The Australian Government has made and registered a critical Regulation dealing with mandatory clearing of derivatives and an exemption allowing certain single-sided reporting.
On 8 September 2015, the Australian Government registered the Corporations Amendment (Central Clearing and Single-Sided Reporting) Regulation 2015 which amends the Corporations Regulations 2011 to implement central clearing of prescribed classes of over-the-counter interest rate derivatives and provide single-sided reporting relief for entities with lower levels of OTC derivatives transactions.
The clearing-related regulations enable the Australian Securities and Investments Commission (ASIC), the financial services and markets regulator in Australia, to make rules requiring certain OTC derivatives to be centrally cleared. These obligations can be imposed on a limited number of institutions in Australia: large Australian domestic banks and foreign banks (in general, those with greater than AUD$100 billion notional exposure to OTC derivatives). End-users will not be affected by the clearing requirement. Under rules proposed by ASIC in its May consultation, central clearing would commence in Australia in April 2016.
The single-sided reporting exemption has been keenly awaited by funds and fund managers. It provides relief from the requirement to report OTC derivative position and transaction information in certain circumstances. There are two key requirements: the notional outstanding position value of the exempt entity remaining below an AUD$5 billion threshold for two consecutive quarters, and the counterparty being required to report OTC derivative information under Australian or foreign rules.
An exempt entity will need to ensure that the total gross notional value of its OTC derivatives outstanding positions remains below an AUD$5 billion threshold for two consecutive calendar quarters. If the total gross notional outstanding positions of the exempt entity go above the AUD$5 billion threshold for two consecutive calendar quarters, the exempt entity will lose the benefit of the exemption and the reporting obligation will commence 3 months after the benefit of the exemption is lost.
The counterparty will need to be a ‘reporting counterparty’ for the single-sided exemption to be available. To be a ‘reporting counterparty’:
- the counterparty will need to have represented to the exempt entity that the counterparty is a reporting entity that is required to report OTC derivative information under Australian rules, or to report the transaction of position under substantially equivalent non-Australian rules;
- the exempt entity will need to make regular enquiries reasonably designed to determine whether that representation by the counterparty is correct; and
- the exempt entity must have no reason to suspect that the representation is incorrect.
Parts 2 and 3 of Schedule 1 of the Regulation, which contain the amendments relating to single-sided reporting and application arrangements, commence on 1 October, in alignment with the commencement of the phase 3B trade reporting regime.
The single-sided reporting exemption represents a welcome relief from compliance for smaller financial services providers.