ASIC Furthers Its Rule Proposals - Produces Draft Regulation For Trade Reporting Obligations

Australian regulator ASIC has proposed draft rules addressing the mandatory trade reporting obligations for over-the-counter (OTC) derivatives such as interest rate swaps.

The proposals are the next step in Australia meeting its G20 commitments to OTC derivatives reform, and follows ASIC consulting on proposals for the licensing and regulation of derivative trade repositories (refer: 13-051MR).

Consultation Paper 205 Derivative transaction reporting (CP 205) proposes rules governing the reporting of OTC derivative transactions to derivative trade repositories. CP 205 covers issues such as which institutions will need to report to trade repositories, what information will need to be reported, and when the reporting obligation will start for different classes of reporting entities.

The rules aim to comply with internationally-agreed standards on transaction reporting developed by the International Organization of Securities Commissions (IOSCO) and the Committee on Payment and Settlement Systems (CPSS).

ASIC has also considered the transaction reporting regimes being implemented in other parts of the world including the EU, US, Singapore, Hong Kong and Canada, aiming to ensure consistency by identifying and trying to mitigate any conflicting or overlapping rules across jurisdictions. The CFTC in the United States has gone one step further and has been considering implementing mandatory risk exposure reporting, but subsequently ruled against making this mandatory for swap dealers just last week.

At present, it is entirely possible to operate a white label or similar partnership with an overseas Forex company, or even for an overseas company to set up its own Australian office with a different name, and satisfy ASIC’s requirements by keeping the required capital adequacy in an Australian bank account and ensuring that an Australia-based compliance director is keeping records, and that sales is conducted from within Australia, however the dealing desk can be located overseas, within the provider of the white label or at a sister-company with shared infrastructure and dealing staff.

According to current ASIC policy, overseas Dealing Desks , even if owned by the same shareholders as an ASIC regulated Australian company, fall outside ASIC’s jurisdiction and until now the regulator has not been able to act on complaints of disreputable conduct by dealing desks located outside of Australia even if the complaint is against an ASIC regulated organization which solely uses that particular dealing desk. This proposed alignment with the rest of the world may see an end to such circumstances.

Such proposals further highlight ASIC’s increasing emphasis on strengthening the rules by which Australian OTC firms can operate. The regulator currently carries out surveillance on firms operating in Australia, a practice which has led to the finding of irregularities which may have not come to light otherwise – rather than relying on random inspections or customer complaints, the software carries out deep searches into firms’ operations and locates instances of malpractice.

Under ASIC’s proposals:

• Major financial institutions (being those with at least $50 billion of notional outstanding positions in OTC derivatives on 30 September 2013) would be subject to a reporting obligation in some asset classes from 31 December 2013; and

• Other smaller financial institutions would be subject to a reporting obligation in some asset classes from 30 June 2014.

CP 205 also proposes a reporting obligation on entities that do not hold an Australian financial services (AFS) license using OTC derivatives from the end of 2014, but further public consultation and an ASIC rule change will be needed before this obligation could take effect, as set out in the accompanying draft rules.

ASIC Deputy Chairman Belinda Gibson said: “This is an important step in Australia’s implementation of the G20 OTC derivatives commitments. The proposed regime will improve the integrity and stability of Australia’s OTC derivative markets, while taking into account the interests of participants in Australia’s OTC derivative markets and the Australian economy more broadly.”

“These reforms will enhance the transparency of OTC derivative markets, both to regulators and the public, and lead to an increased capacity for the oversight and monitoring of systemic risk,” Ms Gibson said.

Submissions to CP 205 are due by 1 May 2013.