Direct FX may cancel derivatives licence itself after temporary compliance rule breach

Thursday 14th January 2016

Direct FX, a foreign exchange services company controlled by managing director Andrew Isbister, is considering cancelling its Derivatives Issuer Licence after a temporary breach of compliance rules covering the tiny portion of forward contracts it handles.

The company's March 31, 2015, financial statements include a note that Direct FX didn't meet a condition of its licence with the Financial Markets Authority requiring it to maintain net tangible assets over $1 million at all times. While actual NTA was about $1.4 million, the figure was below $1 million once ineligible assets were excluded.

The breach covered less than 1 percent of Direct FX's $2.68 million of restricted deposits in that financial year and has since been rectified. The requirements of the licence were new to the company and it notified the FMA when it discovered the error, but notes to its accounts said there was "a possible inability" for Direct FX to complete its financial obligations to clients.

"The breach was immaterial when considered in the context of our overall business," Isbister said. Most of the firm's assets are in cash or cash equivalents and some was deposited in a manner that mean they had to be excluded from the "adjusted" assets calculation for NTA purposes, he said.

Another derivatives issuer brought the issue to Direct FX's attention, having made the same NTA calculation error, and Isbister said he knew of a third issuer who did the same.

Direct FX is among 12 non-bank financial intermediaries that hold a derivatives issuer licence and are surviving in a market dominated by larger firms and banks. Three more hold transitional licences, according to the FMA's website, while seven registered banks are treated as if they hold a licence.

"There is a far better story to tell about how companies like us have survived this far, but many of us are now questioning the ongoing viability of providing services," Isbister said. "For us, the issues caused by our non compliance will most likely see us cancel our derivatives issuer licence shortly. We simply don't need the added weight. We only sought the licence to help a tiny number of clients hedge their physical FX needs."

Isbister said small providers "are ultimately going to be squeezed out of the market, which is ultimately not good for the consumer, especially on forward FX, where rates are not at all transparent."

Another firm, FIRMA Foreign Exchange Corporation (NZ) reported a five-month halt to sales of derivatives last year because of a delay in gaining a licence. It estimated a loss of $95,000 of revenue as a result.

Direct FX's revenue fell about 10 percent to $2.7 million in the March 2015 year. Profit dropped about 23 percent to $500,147. The company arranges the equivalent of about $100 billion in currency exchanges a year, according to its website. It claims better exchange rates than banks and doesn't charge personal or business client fees.

Isbister says the company has two business lines - an interbank brokerage service and a deliverable remittance service. It had survived a cull that had put most remittance providers in New Zealand out of business in an environment "that continues to stack the deck against remitters."

BusinessDesk.co.nz

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