Participants in the financial services industry and their advisors may want to watch this space carefully.
Earlier this year the Administrative Appeals Tribunal (AAT) decided that MINI warrants are not derivatives under the Corporations Act 2001 (Cth) (Act) and therefore not financial products (Decision). Based on this finding, the Act does not apply to MINI warrants.
The Decision was made in the context of a market manipulation investigation by ASIC: Davidof v Australian Securities and Investments Commission (ASIC) 2016/0164.
On 10 December 2015, ASIC imposed a three year banning order against a former financial advisor (a trader) who carried out transactions with MINI warrants in 2013 (Banning Order). The MINI warrants (also referred to as MINIs) had been issued by Credit Suisse Investment Services (Australia) Limited (CSISAL).
The applicant trader lodged an application in the AAT to review the Banning Order. The appeal was heard in July 2016. The Decision is the applicant trader's successful appeal against the Banning Order.
The Current Position
- Warrants are a type of derivative within the meaning of s761D(1) of the Act.
- Derivatives are financial products: s764(1)(c).
- Part 7.10 of the Act regulates market misconduct (including market manipulation (s1041A and s1041B)) relating to financial products and financial services.
What are MINI warrants?
MINI warrants are ASX listed warrants which provide holders with exposure to the price of an underlying asset (including shares on the S&P/ASX200 Share Price index).
The key point in the appeal was that the Product Disclosure Statement for the relevant MINI warrants specified that the MINIs were open ended contracts with no set expiry date. The AAT found that the MINIs issued by CSISAL and traded by the applicant trader did not satisfy s761D(1)(b) of the Act or reg 7.1.04 of the Corporations Regulations 2001.
Results of the Decision
- MINIs are not derivatives under the Act, so do not fall within the definition of financial product.
- The transactions were not governed by the market misconduct provisions because the applicant trader was not transacting in financial products.
- The market manipulation provisions of the Act (and market misconduct provisions generally) do not apply to MINIs.
ASIC filed a notice of appeal from the Decision on 16 February 2017 contending that "the AAT erred in concluding that MINIs were not a derivative under the Corporations Act and therefore not financial products." 1 The appeal is set down for 9 June 2017 in the Federal Court (NSW Registry).
The current MINI warrants market has fewer participants than it did in 2013 (Citi Warrants is now the sole major issuer in MINIs).2 Nevertheless, changes in the jurisprudence in this area may have far-reaching implications and traders and their advisors should stay abreast of developments.
Footnotes
1 Australian Securities and Investments Commission, 'AAT upholds appeal by former financial advisor', media release dated 23 January 2017.
2 ASX Warrants – Monthly Update – March 2017 cf. ASX Warrants – Monthly Update – June 2013.
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