Consultation on leverage limits
The Financial Markets Authority (FMA) has launched a public consultation on proposed changes to the standard conditions for derivative issuer (DI) licences, focusing on investor leverage and suitability for derivative trading.
This initiative stems from insights gathered during the FMA’s 2020 Derivatives Issuer Sector Risk Assessment (SRA) and ongoing sector monitoring.
Proposed changes to leverage conditions
The proposed revisions aim to introduce a standard leverage condition to align with international norms seen in the UK, Europe, and Australia, tailored to the specific asset classes of the derivatives.
Currently, New Zealand does not impose a cap on leverage for retail investors, with offerings ranging from 30:1 to as high as 500:1.
“Investing with leverage amplifies the risk by enabling an investor to have much greater exposure to an increase and decrease in value,” FMA said in a media release, stressing the potential for significant financial impact due to price volatility.
See LinkedIn post here.
Revising suitability standards
FMA, which recently introduced standards for business continuity and cyber resilience, has also proposed changes to the suitability standard conditions for DIs, following findings that some DIs failed to conduct adequate suitability assessments for investors.
The revised conditions would require DIs to ensure that retail investors understand the derivatives they invest in, particularly given the complex nature of products like binary options and cryptocurrency CFDs.
“The proposed changes are about ensuring retail investors fully understand the nature and extent of the risk around derivatives and to align protection measures with international norms,” said John Horner (pictured above), director of markets, investors, and reporting.
FMA consultation period and next steps
Stakeholders are invited to submit their feedback on these proposed changes through the consultation page until Aug. 7. This period is crucial for gathering input from various parties to refine the regulations and enhance investor protection in the derivative markets.
View the DI Standard Conditions consultation page here.
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