASIC imposed enforceable undertakings on Westpac, ANZ, NAB, CBA and Macquarie requiring them to upgrade their systems and controls to address the risks relating to inappropriate conduct in their wholesale FX businesses. ASIC found evidence of insider trading, market manipulation and inappropriate disclosure of client confidential information. Westpac and ANZ were required to make community benefit payments of $3m each, NAB and CBA $2.5m each and Macquarie $2m in connection with the undertakings.
See ASIC Media Releases 16-455MR, 17-065MR and 17-144MR and ASIC Report 525 Promoting better behaviour: Spot FX.
|CA s765A(1) - Things that are not Financial Products|
|Despite anything in subdivision B (ss763A-763E) or subdivision C (s764A), the following are not financial products for the purposes of Chapter 7: ...|
|(m)||a contract to exchange one currency (whether Australian or not) for another that is to be settled immediately.|
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|PF 209 cl 20 - Licence Conditions|
|(a)||the licensee carries on a business of entering, as principal, into foreign exchange contracts that are financial products in Australia; and|
|(b)||a counterparty to a foreign exchange contract that the licensee enters into as principal in Australia covered by this licence is a person who is not:|
|(ii)||a person that is required under their AFS licence to have $10 million of tier one capital,|
|the licensee must either:|
|(c)||have $10 million of tier one capital, as defined in APRA’s Prudential Standards and Prudential Practice Guides as at the date of this licence for authorised deposit-taking institutions; or|
|(d)||have adjusted surplus liquid funds (“ASLF”) of the sum of:|
|(ii)||5% of adjusted liabilities between $1 million and $100 million; plus|
|(iii)||0.5% of adjusted liabilities for any amount of adjusted liabilities exceeding $100 million,|
|up to a maximum ASLF of $100 million.|
Click here for a copy of Pro Forma 209. See also ASIC Regulatory Guide 166 Licensing: Financial requirements (appendix 7).
Condition 20 is imposed on all licensees who are not a body regulated by APRA and are authorised to deal in foreign exchange contracts.
For these purposes, "foreign exchange contracts" is defined in Pro Forma 209 to mean "foreign exchange contracts" as defined in CA s761A and to include "derivatives", as defined in CA s761D (including CR r7.1.04), that are foreign exchange contracts.
|CR r7.6.01(1)(m) - Exemption for Self Hedging|
|An AFSL is not required for a financial service provided in the following circumstances:|
|(i)||the service consists only of either or both of:|
|(A)||dealing in derivatives; and|
|(B)||dealing in foreign exchange contracts;|
|(ii)||the service does not involve the making of a market for derivatives or foreign exchange contracts;|
|(iii)||the dealing is entered into for the purpose of managing a financial risk that arises in the ordinary course of a business;|
|(iv)||the person does not deal in derivatives or foreign exchange contracts as a significant part of the person's business;|
|(v)||the dealing is entered into on the person's own behalf.|
The notes to this section give as an example of a financial service to which it applies a series of forward foreign exchange contracts entered into by a gold mining company to hedge against the risk of a fall in the price of gold. They give as an example of a financial service to which it does not apply the issue and disposal of derivatives relating to the wholesale price of electricity.
There is a broadly equivalent exemption in CR r7.6.01(1)(ma) for dealings in foreign exchange contracts for carbon units, Australian carbon credit units or eligible international emissions units by persons, where the dealings are entered into for the purpose of managing financial risk in relation to the surrender, cancellation or relinquishment of carbon units, Australian carbon credit units or eligible international emissions units by the person, a related body corporate of the person or an associated entity of the person.
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