This article was written by Patricia Tsang and Sophie Gerber (Director, TRAction Fintech Pty Ltd which provides services to report on behalf of OTC derivatives issuers).
Australian issuers of OTC derivatives (with less than A$5 billion gross notional outstanding positions as of 30th June 2014) will need to report for the first time from 12th October 2015 under the ASIC Derivative Transaction Rules (Reporting) 2013 as amended (the Reporting Rules).
Under section 901E of the Corporations Act 2001 (Cth) (Corporations Act), a person must comply with provisions of the Reporting Rules. That section is a civil penalty provision, and courts must, if satisfied that a person has contravened that section, make a declaration of contravention on application by the Australian Securities and Investments Commission (ASIC) (section 1317E of the Corporations Act).
Courts may order payment of pecuniary penalties for contravention of a rule up to (and including) the maximum penalty amount specified for the rule (sections 1317G (1DA) and (1DB) of the Corporations Act).
Section 901A(4) of the Corporations Act 2001 (Cth) allow the Reporting Rules to specify a penalty amount for a rule not exceeding 1,000 penalty units.
The maximum penalty specified – for each of Reporting Rules 2.2.1 (Transaction Reporting Requirements and Position Reporting Requirements), 2.2.2 (Reporting Requirement – Changes), 2.2.3 (Reporting Requirement – Timing (generally, T+1), 2.2.4 (Reporting Requirement – Format), 2.2.5 (Reporting Requirement – Continuity of reporting), 2.2.6 (Reporting Requirement – Accuracy of reporting), 2.3.1 (Keeping of records), 2.3.2 (Provision of records or other information), 2.4.4 (Modification, termination or assignment of outstanding positions before the Position Reporting Date) and 2.4.5 (Reporting to Licensed Repositories from 1 October 2014) – is 1,000 penalty units.
Each penalty unit is currently $180 – so the maximum penalty for each of those Reporting Rules is $180,000.
ASIC also has a number of what it calls its “administrative powers”. Potential remedies that may be available to ASIC under those powers include suspending or cancelling an Australian financial services licence.
For example, ASIC (under section 915C of the Corporations Act) may suspend or cancel an Australian financial services licence, after giving the licensee an opportunity to appear or be represented at a private hearing before ASIC and to make submissions, where the licensee has not complied with their obligations under section 912A (including the obligation under section 901E of the Corporations Act to comply with the provisions of the Reporting Rules).
The retail OTC derivatives sector is currently an area of focus for ASIC. For example, amongst a plethora of regulatory outcomes for ASIC, ASIC has suspended the Australian financial services licence of retail OTC derivative provider Australian Capital Markets Advisory Services Pty Ltd (ACMAS).
Please see for the recent media release by ASIC in relation to ACMAS and for further links to the other recent regulatory outcomes for ASIC in this sector.
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This sector is also specifically listed as an area of focus in the ASIC Report 448 released on 24th September 2015 . In that report, ASIC specifically listed and described regulatory outcomes in the sector relating to ACMAS, Rainbow Legend and FX Primus, and confirmed that it had rejected all three new licence applications in the sector which it received during the first six months of the year.
That report provides as follows:
The Licensing team dealt with three applications during the relevant period relating to ‘deal issue’ and/or make a market in OTC derivatives involving margin FX. Of these applications:
1. one was voluntarily withdrawn after being advised that we were minded to recommend refusal of the application;
2. the other two were both refused by an ASIC Hearing Delegate following a hearing; and
3. one of the applications referred to in point 2 above was appealed to the Administrative Appeals Tribunal (AAT) but the appeal was subsequently withdrawn by the applicant and dismissed by the AAT.
In view of the above, OTC derivatives issuers should be particularly minded to act to comply with the Reporting Rules.
For more information on this area, please see previous published articles by the authors:
6 September 2015 – “Australia – To Whom Should Australian OTC Derivative Issuers Report”
10 September 2015 – “Australia – October 12 Reporting Deadline Looming – Who needs to report under intermediary authorisation or authorised representative arrangements in relation to OTC derivatives?”
20 September 2015 – “Final Regulations on Single-Sided Reporting for OTC Derivatives”