This article was written by Scott Farrell, Roslyn Hinchliffe and Sarah Hickey.
It has been a long wait for the Australian funds and corporates facing reporting obligations for their smaller derivative portfolios but finally there is some relief. The regulation has been passed which allows for single-sided reporting, meaning that they may not need to report derivatives if they obtain certain representations from their counterparties relating to reporting in Australia. And none too soon, as the final stage of Australia’s derivative reporting regime starts to apply next month. Those funds and corporates, and the investment managers and counterparties who deal with them, will be keenly interested in this new regulation. As we discuss in this Alert, the relief it provides is real, but there are some important details to manage in using it.
The new regulation is the Corporations Amendment (Central Clearing and Single-Sided Reporting) Regulation 2015. This has been made by the Australian Government and can be found here, together with its Explanatory Statement. It follows a draft of this regulation which was released in May (our Alert on the draft can be found here). As was the case with the draft, the regulation also implements the foundation of Australia’s central clearing regime. However, this Alert focusses only on the single-sided reporting aspects of the regulation. In this Alert we provide both a brief background to the Australian reporting regime, and the coverage of the new relief.
When do Australia’s derivative reporting requirements start?
They already have. In compliance with its G20 derivatives reform commitments, Australia introduced obligations to report OTC derivative transactions some time ago (see background here). The core of these has been the derivative reporting rules of the Australian Securities and Investments Commission (ASIC) (these can be found here). The rules were built on the foundation of provisions of and regulations under the Australian Corporations Act. Under the ASIC rules, obligations have been phased in for different classes of reporting entities over time, and only the last phase (called “Phase 3B”) is still left. Entities in this phase are the reporting entities which hold total gross notional outstanding positions of less than A$5 billion as at 30 June 2014 and their reporting obligations are to commence in October 2015. The reporting requirement has already started in respect of other reporting entities who are required to report under the ASIC rules.
Do Australia’s reporting rules require both parties to a derivative to report?
Yes. Australia’s reporting regime is a “double-sided” reporting regime, like that applicable in Europe and unlike that applicable in the United States. This is the reason for the interest of participants in delegated reporting and single-sided reporting.
Do Australia’s reporting rules allow for a party to delegate its reporting obligations?
Yes. The ASIC rules already contain a safe-harbour for a reporting entity if it appoints someone else in writing to report its transactions and conducts a reasonable level of enquiry to determine if the reporting is taking place. This is called delegated reporting in Australia, and we refer to this in our earlier Alert here. This is different from single-sided reporting.
How is single-sided reporting different from delegated reporting?
In Australia, there is a difference between delegated reporting and single-sided reporting. Each means a reporting entity does not have to physically report the trade itself, but each safe harbour has a different basis. One is a way of fulfilling the reporting obligation and the other is relief from the reporting obligation. Delegated reporting works on the basis that a reporting entity fulfils the reporting obligation without itself needing to report a transaction because someone else is reporting the transaction on behalf of that reporting entity. Single-sided reporting works on the basis that a reporting entity is exempted from the requirement to report a transaction if it meets conditions that relate to concluding the derivative transaction with counterparties that are already required or have agreed to report. The distinction can get confusing when the reporting entity delegates reporting to its counterparty but it is important because it can make a difference in how reporting needs to happen, and what needs to be reported.
How did the single-sided reporting relief come about?
The safe harbour for delegated reporting is set out in the ASIC rules and has been in place since February 2015. However, in December 2014, the Australian Treasury announced that there would be a further basis of relief available to Phase 3B entities (see our Alert here). This announcement followed Australian funds and other buy-side entities expressing concern that the need for them to report, or find someone to do it for them, was too costly for the regulatory benefit it would achieve. The new regulation implements this announcement.
Are the new single-sided reporting regulations part of the ASIC reporting rules?
No. They are a separate regulation of the Australian Government. Reporting entities which have the benefit of the regulation for particular transactions do not have to report those transactions under the ASIC rules. The regulations prevail over the ASIC rules, but you won’t find them in the ASIC rules.
Do they apply to “Phase 3B” reporting entities?
Yes, but not always. The term “Phase 3B” was used by ASIC for phasing in reporting requirements. It applied to entities which satisfied the test of having total gross notional outstanding positions of less than A$5 billion as at 30 June 2014. Under the new single-sided relief, this test is applied more than at a single point of time. Instead, it is applied at the end of each calendar quarter. If an entity satisfies the test for two successive quarters then it qualifies for the relief until it fails the test for two successive quarters. Once it fails for two successive quarters then the full reporting obligations apply. The drafting for this is a little tricky to work out (especially in working out how the relief applies initially), because the draft regulations use the different ASIC term “Phase 3” but you can get there if you take a little time. The result is important, as it means an entity can move in, and out, of the relief depending on changes in the size of its derivatives portfolio as of the end of a calendar quarter.
Does the counterparty need to report the transaction under the Australian rules for the relief to apply?
No, but this is a critical detail to get right. The relief is available if the counterparty provides a representation that:
- in effect, it is a reporting entity that is required to report the transaction under the ASIC rules (which means the counterparty is a “Phase 1” entity, a “Phase 2” entity and, if it does not have the benefit of this new relief, a “Phase 3” entity); or
- it is a reporting entity that will report the transaction under the ASIC rules; or
- it is a foreign entity which will report the transaction under the Australian alternative reporting regime (meaning that it will report the transaction under an equivalent foreign reporting regime to a prescribed trade repository and “tag” information as being ASIC reportable); or
- it is a foreign entity which will report the transaction in accordance with the ASIC Rules to a licensed trade repository and “tag” the information as being ASIC reportable.
What this excludes are, for example, transactions with counterparties where the counterparty will not provide any of the representations described above because, for instance, the counterparty does not intend to report the transaction under the ASIC rules or the counterparty who would report the transaction under an equivalent foreign reporting regime will not tag the information as being ASIC reportable.
The representations need not be in the ISDA master agreement between the reporting entity and its counterparty.
Do I need to check if the reporting happens to get the benefit of the relief?
No, in the sense that it is not necessary to check if each transaction is reported in order for the relief to be available for that transaction. However, regular enquiries are needed for the relief to apply. The Explanatory Statement explains that:
“… the frequency of the enquiries will depend on the circumstances. For a phase 3 entity with few transactions or provisions and few or no changes to them, such enquiries could be undertaken as infrequently as once or twice a year. On the other hand, for a phase 3 entity with a larger number of outstanding transactions or positions and with frequent changes to them, these enquiries will be expected to take place more frequently.”
The relief is not available to an entity if the entity has reason to suspect that the counterparty is not required to report under the ASIC rules or the counterparty has not been reporting in accordance with the representation provided (as applicable).
Is anything required in order to take the benefit of the relief?
There is no application, authorisation or lodgement required in order to take the benefit of the relief. Once it is in force, it will just apply in accordance with its terms. It comes into effect in October 2015, just before the Phase 3B entities would otherwise be required to report.
Does the relief cover all obligations under the Australian reporting rules?
Not entirely. There are obligations in the ASIC reporting rules beyond the need to report transactions. These include obligations to keep records, for example.
Is there any other relief from reporting included in the regulations?
Yes there is. The regulation defining who is an “end-user” for the purpose of Australia’s derivative reporting and clearing requirements has been expanded. This regulation sets out the entities to whom the ASIC reporting and clearing rules cannot apply. The expansion is two-fold, by excluding the following from the application of the reporting and clearing rules:
- entities who hold an Australian Financial Services Licence (AFSL) which does not include an authorisation covering the derivatives which need to be reported or cleared (this is useful for corporates who hold an AFSL for other activities only); and
- entities who were only excluded from being end-users because they enter into derivatives with offshore wholesale clients and were subject to offshore derivatives regulation (this part of the end-user definition is a little complicated, but it potentially included foreign entities who were not dealing with any Australian counterparties at all).
These regulations represent the final Australian legislative step on one of the key G20 derivative reforms (trade reporting). It has been a long journey since the first Australian consultation on trade reporting in March 2013 and very shortly the Australian regime will be up and running for all entities to which it is to apply. Of course, this is only a milestone in the G20 journey – we have clearing and margining to go.