Broker Jarden has been formally censured by New Zealand's markets watchdog for a breach of derivatives issuer obligations.
The Financial Markets Authority (FMA) - Te Mana Tātai Hokohoko - today announced the censure for contraventions by OM Financial Ltd (OMF) as a licensed derivatives issuer (DI). OMF amalgamated with Jarden Securities Ltd in March 2021.
OMF co-mingled derivative investor money with its own money, a breach of its DI obligations, the FMA said in a statement.
The regulator said the amalgamated entity was censured because it inherited the property, rights and liabilities of OMF and Jarden, including the DI licence.
The watchdog said it was satisfied OMF breached the Financial Markets Conduct 2013 between September 2015 and July 2020, prior to the amalgamation with Jarden.
First NZ Capital Securities - now Jarden - acquired OMF in 2019 and OMF self-reported the issue to the FMA in September 2020.
The contraventions were for OMF transferring its own money into the trust account designated to hold derivative investor money, the FMA explained, and involved at least 150 payments totalling US$1 million.
A fundamental obligation for DI licensees is to hold investor money on trust, separate from the licensees' own funds, to protect client money from the risk of loss that may occur from co-mingling, the FMA said.
Derivatives issuers may deposit money into the trust account to safeguard against the risk of a shortfall. However, the FMA concluded the money deposited by OMF was made for business-related payments to third party providers, not to safeguard against the risk of a shortfall arising.
FMA director of supervision James Greig said: "A derivatives issuer failing to handle client money appropriately is serious and we have previously signaled our concerns around this issue in our 2020 DI Sector Risk Assessment report. We have little tolerance for firms not meeting their obligations in this area."
Although no OMF clients lost money as a result of this issue, Greig said, the FMA considered investor money was at risk while the necessary separation processes were not in place.
"The breaches warranted a public censure due to the significant period over which they occurred, as well as the value and number of transactions," Greig said.
"While we acknowledge that OMF self-reported these issues to us, managing client money in accordance with the regulations is a fundamental, minimum requirement for any licensed derivatives firm. In these circumstances, the self-reporting of the issues is expected and does not prevent the FMA from taking action and using our regulatory tools to hold firms to account."
Jarden has engaged constructively with the FMA through the process and implemented changes to ensure this issue doesn't happen again, Greig said.
The firm has also been working with the former OMF teams to review and improve processes to align them with Jarden group practices, the FMA said.
In a statement, Jarden said during the preparation for amalgamation OMF was found to have a policy that enabled business-related payments to be made from firm funds legitimately held within the OMF client funds trust accounts.
It said at no time was there a risk to client funds, and OMF always held sufficient funds to meet all client obligations.
OMF ceased this practice and self-reported the issue to the FMA and NZX.
Jarden's chief executive officer James Lee said: "Jarden agrees with the FMA's findings that this practice should not have occurred. We take our regulatory responsibilities seriously and have engaged constructively with the FMA through this process."
In August, Jarden was publicly censured by the NZ Market Disciplinary Tribunal and fined $40,000 after reaching a settlement agreement with the NZX over breaches in trading rules.