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Industry is now starting to appreciate the significance of
ASIC's Consultation Paper 177 Electricity derivative market
participants: Financial Requirements (Consultation
Paper). For many licensed electricity derivative market
participants (Licensees), the Consultation Paper
will lead to a dramatic increase in the amount of liquid regulatory
capital required to be tied up on balance sheets.
The increase arises because ASIC is looking to introduce new
financial requirements that will apply to Licensees that enter into
electricity derivatives. The new financial requirements will
operate in tandem with financial requirements that apply to
derivatives over other commodities, in particular the need to have
adjusted surplus liquid funds of up to 5 per cent of liabilities.
Given that most Licensees will enter into derivatives over a range
of commodities, the effect is that most Licensees will need to meet
both sets of financial requirements.
If you have not already done so, we recommend you review the
Consultation Paper and seek advice on the impact of the new
requirements on your company. ASIC has also invited affected
Licensees to make submissions on the Consultation Paper. The due
date for industry submissions is fast approaching.
Key measures
By way of background, the proposed new financial requirements
are summarised below:
Rolling 12 month cash flow projections
Licensees must prepare 'director approved' quarterly
cash flow projections covering at least 12 months.
New NTA requirement
Licensees must hold net tangible assets (NTA) equal to the
greater of $150,000 and 10 per cent of average revenue over a
recent reference period.
The use of a gross revenue measure to calculate the required NTA
may dramatically increase the required NTA for many Licensees. For
example, if the trading or hedge book is held within the same
licensed operating entity, the new financial requirements will
equate to 10 per cent of the entire business revenue. This could
involve significant additional funding costs for many Licensees,
particularly given the application of the liquidity requirements
(see below).
There will also be limits on the entities that will be permitted
to provide eligible undertaking, meaning many companies may need to
find and inject substantial new capital to meet the new
requirements.
Liquidity requirement
Licensees will need to hold the required NTA in the form of
liquid assets, at least 50 per cent of the required NTA in cash or
cash equivalents.
Response to Consultation Paper
Responses to the Consultation Paper are due on 29 June 2012. It
is proposed that ASIC will release an update to Regulatory Guide
166 Licensing Financial requirements (RG 166) in
July 2012 with the final RG 166 to be released in September 2012,
however, we expect the timing will be delayed.
Norton Rose Australia have been advising various companies on
the impact of these proposed changes and is involved in the
development of an industry response to the proposed changes.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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