The Corporations Amendment (Central Clearing and Single-Sided Reporting) Regulation 2015 (Regulation) was recently registered following the release of the draft rules and regulations in June 2015. Please click here to view our previous Alert on this topic.
The Regulation amends the Corporations Regulations 2001 to:
- provide single-sided reporting relief for entities with lower levels of OTC derivatives transactions;
- expand the end user exemption for the purposes of derivatives transactions reporting; and
- implement central clearing of prescribed classes of over-the-counter (OTC) interest rate derivatives.
This means that Phase 3B reporting entities can now move to settle their arrangements with counterparties in order to rely on the single-sided reporting exemption before their reporting obligations come into force on 12 October 2015.
Please do not hesitate to contact us if you have any questions regarding the regulation of this area.
The Regulation provides relief from the transaction reporting obligations for certain entities in the form of single-sided reporting.
The Australian regime ordinarily requires both sides of a transaction to report the trade, which is known as double-sided reporting. The Regulation provides an exemption from the reporting obligations for certain Phase 3 reporting entities, which comply with the threshold limits set out in the Regulation. Essentially, it will apply to entities with less than $5 billion gross notional OTC derivatives positions outstanding. As discussed in our previous alert, the Regulation includes detailed provisions to determine when the threshold is applied, and when an entity will qualify for or be disqualified from the application of the exemption.
The exemption applies where an entity, which complies with the threshold requirements, enters into transactions with a "reporting counterparty" and that counterparty makes certain representations about its status and about OTC derivative transaction and position information. The exemption will apply where:
(i) a reporting entity represents it is required to report
The counterparty has made a representation that it is:
- a reporting entity (other than a Phase 3 reporting entity) that is required to report such information under the Derivatives Transactions Rules (Reporting) (DTRR); or
- a Phase 3 reporting entity that is required to report such information under the DTRR, and that regulation 7.5A.73 does not apply (essentially that the entity will not be under the $5bn threshold).
In each case, the exempt entity must make regular enquiries reasonably designed to determine whether the representation is correct, and must not have any reason to suspect that the representation is incorrect.
(ii) a reporting entity represents it will report
The counterparty has made a representation that:
- it is a reporting entity; and
- it will report such information in accordance with the DTRR.
The exempt entity must make regular enquiries reasonably designed to determine whether the other entity has been making the reports, and must have no reason to suspect it has not been making such reports.
(iii) a foreign entity will report in accordance with alternative reporting requirements and tag the trade as ASIC reportable
The counterparty is a foreign entity and has made a representation that:
- it is subject to alternative reporting requirements in one or more foreign jurisdictions that are substantially equivalent to the requirements under the DTRR;
- it will report such information to a prescribed facility in accordance with the alternative reporting requirements; and
- it will tag the trade as ASIC reportable.
The exempt entity must make regular enquiries reasonably designed, to determine whether the other entity has been making the reports, and must have no reason to suspect it has not been making such report.
(iv) a foreign entity will report in accordance with DTRR and tag the trade as ASIC reportable
The counterparty is a foreign entity and has made a representation that it will:
- report such information to a licensed derivative trade repository in accordance with the DTRR; and
- tag the trade as ASIC reportable.
The exempt entity must make regular enquiries reasonably designed to determine whether the other entity has been making the reports, and must have no reason to suspect it has not been making such report.
Introduction of a safe harbour
Exempt entities are no longer required to check that each transaction is actually reported (as was the case in the draft regulations). Instead, the exempt entity is required to make reasonable enquiries to ensure that the transactions are being reported, and must not have a suspicion that the representations made by the counterparty are incorrect or that the counterparty has failed to make the reports (as applicable). The Explanatory Statement indicates that the level and regularity of enquiries will depend on the nature of the exempt entity's trading. Entities with only a few transactions, which are seldom changed or amended, may be able to undertake such enquiries as infrequently as once or twice a year. Entities with a large volume of trading will need to make enquiries more frequently.
Single-sided vs delegated reporting
The single-sided reporting relief provides the exempt entity with an exemption from the requirement to report its side of the trade. This is distinct from delegated reporting, where the entity still has an obligation to report its side of the trade, but can delegate that obligation to another entity.
End user exemption
Under the DTRR, a person who is an end user is exempt from the application of the rules. The Regulation expands the definition of end user so that the rules will not apply to an entity holding an Australian financial services licence (AFSL), where that AFSL does not authorise them to provide financial services on the relevant class of derivatives. An amendment to the definition was also made in relation to foreign regulated financial services providers which deal in derivatives with wholesale clients. The amendment is intended to clarify that only entities that provide financial services in this jurisdiction are excluded from the definition of end user (and thereby subject to the DTRR).
The Regulation, and associated Ministerial determination, establish the framework for central clearing for interest rate derivatives denominated in Australian Dollars, US Dollars, Euros, Japanese Yen or British Pounds.
The clearing obligations will apply to Australian and foreign authorised deposit-taking institutions (ADIs) and Australian financial services licensees, which hold $100 billion or more in total gross notional outstanding OTC derivative positions. This will also apply to certain foreign regulated entities dealing in derivatives in Australia with wholesale clients, which hold $100 billion or more in total gross notional outstanding OTC derivative positions.
The clearing requirements will apply to the relevant transactions, where the counterparty to the transaction is an Australian clearing entity, a foreign clearing entity or a foreign internationally active dealer. A foreign internationally active dealer means any foreign entity (other than a foreign clearing entity) that is registered or provisionally registered as a swap dealer with the CFTC or securities-based swap dealer with the SEC in the US.
The transactions can be cleared through a clearing facility, which holds an Australian CS facility licence or a prescribed facility. The clearing facilities prescribed in the regulations are:
- CME Clearing Europe Limited;
- Eurex Clearing AG;
- Japan Securities Clearing Corporation;
- NASDAQ OMX Clearing AB; and
- OTC Clearing Hong Kong Limited.
ASIC also has a general power to prescribe additional central counterparties.