Following the receipt of public submissions on the Australian government’s Consultation Paper, "Implementation of a framework for Australia's G20 over-the-counter derivatives commitments",1 the government has released an exposure draft of the Corporations Legislation Amendment (Derivatives Transactions) Bill 2012 (Derivatives Bill). The Derivatives Bill proposes to amend the Corporations Act 2001 (Cth) to provide for a legislative framework for the regulation of derivatives transactions in order to implement Australia's G20 commitments relating to the regulation of OTC derivatives by the end of 2012.
The proposed legislative framework
The Derivatives Bill follows the proposals set out in the Consultation Paper. It establishes a legislative framework that will allow the government to require that certain prescribed classes of derivatives be subject to one or more mandatory obligations relating to trade reporting, central clearing and trade execution (each a mandatory obligation). In addition, the Derivatives Bill introduces a new licensing regime for derivatives trade repositories (ie. the entities that will be licensed to provide trade reporting facilities).
It is important to note that the legislative framework itself does not itself introduce any trade reporting, central clearing or trade execution obligations relating to OTC derivatives, but rather, it establishes a mechanism to impose such obligations through the issue of further rules and regulations made by the Minister for Financial Services (Minister) and the Australian Securities and Investments Commission (ASIC).
Regulation and rule making process
Broadly speaking, the Derivatives Bill provides for the following regulation and rule-making procedures:
The Minister may determine whether a class of derivatives should be subject to a mandatory obligation. In doing so, the Minister must have regard to the following:
- the likely effect of imposing a mandatory obligation on a class of derivatives on the Australian economy and on the efficiency, integrity and stability of the Australian financial system; and
- the likely regulatory impact of imposing a mandatory obligation on a class of derivatives.
In addition, the Minister may have regard to other matters such as international standards and information or advice obtained via consultation with ASIC, the Australian Prudential Regulation Authority and the Reserve Bank of Australia. In this context, regulatory developments in major offshore jurisdictions have an added layer of importance due to their potential impact on the regulatory environment in Australia.
- ASIC may then, following public consultation, make derivatives transaction rules in relation to the trade reporting, central clearing or trade execution obligations relating to a prescribed class of derivatives. These rules will specify, among other things, the persons who will be required to comply with the requirements set out in the rules, how the persons must comply and any applicable exemptions.
When making derivatives transaction rules, the Derivatives Bill requires ASIC to consider the same matters that the Minister must consider when making a determination and other matters that ASIC considers relevant following consultation with the public and with APRA and the RBA (although consultation is not required in certain urgent situations).
Interestingly, the Derivatives Bill notes that derivatives transaction rules may require “intermediaries or agents who facilitate or are otherwise involved in derivatives transactions” to comply with the relevant rules. Such rules will bring those persons under the regulatory framework and market participants will expect clarity in the delineation of which obligations are imposed on which other persons in any such rules.
The Derivatives Bill also makes it clear that civil penalties will apply to a person who fails to comply with a derivatives transaction rule that applies to it, although such a failure to comply will not invalidate the derivatives transaction or affect any rights or obligations under it. Regulations may also specify other alternatives to civil proceedings, including requiring persons to give legally enforceable undertakings.
The road ahead
It is apparent from the Explanatory Memorandum to the Derivatives Bill that this approach has been adopted in order to ensure that Australia is able to promptly implement derivatives regulations that are consistent with international regulations (such as in the United States and European Union) once those are finalised. In particular, the Explanatory Memorandum states that the Derivatives Bill “provides for the implementation of graduated measures to respond proportionally in managing risks in Australian OTC derivatives markets”.
The release of the Derivatives Bill by the government is a welcome step forward as it indicates to market participants that Australia will be well placed to implement necessary regulations as and when they are finalised. However, the ultimate timing for implementation remains unclear. Whilst the Australian Government remains committed to meeting the end of 2012 deadline, no draft rules or regulations have yet been issued which seek to precisely define the classes of derivatives that will be subject to the mandatory regulations or the entities that will need to comply with them.
Reponses to the Derivatives Bill are due by 20 August 2012.