Are you a supplier of goods with a fluctuating price? Do your customers ask for fixed pricing or hedging? Under the Securities Markets Act 1988, some of these types of pricing models are "futures contracts." If you offer them, you risk needing to be "authorised" by the Financial Markets Authority (FMA) – a three to six month complex and expensive process.
The good news is that under the new Financial Markets Conduct Act 2013 (FMCA), these kinds of pricing arrangements with "wholesale" customers become a lot more straightforward. We can help you identify how the new regime may offer you new business opportunities.
What happens under the current regime
The current regime requires people dealing in futures contracts to be authorised to do so by the FMA (or an authorised futures exchange).
You may be caught by this regime if, as part of your ordinary business, you are selling any kind of goods, including emission units, and offer your customers:
- take or pay pricing or any similar arrangement where there is a financial settlement element in place of delivery of the goods;
- pricing adjustment by reference to a marker price for the goods (which could go in your favour or the customer's favour).
Common examples of this type of pricing include:
- the customer agrees to buy a large volume of the goods at a specified price. If in fact they do not take the whole volume of the goods, there is a financial settlement for the balance;
- if the fluctuating price for the goods goes above a marker price, you pay the customer the difference. If the fluctuating price for the goods goes below that pre-set amount, the customer pays you the difference.
Unless your contracts with this type of pricing are carefully restricted to customers who do not rely on your advice or assistance in entering into the contract, there is a risk that you are dealing in futures contracts.
The new regime
The equivalent regime in the FMCA captures "derivatives". Derivatives are more clearly defined as financial products having pricing referenced to the value of the underlying goods. Some contracts that would currently be classified as futures contracts would not be derivatives, and so would not face regulation under the new regime.
Even if your pricing product is a "derivative", if you only deal with "wholesale" customers (or customers falling into other exclusions), you will be free of most of the provisions of the regime. This includes the disclosure and licensing aspects of the FMCA. The "wholesale" exclusion is clearly defined, and much easier to apply than trying to determine whether you are "advising or assisting" your customer.
So what is a "wholesale customer"? A rule of thumb is that the customer should be large, having:
- net assets (including assets under control) exceeding $5 million on the last day of each of the last two accounting periods; or
- consolidated turnover (including entities under control) exceeding $5 million in each of the last two accounting periods.
There are other categories of "wholesale" as well – see our FYI on exclusions here.
When can I take advantage of the new regime?
The relevant provisions of the FMCA are expected to take effect from 1 December 2014.
Is there anything else I should be aware of?
Regardless of the above, pricing that might be a futures contract or derivative can also have implications under:
- financial advising and registration legislation; and
- anti-money laundering legislation (requires a risk assessment, compliance programme, compliance officer, auditing, and customer due diligence).