Mandatory reporting of over-the-counter derivatives contracts will start this year for Australians. Even those who have managed to escape the reach of Dodd-Frank and EMIR will need to understand the draft derivative transaction rules proposed by ASIC today. End-users need to care too.
Trade reporting is one of the key G20 derivatives reforms following the global financial crisis. It is also one of the least controversial. The need for regulators to have access to information on the derivatives transactions which connect financial market participants is generally recognised and understood. For example, reporting requirements are already imposed, or in train, under Dodd-Frank in the US and under EMIR in Europe. Accordingly it makes sense that reporting is the first of the G20 obligations to be implemented in Australia and today ASIC released a consultation package on the new Derivative Transaction Rules (DTRs) that will effect that implementation. A copy of this consultation package can be found here.
Key initial take-aways are as follows.
What needs to be reported?
OTC derivatives which are “reportable transactions”. These are expected to be interest rate, foreign exchange, credit, equity and commodity derivatives (excluding electricity derivatives), whether centrally cleared or not. Exchange traded transactions are not included (unlike EMIR). Reportable transactions include the entry into such transactions, as well as their amendment, termination or assignment.
To be a reportable transaction the OTC derivative must be:
- entered into by an Australian entity or a foreign subsidiary of an Australian entity (wherever that entry takes place),
- booked to the profit or loss account of an Australian branch of a foreign ADI or a registered foreign company, or
- entered in Australia by a foreign ADI or registered foreign company.
Those entities referred to above are “reporting entities” under the DTRs.
The data to be reported is set out in the draft DTRs.
Who must do the reporting?
Reportable transactions must be reported by the “reporting entities” (even if this includes both parties to the reportable transaction). This approach is broadly aligned with that under EMIR.
The obligation to report is not limited to entities holding an Australian financial services licence.
To whom must reports be given?
Reporting is to be provided to an authorised trade repository no later than the business day after the day on which the execution, amendment, termination or assignment occurs. As with EMIR, and unlike Dodd-Frank, there is no real-time reporting. Our Alert on the proposed trade repository licensing regime is contained here.
When does the obligation start?
The reporting obligation is to be implemented in phases. It is proposed that major financial institutions (being ADIs, AFS licensees or exempt foreign licensees with at least $50 billion of notional outstanding positions in OTC derivatives on 30 September 2013) would be subject to a reporting obligation in some asset classes from 31 December 2013. Other smaller financial institutions would be subject to a reporting obligation in some asset classes from 30 June 2014. There is the possibility to opt-in to the reporting obligation earlier than this for example, to assist with compliance with overseas reporting obligations.
Above all, the factor that is likely to determine the practical implications of ASIC’s DTRs is how it deals with cross-border requirements. The paper proposes that ASIC will consider granting relief for certain reporting entities that comply with an overseas reporting regime. ASIC has also stated that it:
“has also considered the transaction reporting regimes being implemented in other parts of the world including the EU, US, Singapore, Hong Kong and Canada, aiming to ensure consistency by identifying and trying to mitigate any conflicting or overlapping rules across jurisdictions”.
Efforts at international consistency will no doubt be appreciated by participants in the global derivatives market. For these entities, the need to make all of the world’s reporting requirements “work together” may be the biggest challenge of all.
Comments are due on the consultation paper by 1 May 2013.