ASIC Corporations (Financial Requirements for Issuers of Retail OTC Derivatives) Instrument 2022/705

This instrument inserts a new, bespoke financial-resource regime for a subset of Australian Financial Services Licence (AFSL) holders that issue over-the-counter (OTC) derivatives to retail clients. Mechanically, Part 7.6 of the Corporations Act 2001 (other than Divisions 4 and 8) is made to apply to those licensees as if it were modified by inserting a new section 912AB into Division 3 of Part 7.6 (see s 5). The inserted section sets out: (a) the scope of licensees caught (s 912AB(1)); (b) quarterly cash‑flow projection, approval and documentation obligations (s 912AB(3)); (c) a binding net‑tangible‑assets (NTA) floor with an explicit liquidity split (s 912AB(4)-(5)); (d) reporting triggers and required notifications when NTA deteriorates (s 912AB(7)-(9)); and (e) an annual auditor’s opinion tailored to these requirements (s 912AB(11)-(12)). The instrument also supplies a detailed set of definitions used in the inserted section (s 912AB(13) and following), including adjusted assets/liabilities, excluded assets, eligible provider, eligible undertaking, average revenue, cash or cash equivalents, liquid assets, market/clearing participant and NTA.

The applied rules impose minimum capital and liquidity metrics. A licensee must maintain at all times NTA equal to at least the greater of $1,000,000 or 10% of average revenue (s 912AB(4)). At least 50% of that required NTA must be held in cash or cash equivalents and at least 50% in liquid assets (s 912AB(5)). Money held in accounts for the purposes of s 981B or other client liabilities may not be counted towards those liquidity requirements (s 912AB(5)). The regime contains operational controls that restrict a licensee entering into new transactions if its NTA is below required levels unless specified written certifications are provided (s 912AB(9)-(10)). It also mandates periodic projections, board (or partners/trustees/individual) sign‑off, documentation of assumptions and availability of those projections to ASIC on request (s 912AB(3)(a)-(f)). Reporting milestones include a 3 business‑day lodgement requirement where NTA falls from above 110% of required NTA to a lower amount, monthly follow‑ups until recovery above 110% (s 912AB(7)), and a 3 business‑day client/beneficiary notification if NTA is below required for a continuous two months (s 912AB(8)). Audit opinions addressing compliance with the capital and liquidity rules and the projections must be lodged with ASIC by the date the licensee must lodge its balance sheet under s 989B, or earlier if ASIC directs (s 912AB(11)-(12)).

The instrument excludes certain entities from the bespoke regime: APRA‑regulated bodies that are not required to comply with paragraph 912A(1)(d), market participants and clearing participants as defined (s 912AB(1)(c)(i)-(iii)). The measure is time‑limited: the instrument repeals itself on 1 October 2027 (s 6 and Part 3). The compilation records two registration events: the original instrument 2022/705 (commencing 8 September 2022) and an amendment instrument 2023/670 (commencing 1 September 2023) (Endnote 1).

In short, the instrument operationally imposes fixed minimum NTA and liquidity holdings, prescriptive quarterly cash projections and sign‑off rules, specified reporting and client notification triggers, and an auditor certification regime for AFSL holders who issue retail OTC derivatives, with exclusions for certain regulated and market/clearing participants (see s 5, notional s 912AB).

The statutory text introduces a number of interlocking financial‑resource concepts that determine both quantitative thresholds and accounting/valuation treatment.

• Net tangible assets (NTA). NTA is defined as adjusted assets minus adjusted liabilities (s 912AB(13): “NTA means adjusted assets minus adjusted liabilities”). Adjusted assets and adjusted liabilities are defined in detail, referencing how a balance sheet would appear if the licensee were a reporting entity under Chapter 2M, with specified additions and subtractions (adjusted assets: paragraphs (a)-(e); adjusted liabilities: paragraphs (a)-(e)). The definitions exclude certain asset types (for example, intangible assets, certain related‑party receivables) unless specific carve‑ins apply (see “excluded assets”).

• Required NTA floor. The licensee must at all times have NTA at least the greater of $1,000,000 or 10% of average revenue (s 912AB(4)). Average revenue is itself a rolling multi‑year or forecast average depending on the licensee’s stage of operation (first, second, third or subsequent financial years) (definition of “average revenue”).

• Liquidity split. Of the required NTA, at least 50% must be held as cash and cash equivalents and at least 50% as liquid assets (s 912AB(5)). The definitions differentiate cash or cash equivalents (which may include eligible undertakings and certain committed facilities subject to time conditions) and liquid assets (cash/cash equivalents excluding eligible provider commitments, plus assets the licensee can expect to realise for market value within six months) (definitions of “cash or cash equivalents” and “liquid assets”).

• Exclusions and non‑double‑counting. Money in accounts held for the purposes of s 981B or other client liabilities cannot be counted towards the liquidity requirements (s 912AB(5)). The instrument expressly prohibits double counting of the same cash/cash equivalents toward both the cash and liquid asset subrequirements (note after s 912AB(5)).

• Eligible provider and eligible undertaking. Cash commitments and undertakings count only if given by an “eligible provider” (Australian ADI; Commonwealth, State or OECD government; approved foreign deposit‑taker; Australian CS facility licensee; or entity ASIC approves) and, in the case of undertakings, must be irrevocable without ASIC consent and payable on written demand (see definitions of “eligible provider” and “eligible undertaking”, s 912AB(13) definitions).

The instrument targets a specific subset of AFSL holders that both issue OTC derivatives and make a market in derivatives, and who do so for retail clients. The catch is defined in s 912AB(1), which requires three conditions to be met concurrently:

1. Licence coverage. The licensee must hold an AFSL that covers both “dealing in a financial product by issuing derivatives” and “making a market for derivatives” (s 912AB(1)(a)(i)-(ii)). That narrows the field to firms with authorisations to issue and to make markets in derivative products.

2. Retail counterparties. The licensee must incur actual or contingent liabilities by issuing derivatives to persons as retail clients (s 912AB(1)(b)). The instrument thus applies only when the relevant counterparties are retail clients, as defined under the Corporations Act and relevant licensing conditions. If a licensee deals exclusively with wholesale clients, this regime does not apply.

3. Exclusions. It does not apply to: (a) an APRA‑regulated body that is not required to comply with paragraph 912A(1)(d) (s 912AB(1)(c)(i)); (b) a market participant as defined under s 761A where specified operating‑rule obligations apply (s 912AB(1)(c)(ii)); or (c) a clearing participant as defined under s 761A where the participant’s business is limited to participating in a licenced CS facility and complying with its financial requirements (s 912AB(1)(c)(iii)).

Consequently, the principal groups affected in practice will be non‑APRA regulated AFSL issuers of retail OTC derivatives who also make markets. This will tend to include boutique derivative issuers, certain proprietary derivative market‑makers, and potentially subsidiaries of larger financial groups that are not APRA regulated. Market and clearing participants operating on particular licensed exchanges are explicitly removed, which concentrates the instrument’s effect outside the exchange/clearing‑member ecosystem (s 912AB(13) definitions of “market participant” and “clearing participant”).

Who pays. The financial cost of compliance (holding additional capital, maintaining liquidity buffers, obtaining eligible undertakings, engaging auditors, preparing quarterly projections and certifications, additional reporting and client notifications) is borne by the licensee. As licensees generally internalise such costs, they can be passed on to clients through pricing, limited product availability, tightened credit or margin terms, or reduced willingness to transact with retail clients. The instrument itself prescribes the obligations; it does not prescribe how licensees fund compliance (debt, equity, retained earnings), but the requirement to hold specified levels of NTA and liquid assets will increase working capital needs (s 912AB(4)-(5)).

The inserted s 912AB creates a set of prescriptive duties, a limited set of conditional rights, and processes for reporting and audit.

Primary duties

• Quarterly cash flow projection and governance duty. Licensees must prepare, each March, June, September and December, a projection of cash flows over at least the next 12 months based on the licensee’s reasonable estimate of revenues and expenses (s 912AB(3)(a)). The projection must be approved in writing by the relevant persons (directors for corporations, partners for partnerships/trustees for trusts, the natural person themselves) as being based on reasonable estimates (s 912AB(3)(b)). The licensee must document calculations and assumptions and explain why those assumptions are appropriate (s 912AB(3)(c)). The projection must be updated on suspicion that an updated projection would show a failure to meet the tests in s 912AB(3)(e) (s 912AB(3)(d)). The same persons must certify in writing that, based on the projection, the licensee will have access when needed to financial resources for at least the next 12 months, and will hold cash or cash equivalents at least equal to the current amount required under s 912AB(5) (s 912AB(3)(e)).

• Maintain required NTA and liquidity split. Maintain at all times NTA equal to the greater of $1,000,000 or 10% of average revenue (s 912AB(4)), and hold cash/cash equivalents and liquid assets each equal to at least 50% of the required NTA (s 912AB(5)).

• Reporting and client notification duties. Lodge a written report with ASIC within 3 business days after discovering a notifiable event: a fall in NTA from >110% of required NTA to a lower amount, and then monthly reports until recovery (s 912AB(7)). If NTA is less than required for two continuous months, notify in writing each person to whom it provides financial services and each person for the benefit of whom it holds money or property under Part 7.8 Div 2 or 3 within 3 business days after the two‑month period (s 912AB(8)).

• Transactional constraint duties. If NTA is less than required, the licensee must not enter into transactions that could create further liabilities unless the persons specified in s 912AB(3)(b) have certified in writing, after reasonable enquiries, that the licensee will comply with s 912A (except to the extent that s 912A(1)(c) requires compliance with subsections (4) and (5) of s 912AB) and that there is no deficiency in client accounts maintained for s 981B purposes (s 912AB(9)). If NTA ≤ 75% of required NTA, entering into such transactions is prohibited (s 912AB(10)).

The instrument itself does not create new separate penalty provisions or criminal offences within the inserted s 912AB text. Instead, the new section is applied as part of Part 7.6 of the Corporations Act 2001 (as modified), meaning that the enforcement mechanisms and remedies available under the Act for breaches of licensed persons’ obligations will apply to these new duties.

Legal placement within Part 7.6. Section 5 of the instrument expressly applies Part 7.6 (other than Divisions 4 and 8) of the Act to financial services licensees as if s 912AB were inserted in Division 3 of Part 7.6 (s 5). Part 7.6 contains licensing obligations and enforcement tools under the Corporations Act; by operating under this Part, the new duties are enforceable through the standard suite of ASIC powers and civil or administrative remedies available under the Act. The instrument’s note (s 912AB(2) note) indicates that conditions on the licence may include other requirements that relate to having adequate financial resources; these licence conditions typically carry civil penalties and can be the basis for disqualification or licence variation by ASIC.

Auditor obligations and potential regulatory action. The audit opinion required by s 912AB(11) must be lodged with ASIC by the time the licensee lodges its balance sheet under s 989B (or when ASIC directs) (s 912AB(12)). A negative or qualified audit opinion, or a failure to lodge the opinion on time, will be visible to ASIC and may prompt supervisory or enforcement action. The audit opinion must address whether the licensee complied with subsections (4) and (5) (the NTA and liquidity requirements), had appropriate projections and assumptions, and managed the risk of insufficient resources as required by paragraph 912A(1)(h) (s 912AB(11)). An adverse statement may therefore expose the licensee to enforcement consequences under general licence compliance provisions.

Reporting triggers and public notices. The section imposes particular reporting duties to ASIC for notifiable events and monthly updates until recovery above specified thresholds (s 912AB(7)), and requires client notifications where the NTA is deficient for two months (s 912AB(8)). Failure to lodge these reports or notifications as required is a failure to comply with licence obligations and therefore enforceable under the Act.

Restrictive transaction rules. The prohibition on entering into transactions that give rise to further liabilities when NTA is below required levels, unless the relevant persons provide certification after reasonable enquiries (s 912AB(9)), and the absolute prohibition when NTA ≤ 75% of required NTA (s 912AB(10)), impose direct legal constraints. Entering into such transactions in breach of these sub‑sections would be a breach of the Corporations Act regime as applied by s 912AB and could attract ASIC action.

The instrument explicitly operates by modifying the application of Part 7.6 of the Corporations Act 2001 and contains multiple cross‑references to other Corporations Act provisions and regulatory instruments. Key interactions are set out in the text and require attention from licensees and advisers.

Interaction with s 912A and licence conditions. The inserted s 912AB sits alongside s 912A (general obligations of financial services licensees). Subsection (2) expressly states that a licensee that complies with s 912AB is taken to comply with licence conditions related to cash needs, financial requirements for transacting with clients, reporting triggers and the obligation to lodge an audit opinion to the extent coverage overlaps (s 912AB(2)). However, the note emphasises that licences may include other requirements. Also, s 912AB(9) requires certifications referencing compliance with s 912A (with a carve‑out to the extent s 912A(1)(c) requires compliance with subsections (4) and (5) of s 912AB), linking the new regime to the broader duty to maintain adequate resources.

References to client accounts and Part 7.8. The instrument excludes from eligible liquidity any money held by the licensee in accounts for the purposes of s 981B or other client liabilities. Section 981B concerns accounts for client money. Section 912AB(8) requires notifications to persons for whose benefit the licensee holds money or property under Divisions 2 or 3 of Part 7.8 (money held on trust). Therefore compliance interacts directly with client money/trust account rules and is likely to require co‑ordination of systems that manage client money under Part 7.8 and required NTA/liquidity under s 912AB.

Chapter 2M reporting. The definitions of adjusted assets and adjusted liabilities are expressed by reference to what would appear on a balance sheet if the licensee were a reporting entity under Chapter 2M (s 912AB(13) definitions). The licensee must lodge an NTA statement with ASIC no later than when it must lodge a balance sheet under s 989B (s 912AB(6)). Thus accounting treatments required under Chapter 2M will influence computation of NTA even for non‑reporting licensees, with the instrument effectively importing Chapter 2M measurement concepts for the calculations.

Definitions drawn from other instruments and sections. The instrument relies on definitions and instruments external to itself. For example, “approved foreign market” is given the meaning by section 9 and notionally inserted by ASIC Corporations (Definition of Approved Foreign Market) Instrument 2017/669 (s 912AB(13) note). “IDPS” is defined with reference to ASIC Corporations (Investor Directed Portfolio Services) Instrument 2023/669 (s 912AB(13)). “Market participant” and “clearing participant” are defined in reference to section 761A and the operation of certain licensed markets and clearing houses (s 912AB(13) definitions). The net effect is that licensees must read and apply multiple instruments and sections in combination.

The compilation provides a concise amendment record in the endnotes, which is short but relevant.

• Original instrument. ASIC Corporations (Financial Requirements for Issuers of Retail OTC Derivatives) Instrument 2022/705 was registered on 7 September 2022 and commenced on 8 September 2022 (Endnote 1). That instrument inserted the notional s 912AB into Part 7.6 as described in s 5 of the compilation.

• Amendment 2023/670. Instrument 2023/670, registered 31 August 2023, commenced 1 September 2023 and amended the compilation (Endnote 1 and Endnote 2). The amendment history table in Endnote 2 lists two specific amendments: Section 2 was repealed (rep. s48D LA) and Section 5 (the notional subsection 912AB(13) definition of IDPS) was amended by 2023/670. The body of the instrument reflects that the definition of IDPS used in the notional s 912AB(13) has been updated to refer to ASIC Corporations (Investor Directed Portfolio Services) Instrument 2023/669 where applicable (see note in the definitions).

• Repeal date. The instrument is expressly repealable by its own provision: this instrument is repealed on 1 October 2027 (s 6). There are no transitional provisions recorded in the compilation beyond the standard commencement/amendment entries in Endnote 1.

• Compilation notes. The compilation itself includes a note stating it includes any commenced amendment affecting the legislative instrument to 1 September 2023. For a compliance programme, practitioners must take into account the 2023 amendment when applying definitions (notably IDPS) and remain alert for any further amendment instruments before the instrument’s repeal date.

There is no history in the compilation of prior iterations before 2022/705; the instrument originated in 2022. The limited amendment history to date focused on definitional alignment (IDPS) and formal amendments related to the Legislation Act 2003. The repeal date is explicit, so further legislative action would be required to extend, replace or make permanent the rules beyond 1 October 2027.

The instrument’s text and the compilation’s endnotes do not reference any judicial decisions, administrative determinations or prior litigation. The instrument is recent (original 2022/705; amendment 2023/670) and the compilation contains no recorded cases. Therefore there is no litigation history recorded in this instrument to cite.

That absence of precedent does not mean disputes will not arise. The statutory text establishes multiple points at which legal interpretation or factual contestation could trigger litigation or disputes with ASIC. These include, but are not limited to, the following discrete issues embedded in the wording of the new section:

• Interpretation of adjusted assets and adjusted liabilities. The calculation of adjusted assets and adjusted liabilities is defined by reference to a hypothetical Chapter 2M balance sheet, with numerous carve‑outs and reclassifications (see definitions of “adjusted assets” and “adjusted liabilities”). Disputes could arise about whether particular assets or liabilities are correctly included, excluded, or the proper valuation date and method.

• Definition and treatment of excluded assets. The excluded assets provision contains numerous sub‑paragraphs with exceptions and conditional re‑inclusions (s 912AB(13) paragraphs (b)-(g)). Litigation could arise over the classification of related‑party receivables, the applicability of the 20% or 60% quantitative cut‑offs, or whether ASIC has appropriately granted (or withheld) consent to treat a receivable as not excluded.

• What constitutes an “eligible provider” or “approved in writing by ASIC”. The definition of “eligible provider” includes entities approved in writing by ASIC; licensees who rely on a provider without prior ASIC approval may face disputes if ASIC later challenges the provider’s eligibility.

• The adequacy and enforceability of “eligible undertakings”. The instrument requires eligible undertakings to be “enforceable and unqualified” and “expressed to be irrevocable without the written consent of ASIC” (definition of “eligible undertaking”). Disputes could focus on the enforceability of undertakings given by foreign entities, the interpretation of “unqualified”, and whether an undertaking meets the timing and notice requirements in the definition of “cash or cash equivalents” (for example, that committed facilities cannot be withdrawn without six months’ written notice and must not expire within six months).

• The threshold mechanics (110%, required NTA, 75%). Litigation may arise about when a “notifiable event” occurs for the 110% trigger, how “continuous period of 2 months” is measured for the two‑month notification requirement (s 912AB(8)), and whether the licensee complied with the transactional prohibition in s 912AB(10) where NTA ≤ 75%.

Several provisions contain traps for the unwary or require careful operational design. These are concrete compliance risks that derive directly from the wording of the instrument.

1. Narrow scope but compound tests. The instrument applies only to licensees that both issue derivatives and make a market in derivatives and that deal with retail clients (s 912AB(1)(a)-(b)). Firms that assume a narrow “issuer only” role or believe themselves wholesale‑only may be caught if they perform market‑making or transact with any retail client. Accurate mapping of authorisations and client types is necessary.

2. NTA calculation complexity. NTA is not a simple statutory capital figure; it is adjusted assets minus adjusted liabilities determined as if a Chapter 2M balance sheet were prepared, with multiple carve‑ins and carve‑outs (definitions of “adjusted assets”, “adjusted liabilities”, “excluded assets”). Firms that are not reporting entities must nevertheless perform Chapter 2M‑style calculations and apply qualitative tests (adequately secured, encumbrance adjustments, subordinated debt approved by ASIC). Misclassification of assets (e.g. related‑party receivables) can materially change NTA.

3. Liquidity double‑counting prohibition. The instrument expressly prevents counting the same cash or cash equivalents towards both the cash (50%) and liquid asset (50%) requirements (note after s 912AB(5)). Some treasury systems may have previously counted the same balance across multiple liquidity metrics; that practice is disallowed here.

4. Client money exclusion. Money in accounts held for s 981B purposes or other client liabilities under Part 7.8 cannot be used to meet the liquidity tests (s 912AB(5)). Firms that commingle or rely on nominal balances in client accounts for liquidity will have to restructure.

5. Eligible provider timing and irrevocability requirements. “Cash or cash equivalents” may include commitments by eligible providers to provide cash within 5 business days, but only if the facility will not expire within 6 months and cannot be withdrawn by the provider without at least 6 months’ written notice, and any cash provided is not repayable for at least 6 months (definition of “cash or cash equivalents”, s 912AB(13)). Commitments that fail these timing conditions will not count. Misreading the timing windows or accepting a facility that does not meet the notice requirement is a material gotcha.

6. Market valuation haircuts. For security interests over financial products, valuation thresholds apply: if the product is a debt instrument the market value must be at least 109% of the amount owing; otherwise at least 120% (definition of “adequately secured”, s 912AB(13)(a)(ii)). Assuming 100% market value without applying these haircuts will overstate adequacy.

A practical compliance roadmap derived from the instrument’s text involves governance, measurement, liquidity management, reporting, auditor engagement and ASIC liaison. Below is a stepwise compliance checklist mapped to the statutory provisions.

1. Determine whether the rule applies. Confirm the licensee satisfies all elements of s 912AB(1): AFSL authorisations to deal by issuing derivatives and to make a market (s 912AB(1)(a)), whether derivatives are issued to retail clients (s 912AB(1)(b)), and that the licensee is not an excluded APRA‑regulated body, market participant or clearing participant (s 912AB(1)(c)). Document the legal analysis and retain evidence of client classification.

2. Establish governance and sign‑off processes for quarterly cash‑flow projections (s 912AB(3)). Each March, June, September and December prepare a 12‑month cash flow projection based on reasonable revenue/expense estimates. Ensure the correct people approve the projection in writing: directors for corporate licensees, partners/trustees for partnerships/trust arrangements, or the natural person for a sole operator (s 912AB(3)(b)). Capture written approvals and maintain the underlying calculations, assumptions and narrative justifying assumptions (s 912AB(3)(c)). Build a protocol for updating projections if there is reason to suspect they would show non‑compliance (s 912AB(3)(d)). Keep projections available for ASIC on request (s 912AB(3)(f)).

3. Calculate NTA and monitor average revenue. Implement an NTA calculation process consistent with the definitions of adjusted assets and adjusted liabilities (s 912AB(13)). For average revenue apply the staged formula (first, second, third, subsequent financial years) set out in the “average revenue” definition. Establish a rolling monitoring cadence and systems for timely recalculation (s 912AB(4), definition of “average revenue”).

4. Maintain required NTA and liquidity split. Ensure that NTA is at all times at least the greater of $1,000,000 or 10% of average revenue (s 912AB(4)). Maintain cash/cash equivalents at least 50% and liquid assets at least 50% of required NTA (s 912AB(5)). Ensure that assets encumbered for client accounts under s 981B or similar are not counted toward these requirements (s 912AB(5)). Avoid double counting the same asset across both liquidity buckets (note under s 912AB(5)).

5. Reassess asset eligibility. Map assets against “excluded assets” criteria (intangible assets, related‑party receivables, certain scheme interests) and determine whether any of the specified exceptions apply (s 912AB(13) paragraph (e) exceptions). Where treatment depends on ASIC consent, prepare applications early.