New licence forces firms to rethink Australian trading presence

Overhaul of regime will drive changes to booking models for trades with Australian clients

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Banks and fund managers are looking at whether they need to restructure their business – including the way in which derivatives trades are booked – in order to continue accessing Australia’s wholesale market, following an overhaul of the country’s foreign financial services provider licensing regime.

“The large global players all have fairly established booking models, and they’ll probably find a way of maintaining these structures, but they need to be aware of the technical application of the Australian rules,” says Jonathan Gordon, a partner and head of the global financial regulation practice at Ashurst in Sydney.

Until now, many foreign firms have relied on an exemption – known as limited connection relief – to be able to sell to wholesale clients without requiring an Australian licence or having an onshore presence in the country.

But from March 31, 2022, each separate branch of a firm that wants to sell to wholesale clients in the country will need to apply for a separate licence, either as a full onshore subsidiary, or as an overseas entity. Only branches that are regulated by one of the 13 foreign authorities that have been granted equivalent status by the Australian government (see table A) will be able to apply for overseas entity status.

 

Sources at eight affected firms who spoke to Risk.net about the rule change say it will alter how they conduct business in Australia. For some, this will simply require bolting one or two more new licences onto their existing framework. But for others, the process is likely to be less straightforward, with diverse teams needing to be consolidated into a single unit.

Wholesale investors include high-net-worth clients, corporates and professional investors. While this excludes institutional investors such as banks and insurance companies, Australia’s vast pot of self-managed superannuation money (amounting to more than half a trillion US dollars) is covered by this definition of wholesale investor.

This change doesn’t just affect sales teams. Derivatives booking hubs could also fall under scope, since the booking entity may be the legal counterparty that ultimately stands on the other side of a trade with a wholesale investor.

“The issue that arises for booking entities is that they will potentially provide financial services to persons in Australia. This includes market-making services for bonds and other financial products, and issuing services where the booking entity is the counterparty to over-the-counter derivative and FX contracts,” says Jim Boynton, a partner at KWM in Sydney. “This is the case even if a separate legal entity conducts research, marketing and sales and another entity trades on behalf of the booking entity.”

Equivalence

There are two licences available for foreign firms doing business in Australia. They can either rely on a full Australian licence, in which case they will need to have an established onshore presence in the country, or they can opt for a slimmed-down overseas licence, providing that the regulator of the foreign branch is deemed sufficiently equivalent.

This equivalence requirement is causing a particular headache for some branches that operate out of certain locations.

For example, Switzerland’s Financial Market Supervisory Authority has not yet been granted equivalence status, even though many of the country’s private banks have interests in Australia. The Hong Kong Monetary Authority is also not yet considered equivalent, even though the territory’s securities regulator, the SFC, is.

Australia can be a pretty difficult market to penetrate, and it may not make sense to apply for eight or 10 different licences

In-house lawyer at a private bank

One private bank has recently slashed the number of booking hubs it uses around the world, as part of a wider efficiency drive. An in-house lawyer from the bank says that, although this change was not triggered by the new Australian requirements, it will stand it in good stead. In particular, they say the law will force banks to consider whether the size of their business is sufficient to justify the number of entities that might need licensing under the new rules.

“Australia can be a pretty difficult market to penetrate, and it may not make sense to apply for eight or 10 different licences,” says the in-house lawyer. “But we have already consolidated into four main booking entities, which I think is a reasonable number.”

Even then, however, this particular private bank could face difficulties, since two of these booking entities are in jurisdictions that are currently not considered equivalent by the Australian regulator. Despite this, the in-house lawyer says the firm believes these jurisdictions will be granted equivalence ahead of next March, and is not considering any further action.

By contrast, Ashurst’s Gordon does not recommend clients making assumptions about whether equivalence will be granted before March 2022.

Consolidation, not upheaval

While lawyers are not expecting the new rules to result in a significant upheaval of booking model structures, firms will need to pay closer attention to their legal entity structure – and be prepared to tweak it if necessary.

“You have got to look at the regulatory status of all the entities involved in the transaction or service being provided to Australian customers and counterparties. [You must then] work out the extent to which the activities are regulated under Australian financial services regulation and, if so, whether a licence is required or an exemption is available,” says Gordon.

For example, he says some firms may try to funnel everything through those group members that already have a functioning licence, but this is likely to be very firm-specific.

“Firms have to analyse each of their flows and make sure they have appropriate arrangements for the new licensing requirements – or if a group entity with Australian customers is not going to have a licence, they must make sure they either don’t need one or can rely on another available licence in the group,” says Gordon. “Whilst there are always solutions, and many of them are not complex, one can't avoid getting into some level of detailed analysis – it is very dangerous to make general assumptions about all of this.”

Firms have to analyse each of their flows and make sure they have appropriate arrangements for the new licensing requirements

Jonathan Gordon, Ashurst

Richard Batten, a lawyer for Australian law firm MinterEllison, says that, while relying on an Australian licence in another part of the group may sound attractive, firms are not always set up in this way – and the licence-holding entity may not feel comfortable taking legal responsibility for what another part of the business is doing.

One solution some firms have been looking at is whether they can ‘chaperone’ derivatives trades, so that a salesperson in an entity with an Australian licence negotiates the deal, and has the booking entity in a separate jurisdiction join the call at the last minute to finalise the trade.

One lawyer on the market says some firms appear to be embracing this idea with enthusiasm, while others want to avoid the strategy at all costs. This is because it remains unclear where the licence obligations lie for such chaperoned trades, meaning different firms have divergent operational and political perspectives on what is legitimate.

While a dramatic revamp of booking models may be unlikely, a number of firms are now streamlining their Australia-facing entities as a direct result of this law.

“Our clients have anywhere between 15 and 50 entities facing the Australian market in some way, and it’s extremely unlikely that they will all want to get a licence,” says Gordon. “So whilst people aren’t consolidating as much as they could, they’re gravitating around a number of hub entities.”

This may see the sales desks integrating more with the booking hubs, and if some firms are still booking trades through peripheral booking hubs, these may now be subsumed by larger regional nodes.

One mid-sized global bank has been looking to consolidate the eight centres it uses to do business with Australia into a single hub. But a lawyer from the firm says this has not been easy: “This means that salespeople in some of these centres will no longer be able to deal with Australia. That has been fraught with [internal] politics.”

Editing by Philip Alexander