This morning, the Australian Government released draft legislation to implement proposals for the future regulation of the Over-The-Counter (OTC) derivative markets in Australia.
This legislation is to introduce the framework needed by the Australian Government to meet its G20 obligations on derivatives regulation. It follows the discussion papers published by the Australian Treasury in April this year.
In this alert we briefly summarise key parts of what is proposed and a few interesting things to note. As the draft legislation is intended to create a framework only, it is clear it is not intended to cover every aspect of the new regulation, and there is much consultation and discussion to follow. A link to the Treasury page with the Exposure Draft and Explanatory Document for the Corporations Legislation Amendment (Derivative Transactions) Bill 2012 can be found here.
The framework at a glance
The purpose of the draft legislation is to allow the Australian Government and its regulators to prescribe, when it determines that it becomes appropriate, one or more of the following as mandatory obligations:
- The reporting of OTC derivatives to trade repositories.
- The clearing of standardised OTC derivatives through central counterparties.
- The execution of standardised OTC derivatives on exchanges or electronic trading platforms.
The legislation is not intended to impose any of these obligations itself. Instead it introduces a framework (by amendments to the Corporations Act) under which they can occur. The framework follows the outline set out in the Government’s earlier discussion paper (a link to our commentary on this can be found here). In outline, the framework will operate as follows:
- The Minister for Financial Services and Superannuation will be empowered to prescribe a certain class of derivatives in relation to the mandatory obligations.
- ASIC may in turn issue derivatives transaction rules (DTR) to establish one or more of the mandatory obligations (reporting, clearing or execution) for participants transacting in this prescribed class of derivatives.
- Any rule must be consented to by the Minister before taking effect. The scope of rules, and other technical features of the scheme, may be further limited by regulation.
In addition, a new licencing regime will be introduced for trade repositories (licensing regimes for clearing and execution facilities already exist in the Corporations Act).
A few interesting things
Most of the exposure draft relates to the new trade repository licensing regime, which is based on the existing Australian market licence regime and Australian clearing and settlement facility licence regime contained in the Corporations Act. However, in the remaining provisions there are a few things worth noting:
- The new mandatory obligations are going to be based on a new defined term of “derivative transaction”. This is defined to include entry into derivatives, modification and termination of derivatives and any other transaction which relates to a derivative. This is exceptionally broad, so it would be hoped that when specific obligations are imposed, they will be limited to particular types of “derivative transactions”. In this vein, the draft does contemplate that DTRs may specify the “classes” of derivative transactions to which requirements apply. The Explanatory Document also states that the prescription of a class would follow public consultation.
- In addition to the “class”, the DTRs may also specify the actual reporting, clearing or execution facility which must be used, as well as the information which needs to be reported and the timeframe in which clearing is required.
- The DTRs may specify who needs to comply with the DTRs and the Exposure Draft provides an obligation on a person to comply with the DTRs which apply to it. A failure to do so triggers the civil penalty provisions in the Corporations Act. However, the Exposure Draft makes it clear that a failure to comply with a DTR does not invalidate the relevant derivative transactions themselves.
- The Exposure Draft contains provisions which appear intended to protect those who provide information in compliance with the new provisions or the DTRs from having proceedings taken against them.
It is only a framework, so detail on what, and who, is to be caught by the new requirements is not included. Also, there is no indication as to which parts of the framework are to be utilised first (although the Explanatory Document does note that a number of stakeholders favoured mandating central clearing, rather than relying on market forces). This all depends on the Minister’s determination and the ASIC DTRs. Key outstanding matters include the intended jurisdictional reach, the types of derivatives caught and the entities which are required to comply. Further consultation awaits on these critical matters.
Participants in the market need to read these provisions to ensure that they understand, and are comfortable with, what is being proposed as this is the first step to making the new regime concrete in our laws. Those who work in the Australian derivatives market should look to make a submission on any concerns which they have, and time is getting short. As noted in the Explanatory Document:
“The guidance provided from the United States and European Union emphasises the need for Australia to act quickly to ensure that Australian businesses and investors are able to demonstrate that they are subject to an equivalent regulatory regime and so be able to continue to participate in the major derivatives markets of the world while still being primarily regulated in Australia.”
The Government has requested comments on the exposure draft by 20 August.