Australia: Part II: Derivative trade reporting: not just one way to comply

This is the second blog in a three part series on derivative trade reporting (DTR) and will examine different ways entities can comply with the DTR Rules. The first blog in the series recapped the key concepts and dates under the DTR regime. Our final blog in the series will look at ASIC's new enforcement powers to deal with non-compliance.

Flexibility of the DTR Rules

Due to the complexity of the DTR Rules, knowing how to comply is daunting. The DTR Rules are not a "one size fits all" reporting regime. Different options exist to enable you to comply given the flexibility in the rules. So, if the DTR Rules apply to your business, knowing about the different options and determining the best way to comply may not only save you time and money, but may also keep you out of ASIC's crosshairs.

Single or Double Sided Reporting?

For the reporting of OTC derivatives under the DTR Rules and similar foreign DTR reporting rules, there are two types of reporting regimes. These are known as single-sided and double-sided reporting. Single-sided reporting regimes require only one party to an OTC derivative transaction to report the trade, whereas double-sided reporting regimes require both parties to an OTC derivative transaction to report.

The Australian DTR Rules are inherently double-sided. However, the DTR Rules permit single-sided reporting for entities with low levels of OTC derivatives in certain circumstances.

For example, if you are a CFD provider, margin FX provider or running a remittance business with less than $5 billion gross notional OTC derivative outstanding positions, you may report on a single-sided basis if your counterparty is required to report (or agrees to report) the trades in Australia or certain other jurisdictions. This may apply to trades with hedging counterparties or liquidity providers, but will not apply to end-user clients.

Where an entity reports on a single-sided basis, they are required to make regular enquiries of their counterparty to ensure they are reporting the trades and have no reason to suspect they are not.

What about foreign AFSL holders?

The DTR Rules provide an exception for foreign entities, so if you are a foreign AFSL holder, you may not need to report under the Australian DTR Rules.

If you are not an Australian entity or a trustee of an Australian entity, you will not be required to comply with the DTR Rules if you:

  • are subject to alternative reporting requirements in a foreign jurisdiction substantially equivalent to the Australian DTR Rules; and
  • have reported information about the transaction or position to a prescribed repository, and you have tagged the information reported as information that is reported under the Australian DTR Rules.

The OTC derivatives rules of foreign jurisdictions may differ to those of the Australian DTR Rules. So, a particular OTC derivative that is required to be reported under the Australian DTR Rules may not need to be reported in a substantially equivalent foreign jurisdiction. In this instance, the OTC derivative will need to be reported under the Australian DTR Rules.

For foreign AFSL holders who already report DTR trades in another jurisdiction, determining whether (and to what extent) you can also report Australian trades in that jurisdiction may save significant time and money.

Direct or Indirect Reporting?

You may discharge your reporting obligations by reporting directly or indirectly. If you report directly, you will require the infrastructure to be able to report the trades to the data repository. Alternatively, you may report indirectly by appointing another party to report on your behalf. Indirect reporting may occur by appointing a counterparty, central counterparty, trading platform, service provider, broker or another third person to report for you.

If you delegate your reporting obligations, you can rely on safe harbour provisions. This means you will be taken to have complied with your DTR obligations for the transactions that the delegate has been appointed to report if:

  • the terms of the delegation and related agreements are in writing; and
  • you make regular enquiries reasonably designed to determine whether the delegate is discharging its obligations under the agreement.

Although you may have delegated your reporting to another party, you will remain responsible and must take all reasonable steps for ensuring the completeness, accuracy and currency of the information reported. One way of doing this is to ensure that you have visibility through the trade repository for trades reported on your behalf.

Intraday or Daily Reporting?

Two options exist for reporting trade information, lifecycle or intraday reporting and daily or snapshot reporting.

Lifecycle reporting means that you report information for a derivative each time a change occurs for that derivative.

Snapshot reporting, on the other hand, permits you to report derivative trades as at the end of each business day. This has the benefit of lowering compliance costs associated with reporting, as only the position as at the end of the day is reported as compared to intraday modifications to the trade.

While snapshot reporting is a reporting option under the DTR Rules, ASIC does have the power to require lifecycle or intraday reporting for particular derivatives or classes of derivatives for market integrity purposes. Currently, ASIC has not utilised this power, but you should be mindful that they may in the future.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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