Foreign exchange market regulation

As with other industries within the Australian financial services sector, there have been sweeping changes to the regulation of foreign exchange markets within Australia. Here we look at these regulatory changes that have been introduced due to financial services reform.

Previously, foreign exchange dealers were authorised by the Reserve Bank of Australia (RBA), however with the introduction of the Financial Services Reform Act (FSRA) in 2001, licensing became the responsibility of the Australian Securities and Investments Commission (ASIC). While a transitional period was put in place in order to allow dealers to remain operating under an RBA authorisation, foreign exchange dealers had to become licensed by ASIC in order to operate by 11 March 2006. From that day, RBA authorisation would no longer apply.

Prior to the Financial Services Reform Act (2001), foreign exchange dealing was largely self-regulated and operated without the regulation of any centralised foreign exchange board, as in contrast to the Australian Stock Exchange, for example.

Now foreign exchange dealers must either hold an Australian Financial Services (AFS) Licence or otherwise be authorised by a Licensee. An AFS Licence is now required because under the Corporations Act 2001, foreign exchange deals, where currency is not immediately exchanged, are deemed to be a financial product (ie there is financial risk involved).

Relief from the new licensing regime

There are however exceptions to this licensing regime, with some foreign exchange dealers in derivatives not required to hold an AFS licence or to be authorised by a licensee. In January 2005, ASIC provided licensing relief to some overseas dealers and market makers in derivatives and foreign exchange contracts.

According to the ASIC ruling in Licensing relief for some overseas dealers or market makers in derivatives and foreign exchange contracts relief “applies to foreign companies that meet the equivalent requirements in Regulation 7.6.01(1)(ma) under the Corporations Act 2001, namely:

• the derivative or foreign exchange contract is issued, acquired or disposed of under an agreement that sets out the terms and conditions for future dealing in a derivative or foreign exchange contract between the two parties to the agreement;
• the other party to the agreement:
  • is a wholesale client in Australia;
  • initiated the agreement;
  • holds an Australian financial services licence which permits it to make a market or deal in the financial product;
• the person relying on the exemption is not in this jurisdiction; and
• each party is dealing in the financial product on its own behalf.”

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The ASIC website provides detailed information on the licensing requirements for foreign exchange dealers including product training and ongoing professional development requirements. More information is available at www.asic.gov.au