17 February 2015

New year, new rules – ASIC settles its OTC derivatives trade reporting regime

This article was written by Sarah Hickey, Kathryn Tomasic and Scott Farrell

ASIC has published its long awaited amendments to the ASIC Derivative Transaction Rules (Reporting) 2013 (Rules), bringing an end to a lengthy consultation process which began back in July 2014.  While many of the changes are likely expected by industry participants, others, such as ASIC’s decision not to extend the reporting requirements to “Phase 4” entities, being foreign subsidiaries of Australian ADIs or AFS Licensees, are noteworthy. With the settlement of its “Nexus” relief, this settles the outstanding public consultations which ASIC has been conducting on the Rules.

What has changed (and what hasn’t)?

In summary, the following changes have been made to the Rules:

  1. Optional snapshot (or end-of-day) reporting has been introduced, subject to some exclusions. This amendment provides an alternative to life-cycle reporting for those Reporting Entities who find life-cycle reporting more onerous.
  2. Foreign entities will be allowed to satisfy the alternative reporting exception by reporting to prescribed trade repositories in jurisdictions other than the jurisdictions in which they are incorporated. This amendment will allow an increased number of foreign entities to take advantage of their existing overseas trade reporting infrastructure to comply with the Rules.
  3. Foreign entities that use alternative reporting arrangements will be required to “tag” transactions as being reported under the Rules. This is intended to allow Australian regulators to obtain information about trades reported overseas under the alternative reporting arrangements.
  4. The definition of “regulated foreign market” has been amended to specifically include “Designated Contract Markets” registered by the United States Commodity Futures Trading Commission and “Regulated markets” as defined by Directive of the European Parliament. This amendment is intended to provide certainty that derivatives traded on those markets are not reportable under the Rules.
  5. Australian Reporting Entities will be required to report to a prescribed trade repository in circumstances where no licensed trade repository is available. This amendment ensures that Australian Reporting Entities will still be required to report in the unlikely event that there is no licensed trade repository.
  6. Australian Business Numbers have been removed from the hierarchy of entity identifiers that must be reported by reporting entities if a global Legal Entity Identifier is not available, bringing Australia into line with international reporting of counterparty identifiers. Avox Limited (AVID) entity identifiers may be reported instead.
  7. “Safe harbours” from enforcement action will be available where Reporting Entities use delegated reporting and certain conditions are met. This amendment is intended to assist with the efficient and effective use of existing trade reporting infrastructure. The safe harbour is intended to reduce the regulatory burden on smaller Reporting Entities by allowing them to enter into delegation agreements with other market participants who will undertake reporting on their behalf. Previously, a Reporting Entity remained responsible for compliance with the Rules even where it had delegated its reporting obligations to a third party. The “safe harbour” provides Reporting Entities with greater certainty as to what conditions they must meet when utilising delegated reporting in order to be deemed to have complied with the Rules.

As noted above, the proposal to extend reporting requirements to “Phase 4” entities (comprising foreign subsidiaries of Australian ADIs or AFS Licensees) has not been implemented. ASIC noted that it has decided, “after consultation with other financial regulators, not to proceed with the proposal”, having concluded that “the regulatory benefit would not outweigh the additional compliance cost”. However, ASIC also stated that regulators will keep this issue under review.

ASIC has also published an updated regulatory guide (Regulatory Guide 251) and FAQs, which provide further detail about the recent amendments.

The revised Rules also follow on from recent announcements of the Australian Government in relation to trade reporting, such as the extension of the end-user exemption under the Corporations Regulations 2001 and the application of limited “one-sided” reporting for certain entities. For further information on these announcements, please see our December alert.

Why were the changes made?

The Regulation Impact Statement (RIS) accompanying the amendments to the Rules noted that ASIC had identified a number of issues where the rules had either:

  1. “Imposed compliance costs on reporting entities that are disproportionate to the regulatory benefits gained from obtaining the relevant data
  2. Led to undesirable gaps in reporting, where regulators and the market do not have access to comprehensive and complete information that is relevant to Australian financial markets and which impacts fair and efficient market operations.

Since the introduction of the Rules in July 2013, there has been extensive debate from market participants regarding their application in various circumstances. In a number of cases, issues have been addressed by giving time-limited relief in the form of waivers applicable to certain Reporting Entities (or classes of Reporting Entity). Whilst the granting of transitional exemptive relief assists Reporting Entities in managing compliance with the Rules in the short term, ASIC noted in the RIS that this approach creates uncertainty and is “undesirable for both the credibility and enforcement of the OTC derivative trade reporting regime”. Instead, ASIC considers that permanent amendments to the Rules are the most appropriate means of ensuring there is certainty for industry.

ASIC has characterised the amendments to the Rules as primarily “deregulatory” in nature, noting however that some amendments will impose regulatory costs.

ASIC Derivative Transactions (Nexus Derivatives) Class Exemption 2015

ASIC has also published ASIC Instrument [15/0067], which provides relief for foreign Reporting Entities from the requirement to report derivatives transactions "entered into" in Australia if a Reporting Entity instead reports its "nexus transactions" and certain conditions are met. This was the result of consultation with a number of affected stakeholders.

The alternative test for what constitutes a nexus transaction involves consideration of the location of the persons performing the functions relating to an OTC derivative. This test is separate to the existing “entered into” test which otherwise applies under the Rules. Further detail on this test is contained in the Instrument and Explanatory Statement.

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