The Australian Securities and Investments Authority has forced the licensed retail OTC derivatives issuer XTrade.au to change the way it handles client money.

ASIC's surveillance raised concerns that XTrade group's payment processes were not complying with the requirements of the Corporations Act because the firm was not paying client money into client trust accounts on the day it was received or even on the next business day. Client money accounts were only reconciled on a periodic basis.

ASIC was also concerned that XTrade's parent company was depositing a 'buffer' into the client trust account to cover any potential shortfall. The Corporations Act does not allow a licensee to deposit funds belonging to the licensee into client money accounts, by way of a 'buffer' or otherwise. ASIC expects every licensee to maintain appropriate and prudent reconciliation practices in respect of its client money accounts. The operative rule is to be found in paragraph 42 of ASIC's Regulatory Guide 212 or RG 212, entitled "Client money relating to dealing in OTC derivatives."

The client money provisions protect the interests of clients of licensees. They require each licensee to separate client money from its own money, to hold the money on trust and to set limits on how the money is used, withdrawn or otherwise dealt with.