The Australian Securities and Investment Commission has found 14 OTC issuers which are failing to comply with client money handling practices.

The financial watchdog is half-way through its year-long review of client money handling and reconciliation practices, and has discovered non-compliance by 14 out of the 40 issuers of over-the-counter contracts for difference and margin FX derivatives that are in review.

In the first half of its review, ASIC found that eight issuers failed to pay client money into a properly designated trust account, when no exception applied, and six issuers failed to pay client money into a compliant account on the day it was received or within one business day.

ASIC commissioner, Greg Tanzer said: ‘The client money provisions are an important safeguard to protect the interests of retail investors. ASIC expects issuers to know and comply with their obligations under the law and to put in place effective measures and supervisory arrangements to ensure these obligations are met."

Tanzer said the announcement should serve as a warning to those issuers who aren’t complying with the law.

"In the second half of our review and in view of today’s advice highlighting the non-compliance areas, we will consider taking strong action against any issuers found to be in breach of the client money provisions," Tanzer added.

In July 2010, ASIC released a new regulatory guide on client money
relating to dealing in OTC derivatives. The guide provides an overview
of the statutory client money provisions and in particular, the specific
provisions that relate to derivatives.

ASIC’s expectations for good practice include feedback on performing
daily client money reconciliations, ensuring there is an appropriate
segregation of duties and that the reconciliation is signed off by
senior management, and documenting policies for dealing with variances.

Client money is money paid by investors to an Australian financial services licensee in connection with a financial product or the provision of a financial service, in this case, trading in derivatives in the over-the-counter market. Client money held in a compliant account receives statutory protection in the event of the issuer’s insolvency or ceasing to carry on business.