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Proposal to Declare Certain Derivative Contracts to be Futures Contracts Under the Securities Markets Act 1988

A Discussion Paper

4. DECLARATION POWER

4.1

The Commission considers it is important for there to be certainty in the futures industry as to what constitutes a futures contract for the purposes of the Securities Markets Act. The enquiries we have received regarding the regulation of CFDs leads us to believe that clarification may be needed.

4.2

Under section 37(7) of the Securities Markets Act the Commission may, by notice in the Gazette, declare:

1. an agreement, option, or right; or
2. a class of agreements, options, or rights,

to be agreements to which the Securities Markets Act applies; i.e. futures contracts.

4.3

This declaration power is also recognised in the definition of futures contract in sections 37(1)(e) and (f).

4.4

The Commission has previously made declarations under section 37(7) mainly 'for the avoidance of doubt' when uncertainty exists over the appropriate treatment of derivative products, especially some equity options.

4.5

Other circumstances that may warrant the use of the Commission's declaration power include:

• providing for new products and new types of futures contracts, which have not previously been contemplated, to be subject to the futures regulatory regime;
• where an agreement is in substance the same as a futures contract, and exposes investors to the same sort of risks in a transaction as those involved in futures contracts, in the sense that the potential harm to investors that is sought to be mitigated exists in the same manner for the agreement as for a futures contract.

4.6

The Commission's declaration power must, like any discretionary power, be used in a manner that is consistent with the purpose of the Act under which the power is used. The Commission cannot use its power to effectively override the Securities Markets Act or to declare agreements to be futures contracts where this would be plainly inconsistent with the intention of the law.