Abstract
The Financial Markets Conduct Act 2013 (FMC Act) represents the most substantial overhaul of New Zealand's securities law in recent history. The regulation of derivatives in particular featured high on the agenda as an area in need of reform and, as a result, the FMC Act is much more clear than the Securities Act 1978 and Securities Markets Act 1988 with respect to typical derivative agreements. The focus of this article, however, is on the atypical: the use of derivatives in prediction markets. This article examines whether New Zealand-based prediction market iPredict will be regulated under the FMC Act and, if so, how it will be regulated. The conclusion reached is that iPredict can operate under the FMC Act only if the Financial Markets Authority declares that its contracts are derivatives and grants substantial exemptions from regulatory compliance. This article then makes recommendations for a more coherent approach to the regulation of prediction markets by analogy with the new prescribed intermediary service licences under the FMC Act.
Highlights
The Financial Markets Conduct Act 2013 (FMC Act) represents the most substantial overhaul of New Zealand's securities law in recent history.[1]
The conclusion reached is that iPredict can operate under the FMC Act only if the Financial Markets Authority declares that its contracts are derivatives and grants substantial exemptions from regulatory compliance
If contracts for "New Zealand Government to achieve Budget operating balance ABOVE 0.5% of GDP in 2014/15" are trading at $0.22 today, and that contract promises to pay the holder $1.00 if the event occurs, the price reflects the current belief of the market that government is 22 per cent likely to achieve a budget operating balance above 0.5 per cent of GDP in 2014/15.37 This information can be compared to and even supplement official forecasts, such as that issued by the Minister of Finance on the same question.[38]
Summary
The Financial Markets Conduct Act 2013 (FMC Act) represents the most substantial overhaul of New Zealand's securities law in recent history.[1] Since the enactment of the Securities Act in 1978, the development of securities law in New Zealand has been marked by piecemeal attempts to patch legislative gaps in reaction to economic downturns and investor losses This pattern of ad hoc reform added layers of confusion to a complex area of law to create a regime that was in many respects inconsistent and ineffective.[2] The FMC Act, on the other hand, was enacted following a. Two key objectives of the FMC Act reform to achieve these ends were to define "derivative" with greater clarity and establish licensing regimes for derivatives issuers and markets.[8] As a result, the FMC Act is much more clear than the Securities Act 1978 and Securities Markets Act 1988 with respect to typical derivative agreements.[9] The focus of this article, is on the atypical: the use of derivatives in prediction markets.
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