Discussion paper released on derivative futures contracts

In response to requests from market participants, the Securities Commission has put forward a proposal to use its powers under the Securities Markets Act 1988 to declare certain derivative contracts known as contracts for difference (CFDs) in respect of shares or other securities to be futures contracts.

The reform of New Zealand’s futures regulation is currently being addressed by the Ministry of Economic Development as part of its review of Financial Products and Providers. However, the Securities Commission considers that more immediate clarification is needed for the status of certain types of financial instruments known as CFDs in respect of shares or other securities.

At present it is unclear whether these products constitute a future contract for the purposes of the Securities Markets Act. If the Commission declared CFDs in respect of shares or other securities to be futures contracts, a futures dealer in these products would be able to take advantage of the Securities Act (Authorised Futures Dealers) Exemption Notice 2002. This notice unconditionally exempts persons who deal in authorised futures contracts from the trustee, statutory supervisor, prospectus and investment statement requirements of the Securities Act and all of the Securities Regulations 1983 (except in relation to regulation 8 for misleading information). Instead people dealing in these products will be required to obtain authorisation to deal in futures contracts under the Securities Markets Act.

The Securities Commission sought comments on its proposal to use its specific powers under the Securities Markets Act to declare CFDs in respect of shares and other securities to be futures contracts in a discussion paper released in April. Submissions closed on 4 May 2007.

To view a copy of the discussion paper visit the Securities Commission’s website.

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