Consultation Paper No. 5 of 2022 - Proposals for Dealing in OTC Leveraged Products in Relation to Retail Clients

CONSULTATION PAPER
NO. 5 OF 2022
PROPOSALS FOR DEALING IN
OTC LEVERAGED PRODUCTS
IN RELATION TO RETAIL CLIENTS
26 SEPTEMBER 2022

Consultation Paper No. 5 of 2022
TABLE OF CONTENTS
Introduction ............................................................................................................................3
Why are we issuing this paper? ........................................................................................ 3
Who should read this paper? ............................................................................................ 3
How to provide comments................................................................................................. 3
What happens next?......................................................................................................... 3
Background ............................................................................................................................5
Proposed amendments to Rulebooks and Supplementary Guidance................................6
Definition of “OTC Leveraged Products” ........................................................................... 6
Additional requirement and prohibitions ............................................................................ 7
Transition period ............................................................................................................... 8
Proposed Supplementary Guidance ................................................................................. 8
Appendices and Attachment .................................................................................................9

Consultation Paper No. 5 of 2022
Why are we issuing this paper?

1. The Financial Services Regulatory Authority (“FSRA”) of Abu Dhabi Global Market
   (“ADGM”) has issued this consultation paper to seek views on proposed amendments to the Conduct of Business Rules (“COBS”), the Prudential – Investment, Insurance Intermediation and Banking Rules (“PRU”) and those relating to fees (“FEES”) for Authorised Persons. The amendments to the COBS, PRU and FEES Rulebooks proposed within this paper include a formalisation, through Rulebook provisions, of currently existing conditions placed on the licences of Authorised Persons offering over-the-counter leveraged products (“OTC Leveraged Products”) to Retail Clients. In addition, we are proposing further regulatory enhancements that have been benchmarked against standards established by peer regulators and international standard-setting bodies.
2. Unless otherwise defined, capitalised terms used in this paper have the meanings
   attributed to them in the Financial Services and Markets Regulations 2015 (“FSMR”) or the Glossary Rulebook (“GLO”). Who should read this paper?
3. This Consultation Paper should be of particular interest to all entities in ADGM
   offering OTC Leveraged Products to Retail Clients, and also to potential entrants to this area. How to provide comments
4. All comments should be made in writing and sent to the address or the email address
   specified below. If sending your comments by email, please use the Consultation Paper number in the subject line. If relevant, please identify the organisation you represent when providing your comments. The FSRA reserves the right to publish, including on its website, any comments you provide, unless you expressly request otherwise at the time of submitting those comments. Comments supported by reasoning and evidence will be given more weight by the FSRA. What happens next?
5. The deadline for providing comments on the proposed framework is
   28 October 2022. After receiving comments, we shall consider whether any modifications are required to the proposals and the Board of ADGM and the FSRA will then proceed to enact the proposals in their final form as rules and associated guidance. You should not act on these proposals until final rules and guidance are issued by the FSRA, at which time we shall issue a notice on our website. Introduction

Consultation Paper No. 5 of 2022
Comments to be addressed to:
Consultation Paper No. 5 of 2022
Abu Dhabi Global Market
ADGM Square
Al Maryah Island
PO Box 111999
Abu Dhabi, UAE
Email: consultation@adgm.com

Consultation Paper No. 5 of 2022

1. Firms authorised in ADGM to offer OTC Leveraged Products to Retail Clients are
   currently subject to more than twenty specific license conditions, imposed by the FSRA through the Financial Services Permissions (“FSP conditions”) of those firms. The conditions are stringent and aimed at providing robust protection for Retail Clients as the risk of using such products has the potential to result in substantial losses. Alongside existing FSP holders in this area, there has been continued interest from firms wishing to offer OTC Leveraged Products to Retail Clients and we now wish to formalise the conditions, as explicit Rulebook provisions, that both groups will have to meet as authorised entities.
2. Our proposals are also aligned with international best practices from peer regulators
   and international standard-setting bodies. In particular, our proposals take into consideration the findings from a survey undertaken in 2016 1 and the resulting recommendations published in 2018 2 by the International Organization of Securities Commissions (“IOSCO”) in relation to retail OTC Leveraged Products, covering products comprising (i) rolling-spot forex contracts, (ii) contracts for differences and (iii) binary options. The risks to Retail Clients have been further highlighted by IOSCO members in two recently published consultation reports in the areas of “Retail Distribution and Digitalisation”3 and “Retail Market Conduct”4 .
3. Currently, the FSP conditions cover, amongst other requirements: limitations on the
   types of products that may be offered by such firms; an increased Base Capital Requirement, enhanced margin requirements; the risk disclosures that must be made by the firms to Retail Clients; product governance and appropriateness requirements; prohibitions on specified promotions; and caps on the maximum losses that might be incurred by those clients (i.e. so-called “negative balance protection”).
4. For example, in respect of enhanced margin requirements, an Authorised Person
   must require a Retail Client to have initially posted minimum margin of the following proportion of the value of the exposure of the Retail Client:

• 3.33% for major currency pairs and relevant sovereign debt;
• 5% for non-major currency pairs, gold and major equity indices;
• 10% for commodities, excluding gold, and non-major equity indices;
• 20% for individual equities; or
• 50% for Virtual Assets.
  1 https://www.iosco.org/library/pubdocs/pdf/IOSCOPD550.pdf 2 https://www.iosco.org/library/pubdocs/pdf/IOSCOPD613.pdf 3 https://www.iosco.org/library/pubdocs/pdf/IOSCOPD695.pdf 4 https://www.iosco.org/library/pubdocs/pdf/IOSCOPD698.pdf Background

Consultation Paper No. 5 of 2022
5. We are proposing that the current FSP conditions, and a small number of additional
conditions outlined below, be incorporated into Rules and associated Rulebook guidance in a new chapter 23 of COBS (“COBS 23”, see Appendix 1), and that the increased Base Capital Requirement is reflected in PRU (see Appendix 2). Topic Proposed Rationale Definition of “OTC Leveraged Products” GLO To clarify scope of instruments falling within scope of COBS 23 Margin close-out requirements for Retail Clients COBS 23.7.1 To provide greater detail on closure of client’s open positions Prohibition on referrals by unregulated Persons COBS 23.10.2 and 23.10.3 To prevent mass marketing to potential Retail Clients outside the target market and thereby reduce the risk of mis￾selling Prohibition on funding account through a credit card or a third-party credit facility COBS 23.12.3 To reinforce the appropriateness assessment requiring the Retail Client to have “liquid financial resources sufficient to absorb potential losses resulting from trading in OTC Leveraged Products” (COBS 23.5.1(b)) Definition of “OTC Leveraged Products”
6. The proposed definition of OTC Leveraged Products explicitly encompasses the first
two product groups addressed by IOSCO (i.e. rolling-spot forex contracts and contracts for differences), but omits explicit mention of binary options. However, we are proposing that the offering or sale of binary options and analogous products to Retail Clients should be prohibited under proposed COBS 23.12.1, which will also include analogous products. This mirrors the approach taken by the Financial Conduct Authority in the UK, which issued an explicit ban in April 2019 on the sale, distribution and marketing of binary options to retail clients. Question 1 Do you agree with the proposed definition of “OTC Leveraged Products”, given the prohibition on the offering or sale of binary options and analogous products to Retail Clients proposed in COBS 23.12.1? Proposed amendments to Rulebooks and Supplementary Guidance

Consultation Paper No. 5 of 2022
Additional requirement and prohibitions
7. The proposed requirement under COBS 23.7, relating to the available margin that
triggers close-out of a Retail Client’s open position(s), is derived from the IOSCO recommendations. It is designed to protect Retail Clients as they do not have the knowledge, experience and ability to take prompt action to limit losses resulting from adverse market movements relating to the class of underlying assets, particularly given the high leverage involved in such products. This is a common feature employed across the benchmarked jurisdictions. Question 2 In the proposed COBS 23.7 is the figure of 50% of the margin requirement appropriate?
8. The FSRA proposes prohibiting Authorised Persons from accepting referrals of Retail
Clients from unregulated third parties, e.g. call centres, for reward. The FSRA considers such a prohibition to be appropriate as the practices of those parties encouraging Retail Clients to invest in OTC Leveraged Products may be opaque to an Authorised Person. The use of such third parties might see them identify an inappropriate target market, alongside the possibility of inducements being offered to potential clients to invest in OTC Leveraged Products, neither of which practices may be detected by Authorised Persons; again, this is a measure referenced by IOSCO in its final report from 2018. Question 3 Should Authorised Persons offering OTC Leveraged Products be allowed to accept referrals, for reward, from unregulated third parties of Retail Clients seeking those products?
9. The proposed prohibition on Retail Clients funding their accounts using credit cards
and/or credit facilities, is designed to work alongside the existing FSP condition on account appropriateness, the latter being proposed as COBS 23.5.1. This requires the Authorised Person to assess, amongst other things, that the offering of OTC Leveraged Products to Retail Clients is appropriate given their financial situation and in the light of the high level of losses suffered by the target market. Using a credit card or credit facility to fund an account used for trading in OTC Leveraged Products may encourage Retail Clients to make speculative investments in these products with money they do not possess, and thereby increase the client’s future debt burden. Some jurisdictions have adopted this prudent approach in terms of protecting Retail Clients from further excessive losses.

Consultation Paper No. 5 of 2022
Question 4
Should Retail Clients be allowed to fund their accounts using credit cards and/or credit facilities? Transition period
10. For existing FSP holders in this area at the time that the proposals are implemented,
we propose granting a six-month transition period in relation to their meeting of the proposed introduction of margin close-out requirements and the prohibitions on referrals by unregulated third-parties and the use of credit cards and/or credit facilities. Question 5 Do you believe that a six-month transition period for to enable existing FSP holders to meet the additional requirement and prohibitions, if they are introduced, is appropriate?
11. Amendments are also proposed for the FEES Rulebook (see Appendix 3) to reflect
that authorising firms wishing to offer those products and subsequently supervising them is more resource-intensive for the FSRA than for other firms that offer more traditional products. The application fee and annual supervision fee for these firms are each set at US$40,000 to reflect this and these fees are reflected in the existing FSP conditions. Proposed Supplementary Guidance
12. Alongside the material proposed for the Rulebooks, we propose to issue
supplementary, non-Rulebook guidance (see Attachment 1) that will aid potential applicants in understanding our expectations in relation to the experience and qualifications of individuals proposed for senior positions and further operational considerations. Question 6 Do you believe that the proposed Supplementary Guidance covers all areas relevant to firms offering or selling OTC Leveraged Products to Retail Clients or should it be expanded? If it should be expanded, which areas should be covered?

Consultation Paper No. 5 of 2022

• Appendix 1: Proposed amendments to COBS
• Appendix 2: Proposed amendments to PRU
• Appendix 3: Proposed amendments to FEES
• Appendix 4: Proposed amendments to GLO
• Attachment 1: Proposed Supplementary Guidance – “Regulatory Framework for
  Authorised Persons dealing in OTC Leveraged Products for Retail Clients” Appendices and Attachment

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Appendix 1 - Proposed amendments to COBS

Appendix 1
Conduct of Business Rulebook (COBS)
*In this attachment underlining indicates new text and striking through indicates deleted text.

Appendix 1
23. CORE RULES – AUTHORISED PERSONS DEALING IN OTC LEVERAGED
PRODUCTS
23.1 Application
The Rules in this Chapter apply to every Authorised Person with respect to the conduct of any Regulated Activity in relation to an OTC Leveraged Product.
23.2 Interpretation
In this Chapter, the following terms have the following meanings attributed to them:
“major currency” means any of the following:
(i) U.S. Dollar;
(ii) Euro;
(iii) Japanese Yen;
(iv) Pound Sterling;
(v) Swiss Franc;
(vi) Canadian Dollar;
(vii) Australian Dollar; or
(viii) New Zealand Dollar;
“major equity indices” means any index identified in the table below:
Country Index
Australia All Ordinaries
Austria Austrian Traded Inde`x
Belgium BEL 20
Canada TSE 35, TSE 100, TSE 300
France CAC 40, SBF 250
Germany DAX
European Union Dos Jones Stoxx 50 Index, FTSE Eurotop 300, MCSI Euro Index Hong Kong Hang Seng Italy MIB 30 Japan Nikkei 225, Nikkei 300, TOPIX Korea Kospi

Appendix 1
Country Index
Netherlands AEX
Singapore Straits Times Index
Spain IBEX 35
Sweden OMX
Switzerland SMI
United Kingdom FTSE 100, FTSE Mid 250, FTSE All Share United States of America S&P 500, Dow Jones Industrial Average, NASDAQ Composite, Russell “margin” means the means the amount of Money a Retail Client has agreed to pay to the Authorised Person in order to open a position in relation to an OTC Leveraged Product; “non-major currency” means any currency which is not a major currency. “relevant sovereign debt” means an issue of public debt by or on behalf of:
(i) the United Kingdom;
(ii) the United States of America;
(iii) France;
(iv) Australia;
(v) Germany;
(vi) Japan;
(vii) Canada;
(viii) Switzerland; or
(ix) a member state of the EU that has adopted the Euro as its currency. “rolling spot forex contract” means a contract for difference where the value of the contract is ultimately determined by reference, wholly or in part, to fluctuations in an exchange rate or the value of a currency.
23.3 Marketing Materials
An Authorised Person must include sufficiently prominent and clear links to the risk disclosure statement containing the information set out in Rule 23.4(3) on the main
page of its website, in all marketing and educational materials, other
communications channels and as part of each risk warning or disclaimer that appears on its website.

Appendix 1
23.4 Risk Disclosure Statement
23.4.1 Before an Authorised Person opens a trading account enabling a Retail Client to
buy and sell OTC Leveraged Products, it must:
(a) provide a separate risk disclosure statement, as described in Rule 23.4.3, to Retail Clients as part of the onboarding process in good time before the Authorised Person carries on any business for a Retail Client; (b) obtain a documented acknowledgement from such Retail Client that they have received and reviewed the risk disclosure statement and fully understand and accept the risks involved in trading in OTC Leveraged Products; (c) provide a duplicate copy of the documented acknowledgement to each Retail Client; and (d) maintain a record of the acknowledgment in (b) in accordance with applicable record keeping requirements.
23.4.2 The risk disclosure statement must also be:
(a) provided on an annual basis to each Retail Client; and (b) published and available at all times on the website of the Authorised Person.
23.4.3 A risk disclosure statement provided by an Authorised Person to a Retail Client in
accordance with Rule 23.4.1 must include a prominent warning that investing in OTC Leveraged Products involves the risk of losing substantially more than the initial margin posted by the Retail Client, and further state that:
(a) the risk disclosure statement may not identify or address all risks associated with OTC Leveraged Products; (b) the Retail Client is at risk of losing all of their capital outlay and any profits not redeemed; (c) the Retail Client is at risk of losing money and accumulating losses rapidly; (d) margin trading and use of leverage amplifies losses when they occur; (e) margin-trading limits, stop-loss limits, or other systems and controls designed to mitigate or limit loss exposures may not be effective or may fail. Where relevant, an explanation of stop-loss orders, which must include clear information about whether or not a stop-loss is “guaranteed” (i.e. it would operate whatever the market circumstances are), and that in the case that it is not guaranteed, it may not limit Retail Client losses in the event of highly volatile trading conditions in an underlying asset or reference price; (f) the risk of slippage, i.e. a divergence between the price at which a trade was approved and the price at which it was executed; and (g) most Retail Clients transacting in OTC Leveraged Products lose money.
23.4.4 The risk disclosure statement must include a prominent display of performance
data for each relevant OTC Leveraged Product that clearly identifies the

Appendix 1
percentage of active Retail Client accounts that were profitable. For the purposes of this disclosure:
(a) active accounts include the total number of Retail Client accounts in which that specific OTC Leveraged Product was traded or held during that period; (b) profitable accounts include each active account for which net trading activity involving only that specific OTC Leveraged Product resulted in a realised profit, excluding any bonus or promotional amount, for that period; and (c) the performance data must state separately each of the four most recently completed calendar quarters or, where the Authorised Person has not yet completed four calendar quarters of offering OTC Leveraged Products to Retail Clients, those calendar quarters that have been completed.
23.4.5 The risk disclosure statement must state that it is the responsibility of the Retail
Client:
(a) to consider whether the products are suitable for them and whether they can afford to risk all of their capital outlay; and (b) to consult with their own legal and other professional advisors before committing to any transaction, signing any documents and/or entering into any legally binding arrangement in relation to these products.
23.4.6 The risk disclosure statement must state whether the Authorised Person has any
actual or potential conflicts of interest with their Retail Clients, including placing the interests of the Retail Client first, and clearly identify:
(a) what those conflicts of interest are, or may be; (b) any potential, associated benefits for the Authorised Person; (c) the right of the Retail Client to object to those conflicts of interest; and (d) the Authorised Person’s obligation to request a positive written affirmation from the Retail Client as to whether or not they accept the actual or potential conflicts of interest.
23.4.7 The risk disclosure statement must provide details of the Regulator of the
Authorised Person.
23.4.8 All information provided or made available by the Authorised Person to a Retail
Client in accordance with this Chapter must be provided or made available in English or the language they are most likely to comprehend, using easily understandable language and in a clear and comprehensible form. Guidance

1. The requirements in this section specify the minimum information that an
   Authorised Person must communicate to its Retail Clients and it should consider whether there is any additional information that should be disclosed to them.
2. The risk disclosure statement should not be longer than three A4 size pages,
   including any diagram or numerical illustration, but excluding the Retail Client’s acknowledgement. Information in the short-form disclosure fact sheet (including

Appendix 1
footnotes) shall be presented in a font size of at least 10-point Calibri or Times New Roman.
23.5 Appropriateness Assessment
23.5.1 An Authorised Person must not offer OTC Leveraged Products to a Retail Client,
or provide any advice or make arrangements on behalf of a Retail Client relating to OTC Leveraged Products unless it has first completed an assessment of the skill, experience, knowledge, financial resources and risk tolerance of the Retail Client, such that the Authorised Person may reasonably conclude that the Retail Client has:
(a) adequate experience and skill enabling them to understand the potential risk of loss involved in investing in OTC Leveraged Products; and (b) liquid financial resources sufficient to absorb potential losses resulting from trading in OTC Leveraged Products. Guidance

1. In order to satisfy the requirements imposed by Rule 23.5.1, the Authorised
   Person should, prior to establishing a business relationship with a Retail Client, consider whether such Retail Client demonstrates an understanding of the risks and potential magnitude of losses which they may be exposed to.
2. In order to gain such understanding, the Authorised Person should consider the
   trading history of the Retail Client, including the volume of that trading, as well as any relevant professional qualifications the Retail Client might have. The Authorised Person should also seek information concerning the liquid financial resources of the Retail Client, which will enable them to absorb losses which may result from trading in OTC Leveraged Products, including whether the Retail Client may be able to absorb losses arising from their contemplated investments without needing to resort to credit facilities.
   23.5.2 The assessment required by Rule 23.5.1 must be reassessed by an Authorised
   Person:
   (a) on an annual basis; or
   (b) where there is any material change in the financial situation or risk tolerance of the Retail Client, if that change occurs prior to the annual reassessment.
   23.6 Margin Requirements for Retail Clients
   An Authorised Person must require a Retail Client to have posted margin, in the form of Money, before it opens a position in an OTC Leveraged Product for that Retail Client of at least the following proportion of the value of the exposure of the Retail Client:
   (a) 3.33% for major currency pairs and relevant sovereign debt; (b) 5% for non-major currency pairs, gold and major equity indices; (c) 10% for commodities, excluding gold, and non-major equity indices; (d) 20% for individual equities; or

Appendix 1
(e) 50% for Virtual Assets.
Guidance

1. The funds in the account of a Retail Client consist of the margin deposited
   in the account for the purpose of trading OTC Leveraged Products plus unrealised net profits from open positions in them, the latter taken as the sum of unrealised gains and losses of all open positions recorded in the account. Any cash or other assets in the account for purposes other than trading OTC Leveraged Products do not represent funds available to meet the above margin requirements.
2. Margin deposited in the account of a Retail Client to meet a margin
   requirement above in relation a position in an OTC Leveraged Product may not be used to meet a margin requirement in relation to any other OTC Leveraged Products.
   23.7 Margin close-out Requirements for Retail Clients
   23.7.1 An Authorised Person must ensure that “net equity” of a Retail Client in an account
   used to trade OTC Leveraged Products does not fall below 50% of the margin requirement, as outlined in COBS 23.6, required to maintain the Retail Client’s open positions.
   23.7.2 Where the net equity of a Retail Client falls below 50% of the margin requirement,
   the Authorised Person must close the Retail Client’s open position(s) in OTC Leveraged Products as soon as market conditions allow. Guidance In this Rule, “net equity” means the sum of the deposited margin and the unrealised net profit and loss on open positions in that account.
   23.8 Negative Balance Protection
   The liability of a Retail Client for all their investments in OTC Leveraged Products connected to their account is limited to the funds in that account maintained for the purpose of trading OTC Leveraged Products. Guidance
3. Funds in the account of a Retail Client are limited to the then current amount
   of deposited margin in the account plus all unrealised net profits from open positions.
4. Any cash or other assets in the account for purposes other than trading
   OTC Leveraged Products do not represent funds available to meet the liability.
   23.9 Prohibition of Incentives
   An Authorised Person must not offer promotions, bonuses or other inducements to Retail Clients in connection with the offer or sale of OTC Leveraged Products, whether monetary or non-monetary in nature.

Appendix 1
23.10 Promotion by Third Parties and Referrals
23.10.1 An Authorised Person must have systems and controls in place to ensure that
introducing brokers are not actively promoting OTC Leveraged Products and that Retail Client acquisition does not involve the provision of investment advice or portfolio management on behalf of the Authorised Person.
23.10.2 An Authorised Person must not accept a referral of a Retail Client made by an
unregulated Person for reward.
23.10.3 An Authorised Person must have adequate systems and controls to ensure
compliance with Rule 23.10.2.
Guidance
For the purposes of Rule 23.10.2, an “unregulated Person” means a Person that is not an Authorised Person or a Regulated Financial Institution.
23.11 Liquidity Providers
An Authorised Person must, in relation to liquidity providers:
(a) undertake an assessment and conclude that the liquidity providers used are suitable to provide liquidity to its Retail Clients; (b) ensure that the best price is available from liquidity providers for its Retail Clients, including under extreme market conditions; (c) at all times retain more than one liquidity provider in order to better discharge the requirement stated in (b); and (d) undertake independent monitoring of the quality of the orders executed by liquidity providers on behalf of its Retail Clients.
23.12 Additional Restrictions relating to OTC Leveraged Products
23.12.1 The Applicant must not offer or sell to Retail Clients OTC Leveraged Products
which:
(a) relate to underlying non-financial instruments or non-commodities, binary options or analogous products; (b) do not have a transparent pricing mechanism available for determining the price movement of the underlying reference, by which the profit or loss of each party to the OTC Leveraged Product may be determined; (c) do not have a two-way pricing mechanism that permits the Retail Client to trade at the prices quoted during the currency of the OTC Leveraged Product.
23.12.2 An Authorised Person must not offer or arrange for Retail Clients to subscribe to
“copy trading,” “mirror trading,” or similar services unless it holds a Financial Services Permission to undertake the Regulated Activity of Managing Assets and has implemented, to the satisfaction of the Regulator, effective systems and controls and governance to identify and manage all related material risks.

Appendix 1
23.12.3 An Authorised Person must ensure, to the extent possible, that a Retail Client
does not fund its account through the use of a credit card or a third party credit facility.

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Appendix 2 - Proposed amendments to PRU

Appendix 2
Prudential – Investment, Insurance Intermediation and Banking Rules (PRU) *In this attachment underlining indicates new text and striking through indicates deleted text.

Appendix 2
PART 3 - Calculating Capital Requirements
3.3 Base Capital Requirement
3.3.1 This Section applies to an Authorised Person in any Category.
Guidance
The Base Capital Requirement is a component of the calculation of the Capital Requirement under Sections 3.4 and 3.6.
3.3.2 Subject to Rule 3.3.2A, the The table below sets out the Base Capital Requirement for
each Category of Authorised Persons.
Category Base Capital Requirement (US $)
1 10 million
2 2 million
3A
500,000, except where an Authorised Person is conducting the Regulated Activity of Dealing in Investments as Principal (only as Matched Principal) in relation to OTC Leveraged Products with Retail Clients in which case the Base Capital Requirement is 2 million. 3B 4 million 3C 250,000, except where an Authorised Person has a Financial Services Permission only to carry out the Regulated Activity of Managing a Collective Investment Fund, in which case the Base Capital Requirement is the higher of:
a) 150,000 if the Authorised Person manages a Public Fund or any other type of fund that is available to retail customers; or b) 50,000 otherwise. 10,000, except where an Authorised Person has a Financial Services Permission:
a) to carry out the Regulated Activity of Operating a Private Financing Platform and holds Client Assets, in which case the Base Capital Requirement is 150,000; or b) to carry out the Regulated Activity of Providing Third Party Services, in which case the Base Capital Requirement will be 50,000. 5 10 million …

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Appendix 3 - Proposed amendments to FEES

Appendix 3
Fees Rules (FEES)
*In this attachment underlining indicates new text and striking through indicates deleted text.

Appendix 3
3. SPECIFIC AUTHORISATION AND SUPERVISION FEES
…
3.17 OTC Leveraged Products
3.17.1 An Applicant for a Financial Services Permission to conduct a Regulated Activity in
relation to OTC Leveraged Products must pay to the Regulator an initial authorisation fee of (as applicable):
(a) $40,000 where those OTC Leveraged Products are to be offered to Retail Clients; or (b) $5,000 otherwise.
3.17.2 An Authorised Person conducting a Regulated Activity in relation to OTC Leveraged
Products must pay to the Regulator an annual supervision fee of (as applicable):
(a) $40,000 where those OTC Leveraged Products are to be offered to Retail Clients; or (b) $5,000 otherwise. …

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Appendix 4 - Proposed amendments to GLO

Appendix 4
GLOSSARY (GLO)
*In this attachment underlining indicates new text and striking through indicates deleted text.

Appendix 4
1.2 Defined Terms
1.2.1 In the Rulebooks:
(1) a word or phrase which is defined in GLO is a defined term and has the meaning given in GLO; and (2) a word or phrase which relates to a defined term must be interpreted accordingly. …. Defined Terms Definitions OTC Leveraged Product Means an OTC Derivative that is:
(a) a leveraged contract for differences;
(b) a leveraged rolling spot forex contract; (c) an Option over a contract referred to in (a) or (b); or (d) any other leveraged Investment similar in nature to an instrument referred to in (a), (b) or (c) but which is not prohibited pursuant to COBS 23.12.1.

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Attachment 1 - Proposed Supplementary Guidance – Regulatory Framework for Authorised Persons dealing in OTC Leveraged Products for Retail Clients

Attachment 1
Supplementary Guidance –
Regulatory Framework for Authorised Persons dealing in OTC Leveraged Products for Retail Clients

Attachment 1
TABLE OF CONTENTS

1. Introduction.......................................................................................................................3
2. Licensing conditions..........................................................................................................3
3. Operational considerations ...............................................................................................4

Attachment 1

1. Introduction
   1.1 The FSRA has formalised the conditions that Authorised Persons dealing in OTC
   Leveraged Products in relation to Retail Clients are subject to, in order to provide transparency and clarity around those requirements. These conditions and a small number of additional ones have been translated into Rules via chapter 23 of the Conduct of Business Rulebook (“COBS 23”) and associated guidance. In addition, we are issuing this supplementary guidance to inform Authorised Persons and potential applicants of the further criteria that we expect those firms to meet in order to be allowed to offer these products to Retail Clients.
   1.2 Unless otherwise defined or the context otherwise requires, the terms contained in this
   Guidance have the same meanings as defined in the Financial Services Markets Regulations 2015 (“FSMR”) or the Glossary Rulebook (“GLO”), or as they appear in proposed COBS 23.2.
2. Licensing conditions
   2.1 The FSRA is conscious that losses for most Retail Clients exposed to OTC Leveraged
   Products are likely to be substantial, and the requirements contained in COBS 23 are aimed at providing protection from excessive losses.
   2.2 In addition, it must be noted that the FSRA is not minded to grant relevant approvals
   to start-up operations seeking to provide OTC Leveraged Products to Retail Clients, given their lack of a track record. The criteria that the FSRA would look at before granting any such licence is the extent to which the Applicant and its officers meets the Principles for Authorised Persons as stated in section 2.2 of the General Rulebook (“GEN”). Qualitative criteria the FSRA would examine are the experience and qualifications of the individuals proposed for the following positions. a) Senior Executive Officer - a minimum of ten years’ experience in dealing with Retail Clients in respect of similar products in an equivalently regulated environment and holding a directly relevant qualification and membership of appropriate professional body. b) Licensed Director, whether executive or non-executive - a minimum of seven years’ experience in dealing with Retail Clients in respect of similar products in an equivalently regulated environment and holding a directly relevant qualification and membership of appropriate professional body. c) Senior Managers - a minimum of five years’ experience in dealing with Retail Clients in respect of similar products in an equivalently regulated environment and holding a directly relevant qualification and membership of appropriate professional body. d) Compliance Officer, Money Laundering Reporting Officer - a minimum of five years’ experience in dealing with Retail Clients in respect of similar products in an equivalently regulated environment and holding a directly relevant qualification and membership of an appropriate professional body.
   2.3 Authorised Persons or Applicants, as applicable, should only propose individuals for
   approved positions who in their opinion are fit and proper persons and meet the above criteria, alongside the Principles for Approved Persons and Recognised Persons in

Attachment 1 accordance with GEN 2.4. The FSRA expects such entities to carry out their own due diligence and assessment of such persons, not only prior to proposing such persons to the FSRA, but also on an ongoing basis. The checks which should be conducted by the Authorised Person or Applicant or do not replace those conducted by the FSRA, but should be considered as a first filter and a primary safeguard.
2.4 Other considerations will include, but not be limited to, the track record, reputation and
financial resources of an Applicant. The FSRA would discourage Applicants seeking to provide OTC Leveraged Products to Retail Clients where they fail to meet any of the above criteria.
3. Operational considerations
Copy trading and mirror trading
3.1 An Authorised Person must not offer or arrange for Retail Clients to subscribe to “copy
trading,” “mirror trading,” or similar services unless it holds a Financial Services Permission to undertake the Regulated Activity of Managing Assets and has implemented, to the satisfaction of the FSRA, effective systems and controls and governance to identify and manage any related risks. Anti-money laundering measures
3.2 An Authorised Person must ensure that it satisfies all the requirements that it is subject to
in relation to anti-money laundering, as specified in the Anti-Money Laundering and Sanctions Rules and Guidance Rulebook (“AML”).