ASIC surveillance after MF Global’s collapse has revealed a great concern within the OTC derivatives industry in that more than 30% of providers have failed to comply with client money laws. 

“After MF Global’s collapse it is disheartening to read that there are a large proportion of providers who are not complying with the most important procedure in running a company, the protection of client money,” said Andrew Merry, Managing Director, Capital CFDs. 

Section 981D of the Corporations Act states that client money held by OTC derivative licensee can be used for the purpose of meeting obligations in connection with margining, guaranteeing, securing, transferring, adjusting or settling dealings in derivatives by the licensee (including dealings on behalf of people other than the client). 

“When Capital CFDs came to Australia, we were stunned to find out that the Corporations Act allowed operators to use client funds to finance operational costs, which is clearly not in the interest of the client. We brought with us the UK practice of quarantining client monies and not using it for any operational purposes at all, including the hedging of client positions. I believe we are getting closer to having this standard applied across the industry with Treasury considering a change to the law,” said Merry.

 4 June 2012

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“The Forum’s Client Money Standard prevents member firms from using client funds for any reason, thereby offering the client the highest level of protection. To my knowledge this standard is the safest client money protection model that is available anywhere,” said Andrew Merry, Managing Director, Capital CFDs. 

“After the collapse of MF Global  any financial industry participants dealing with the public must have excellent safety settings in place for their money and, furthermore, be able to show that this process is transparent to the investor,” said Mr Merry. 

Under current legislation a provider is able to use client money to fund the operational costs of the business which is clearly not in the best interest of the client. The recent failings of MF Global and Sonray Capital have highlighted the lack of protection that the Corporations Act affords to client money. 

A key standard of the Australian CFD Forum prevents a member firm from using client money, whether it be cash or unrealised profit, for hedging or any other reason.

“To participate in the CFD Forum each member firm must comply with each of the 16 standards without exception. This provides transparency to investors and assurance that the members firms are following best practice across the board,” said Mr Merry.

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