On 27 July 2018, the newly established Financial Sector Conduct Authority ("FSCA") published the final Conduct Standard, No 1 of 2018, setting out the Criteria for Authorisation of OTC Derivatives Providers ("ODPs").
The Regulations under the Financial Markets Act, 2012 (the "FMA Regulations") were promulgated in February of this year, effectively setting a deadline of 8 August 2018 for ODPs to apply for licences. However, with the Conduct Standard still in draft form until near the end of July, there was some uncertainty among potential applicants about whether they should have their applications ready for 8 August 2018 and exactly what the applications should contain.
Together with the Conduct Standard, the FSCA published a notice extending the deadline for applicants to 28 January 2019, affording potential applicants six months to prepare their ODP applications.
The Consultation Report published with the Conduct Standard helpfully clarifies a number of questions that were being asked in the market. For example, in its responses in the Consultation Report, the FSCA clarifies that Regulation 2 of the FMA Regulations, prohibiting any person from acting as an ODP without a licence, is intended to capture ODPs that comply with the definition of "OTC derivative provider" in the FMA Regulations and that have their main place of business in South Africa. The ODP licensing requirement, therefore, would not apply to offshore derivatives providers who conduct some derivatives business in South Africa, nor to corporate treasury functions that are located offshore and provide hedges to their affiliates. In addition, in the Consultation Report, the FSCA states that financial services providers acting as ODPs must apply for ODP licences (ie, their licences under the Financial Advisory and Intermediary Services Act, 2002 will not "convert" into ODP licences) and banks will be subject to the ODP prudential requirements, notwithstanding that they are already subject to stringent prudential requirements as banks.
Finally, the FSCA maintains in the Conduct Standard and the Consultation Report that it will not establish a bright-line rule or test for what constitutes the business of an ODP. The FMA Regulations define an ODP as "a person who as a regular feature of its business and transacting as principal—(a) originates, issues or sells OTC derivatives; or (b) makes a market in OTC derivatives." In the Consultation Report, the FSCA declined to deviate from its previous statements that the test "as a regular feature of its business" will be applied on a case-by-case basis.
ODPs will be the first in a line of market participants and infrastructures to be established and/or licensed under the FMA Regulations, as part of South Africa's efforts to comply with its G20 obligations to regulate the derivatives market. Hopefully, the market can now look forward to clarity on other aspects of the coming regulations.
Derivatives market participants should work with their advisors to determine whether the ODP licensing requirement applies to their activities, and/or whether any of the other upcoming derivatives regulatory changes will have an effect on their current operations.
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