Industry is now starting to appreciate the significance of ASIC’s Consultation Paper 177 Electricity derivative market participants: Financial Requirements (Consultation Paper). For many licensed electricity derivative market participants (Licensees), the Consultation Paper will lead to a dramatic increase in the amount of liquid regulatory capital required to be tied up on balance sheets.
The increase arises because ASIC is looking to introduce new financial requirements that will apply to Licensees that enter into electricity derivatives. The new financial requirements will operate in tandem with financial requirements that apply to derivatives over other commodities, in particular the need to have adjusted surplus liquid funds of up to 5 per cent of liabilities. Given that most Licensees will enter into derivatives over a range of commodities, the effect is that most Licensees will need to meet both sets of financial requirements.
If you have not already done so, we recommend you review the Consultation Paper and seek advice on the impact of the new requirements on your company. ASIC has also invited affected Licensees to make submissions on the Consultation Paper. The due date for industry submissions is fast approaching.
By way of background, the proposed new financial requirements are summarised below:
Rolling 12 month cash flow projections
Licensees must prepare ‘director approved’ quarterly cash flow projections covering at least 12 months.
New NTA requirement
Licensees must hold net tangible assets (NTA) equal to the greater of $150,000 and 10 per cent of average revenue over a recent reference period.
The use of a gross revenue measure to calculate the required NTA may dramatically increase the required NTA for many Licensees. For example, if the trading or hedge book is held within the same licensed operating entity, the new financial requirements will equate to 10 per cent of the entire business revenue. This could involve significant additional funding costs for many Licensees, particularly given the application of the liquidity requirements (see below).
There will also be limits on the entities that will be permitted to provide eligible undertaking, meaning many companies may need to find and inject substantial new capital to meet the new requirements.
Licensees will need to hold the required NTA in the form of liquid assets, at least 50 per cent of the required NTA in cash or cash equivalents.
Response to Consultation Paper
Responses to the Consultation Paper are due on 29 June 2012. It is proposed that ASIC will release an update to Regulatory Guide 166 Licensing Financial requirements (RG 166) in July 2012 with the final RG 166 to be released in September 2012, however, we expect the timing will be delayed.