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

A Discussion Paper

6. SUMMARY / TIMING

6.1

The Commission has received requests from market participants for clarification of whether CFDs in respect of shares or other securities are "futures contracts" under the Securities Markets Act.

6.2

The Commission appreciates that regulation of derivatives will be considered by the Government as part of its review of securities laws. However, the Commission believes it is necessary to clarify the situation in the interim.

6.3

The Commission proposes to use its power under the Securities Markets Act to declare CFDs in respect of shares or other securities to be futures contracts.

6.4

The effect of the Commission's proposed declaration will mean that people dealing in these products will be required to obtain authorisation to deal in futures contracts under the Securities Markets Act.

6.5

We welcome submissions from all participants in the futures industry on whether it would be effective and appropriate to clarify the application of the Securities Markets Act to CFDs in respect of shares or other securities by way of the Commission making a declaration.

Questions

6.6

The Commission welcomes comments from interested parties on the following:

• Should a CFD contract in respect of equity securities be regulated as a futures contract under the Securities Markets Act? If so, should there be any exceptions to this?
• Is the term "contract for difference" sufficiently understood within the industry to form the basis for a declaration in this area? If not, how should the term be defined?
• Should the Commission's current approach to regulating dealers (issuers) of CFD products with the focus on product disclosure, rather than supervision, continue? Are there any other terms and conditions of authorisation that may be appropriate?
• If the Commission does decide to make a declaration in this area, is a transition period needed before any such declaration comes into force? If so, what would be an appropriate lead-in period?

6.7

We also welcome comments on any other relevant issues arising from this discussion document. Comments should be sent to the Commission by 5pm Friday 4 May 2007.

Postal:
Securities Commission
PO Box 1179
WELLINGTON
Attn: Meredith Pearson
Email: meredith.pearson@sec-com.govt.nz
Facsimile: (04) 472 8076