Australia: Government consults on new OTC derivatives framework for Australia

Last Updated: 25 April 2012
Article by Louise McCoach

On 18 April 2012, the Australian Government took the next step towards reform of the over-the-counter (OTC) derivatives market in Australia by its release of a Treasury consultation paper proposing a legislative framework for implementing Australia's G-20 commitment to OTC derivatives reform.

It also released a report by the Council of Financial Regulators, provided to the Government in March. The Council's report recommends regulatory settings for the design of OTC derivatives reforms and details many of the policy considerations that underpin Treasury's proposed legislative framework. The report follows a June 2011 consultation paper and subsequent submissions and consultation with industry that focused on issues around central clearing of OTC derivatives.

The legislative framework proposed by Treasury provides greater certainty in relation to the future direction of OTC derivatives regulation in Australia. In line with Australia's G-20 commitments, it foreshadows that Australian OTC derivatives regulation will fall in step with the rest of the world by requiring a move towards:

  • clearing of OTC derivatives through central counterparties (CCPs);
  • mandatory reporting of OTC derivatives through trading repositories; and
  • executing standardised OTC derivatives on exchanges or electronic trading platforms.

Although the framework establishes a mechanism for regulatory intervention, it also leaves open the possibility for industry-led fulfilment of Australia's G-20 commitments and builds in sufficient flexibility to ensure that Australia will not be out of step with the rest of the world as it implements its reform agenda.

In this article we set out the key features of the proposed legislative framework and explain some of the policy decisions that have shaped the proposals.

Elements of the proposed legislative framework

The legislative framework will be enacted via amendments to the Corporations Act. The framework itself will not impose any obligations on market participants. Rather, it gives power to the Minister for Financial Services and Superannuation and the Australian Securities and Investments Commission (ASIC) to make rules and enact future regulations relating to the reporting, clearing and trading of particular types of OTC derivatives.

By adopting this approach, the Government is giving itself the flexibility to take steps toward fulfilling its G-20 commitments while holding back on the detail until the US and European Union (EU) are closer to finalising their legislative response.

The Minister will have the power, by legislative instrument, to prescribe a class of derivatives as subject to one or more of the following mandatory obligations:

  • trade reporting;
  • central clearing; or
  • trade execution.

The Minister will be required to consult publicly prior to prescribing a class of derivatives, and will be required to prepare a regulation impact statement considering the utility, feasibility and impact on the affected markets.

Once a class of derivatives is prescribed, ASIC may make derivative transaction rules (DTRs) in relation to the mandatory obligations applying to that class of derivatives, subject to Ministerial approval. DTRs will have several functions, including:

  • determining which parties to a transaction will be subject to the mandatory obligations, how they are to comply and the timing requirements;
  • creating exceptions to mandatory obligations, with ASIC able to specify cases in which certain persons, parties or transactions will not be required to report, clear or execute trades in accordance with the DTRs;
  • imposing obligations on trade repositories, CCPs and trading platforms operating in the OTC derivative market;
  • governing the extent to which any mandatory obligation applies to pre-existing positions; and
  • imposing obligations on parties to prescribed transactions and penalties for compliance failures.

DTRs will be developed by ASIC in consultation with the public and other agencies, such as the Australian Prudential Regulation Authority and the Reserve Bank of Australia. ASIC's DTR-making power will be limited by regulations made under the new legislation.

Jurisdictional reach

An important aspect of the new laws will be their jurisdictional reach. Once a class of OTC derivative is prescribed, mandatory obligations will apply to any domestic or foreign person dealing in OTC derivatives of that class where that dealing satisfies the relevant jurisdictional nexus to Australia. The paper currently proposes that any foreign entity should be caught by the new laws if it performs an action within the Australian jurisdiction that "contributes to" that entity becoming a party to the making, modification or termination of a prescribed derivative.

The paper also invites feedback on a range of other options for determining whether a dealing will satisfy the relevant nexus with Australia, including where a party has a presence in Australia or the extent to which the transaction takes place in, or has a substantial and foreseeable effect within, Australia.

Options for implementing the framework

The consultation paper seeks views on a range of possible approaches to activating the mandatory obligations under the new framework, including the approaches that we have highlighted below.

Trade reporting

The consultation paper indicates that mandatory trade reporting obligations are likely to be introduced for a broad range of derivative classes. The current proposal is to introduce these as early as this year in order to provide the regulators with important information to allow them to more accurately assess the importance and timing of exercising their powers to mandate central clearing and trading under the new framework.

The paper also seeks feedback on whether there are specific entities or classes of transaction that should be excluded from the reporting obligations. Although under the Government's favoured option most parties would be captured by trade reporting obligations, the paper contemplates that the DTRs may allow an end user to rely on a dealer or counterparty to report transaction data.

Central clearing

In relation to the mandatory clearing of standardised OTC derivatives, the Council stated in its March report that it expects certain market forces to drive participants towards clearing through CCPs, including to avoid the more burdensome regulatory capital and collateral requirements in respect of non-centrally cleared OTC derivatives. Consistent with the Council's observations, Treasury proposes an initial "wait and see" approach to allow market forces to provide the initial impetus for parties to migrate to CCPs, rather than immediately mandating for this.

However, given the risk that the transition to central clearing could be slow or uneven across market participants, powers to impose mandatory clearing will be enacted as part of the proposed framework. Depending on how the anticipated changes play out, regulators may prioritise the mandatory migration to CCPs of particular OTC derivatives identified as systemically important to Australia, such as AUD denominated interest rate swaps. Treasury indicates that it will monitor and assess market activity and overseas regulatory changes relating to clearing on a continuous basis to enable the Government to better assess the appropriateness of mandating clearing under its new powers.

Notably, in its June 2011 consultation paper, the Council expressed a preference that certain OTC derivatives systemically important for Australia be cleared through CCPs based in Australia. However, in light of submissions expressing concern about fragmentation of the global market for such derivatives, and considering international regulatory developments that have given the Council increased comfort on the use of overseas clearing facilities, the Council has stepped back from its earlier view. Nevertheless, the paper indicates that in some circumstances Australian regulators may ultimately insist on particular entities establishing a presence in Australia, or seek assurances as to the compatibility of an entity's rules with Australian law.

Trade execution

The "wait and see" approach is also proposed in relation to the trade execution aspects of the structural reforms. Treasury considers that more information is required to enable the identification of markets that are suitable for mandatory trade execution requirements. This is in line with the Council's observations that it would be premature to impose any mandatory trade execution obligations before the Government has conducted more analysis on the volume and liquidity characteristics of markets for particular derivatives classes and the emergence of suitable trading platforms.

The paper acknowledges that volume and liquidity are important prerequisites to any electronic trading platform and on this basis appears to favour organic uptake by market participants. In this regard, the paper observes that the standardisation of OTC derivatives as a result of central clearing is likely to result in a market-led increase in electronic trading.


The paper presents proposals for the introduction of a licensing regime for trade repositories, along the lines of the current Australian Market Licence and Australian Clearing and Settlement Facility Licence regimes for trading and clearing facilities. In recognition of the need to facilitate mutual recognition and the offering of services in Australia by foreign operators, the regime is likely to be equivalent to similar regimes in the EU and US and provide alternative licensing criteria for overseas operators who are subject to equivalent regulation in their home jurisdictions. Licensed entities (whether trade repositories, CCPs or trading platforms) will be "eligible" entities under the DTRs.

Licences will include requirements for data protection and access to data, proper operation for the protection of clients and risk management.

Next steps

The consultation paper seeks initial views on:

  • entities and transactions that should be excluded from the scope of ASIC's DTR-making power;
  • the jurisdictional nexus test with Australia that should enliven the rules;
  • other regulations that should be included in the framework; and
  • the derivatives classes that should be subject to one or more mandatory obligations.

The paper also poses 46 specific "feedback questions", covering all aspects of the proposals. The focus of the consultation is on the framework and the powers it creates, as well as the proposals for the initial exercise of those powers.

Draft proposals for mandating derivative classes and for regulations limiting ASIC's DTR-making power will be released for stakeholder feedback following the consultation. After the scope of the rule-making power is settled, ASIC will consult stakeholders further in relation to the final form of the DTRs.

Industry consultation

Feedback on the proposals in the consultation paper is due by 15 June. In addition, Treasury will be conducting stakeholder consultation meetings during the consultation period and has requested that persons wishing to arrange a meeting register their interest by 4 May.

If you are interested in contributing to the consultation process, or participating in a stakeholder meeting, and would like our assistance, please contact Louise McCoach or Graeme Dennis.

Thanks to Mark Wiese for his help in writing this article.

You might also be interested in...

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.