The 2009 G20 summit set a roadmap for global over-the-counter (OTC) derivative regulation and progress is being made in Australia in the key areas of derivatives trade reporting and central clearing.
Trade reporting is being introduced in three phases, based on counterparty size, with the first two phases having been in operation for some months. Following a recent Australian Securities and Investments Commission (ASIC) class order, the commencement of Phase 3 has been delayed until mid to late 2015. ASIC issued Consultation Paper 221 which recommends confirming the delayed commencement in the OTC Derivative Reporting Rules and making a number of other technical amendments. Consultation closes on 29 August 2014.
In parallel, the Australian Government is seeking industry comment on a proposal to require central clearing of AUD, USD, EUR, JPY and GBP interest rate derivatives. The Government hopes to establish a framework to give ASIC rulemaking power in this area during 2014.
Trade reporting is designed to give regulators a more complete picture of the OTC derivatives market in Australia, by requiring relevant derivatives transactions to be reported to an ASIC-licensed trade repository.
The regime will be significant for all Australian banks and Australian Financial Services Licence (AFSL) holders who trade in derivatives. Unlike in the United States, the Australian reporting requirements will be two-sided, in that both parties to a trade must report. Dual-sided reporting is also required in Europe. However, counterparties to a trade that qualify as end-users (ie non-AFSL holders using derivatives for their own hedging or investment purposes) will not need to report.
To give the industry time to develop the requisite processes, the trade reporting regime is being introduced in three stages. Phases 1 and 2 captured a small group of significant OTC trading entities and have already commenced. Phase 3 will capture all remaining banks and AFSL holders that trade in derivatives and will also apply to certain trades entered into by foreign firms operating in Australia.
Delayed commencement for Phase 3 entities
Phase 3 had been due to commence on 1 October 2014 for interest rate and credit derivatives and 1 April 2015 for all other derivatives. Various industry groups, including the Financial Services Council, sought to delay Phase 3 commencement on a number of factors, including that ASIC has not yet licensed any trade repositories and that it can take some months for counterparties to develop reporting systems which accurately interact with the systems of the trade repositories.
In response to the lobbying, ASIC has issued a Class Order delaying the start of Phase 3 until 2015. The table below outlines the commencement dates for Phase 3 entities.
|Type of OTC derivative||Phase "3A" entities - AUD5bn or more of total gross notional outstanding OTC positions||Phase "3B" entities – less than AUD5bn of total gross notional outstanding OTC positions|
|Interest rate and credit derivatives||7 calendar months after a trade repository is licensed by ASIC, but not before 13 April 2015.||12 October 2015 or 13 calendar months after a trade repository is licensed by ASIC – whichever is earlier.|
|Other derivatives||12 October 2015 or 13 calendar months after a trade repository is licensed by ASIC – whichever is earlier.|
If ASIC does not license a trade repository before 12 October 2015, Phase 3 entities will need to engage with an ASIC approved (but not necessarily licensed) foreign trade repository and report trades to it, tagging the trades as relating to Australia. ASIC hopes to license a trade repository in 2014 to avoid this situation.
ASIC Consultation Paper 221 proposed to confirm the delayed commencement. It also proposes a number of technical amendments which will somewhat lessen the compliance burden, including by clarifying how reporting entities can delegate their reporting obligations. Consultation closes on 29 August 2014.
Despite the extended deadlines, Phase 3 reporting entities should progress discussions with a trade repository as soon as possible, to ensure appropriate reporting systems will be in place for the start of reporting obligations.
Moves towards central clearing of OTC derivatives transactions are in their infancy in Australia. The Australian Government's Treasury Department issued proposal papers in February and July this year seeking comment on its proposal to require central clearing for interest rate derivatives denominated in AUD, USD, EUR, GBP and JPY. It is not currently proposed that central clearing be required for North American and European credit derivatives, however this may be revisited as the proposal develops.
Central clearing would involve OTC derivatives being cleared through a licensed central clearing counterparty, such that the central clearing counterparty would take responsibility for both party's obligations to each other. Central clearing counterparties may impose margin requirements on both parties before accepting a trade for clearing. With appropriate risk management and margin and capital requirements at the central clearing counterparty level, this regime could significantly reduce counterparty risks associated with OTC derivative trades.
The central clearing regime is proposed to apply only to large financial institutions. How this category will be defined is still a matter of discussion. The current intention is that the regime would capture Australian entities with AUD100 billion or more of total gross notional outstanding OTC derivatives positions. Treasury has invited further consultation on this issue.
Submissions to Treasury closed on 1 August 2014. Following this consultation, the first step will be for ASIC to be given rule-making powers to develop a central clearing regime, as occurred with the trade reporting regime. This is intended to occur during 2014. ASIC is then likely to conduct further consultation to flesh out the details of the regime.
Firms wishing to have input into the discussion should contribute to the Treasury consultation and monitor future developments at ASIC.
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