FAQ

Australia (ASIC)

OTC derivative issuers as reporting entities – to whom should they report under Australian law?

The answer generally depends on how the OTC derivative issuer is set up – whether it is

(1) an Australian entity;

(2) a foreign subsidiary of an Australian entity where the Australian entity is an authorised deposit-taking institution (ADI) or an Australian financial services (AFS) licensee;

(3) a foreign ADI that has a branch located in Australia or

(4) a foreign company that is required to be registered under Div 2 of Pt 5B.2 of the Corporations Act.

(1) Australian entity (i.e. entity, including a corporation, partnership, managed investment scheme or trust, incorporated or formed in Australia)

An Australian entity must report information about all the derivatives to which it is counterparty (subject to the proposed single-sided reporting relief for certain transactions/positions for certain entities – see our separate article “Single-sided trade reporting – how will this help?”).

An Australian entity must report to a trade repository that is licensed by ASIC under the Corporations Act. There is currently only one trade repository that is licensed by ASIC under the Corporations Act – DTCC Data Repository (Singapore) Pte Ltd (in respect of commodity, credit, equity, foreign exchange and interest rate derivatives).

(2) Foreign subsidiary of an Australian entity, where the Australian entity is an ADI or an AFS licensee

A foreign subsidiary of an Australian entity, where the Australian entity is an ADI or an AFS licensee, must report information about all derivative transactions to which it is a counterparty (subject to the proposed single-sided reporting relief for certain transactions/positions for certain entities – see our separate article “Single-sided trade reporting – how will this help?”).

Such a reporting entity can report to a licensed trade repository or a prescribed trade repository on an ongoing basis (subject to certain conditions being met) – see below.

(3) Foreign ADI that has a branch located in Australia

A foreign ADI that has a branch located in Australia must report information about all derivative transactions booked to the profit and loss account of the foreign ADI, or entered into by the foreign ADI, in Australia (subject to the proposed single-sided reporting relief for certain transactions/positions for certain entities – see our separate article “Single-sided trade reporting – how will this help?”).

Such a reporting entity can report to a licensed trade repository or a prescribed trade repository on an ongoing basis (subject to certain conditions being met) – see below.

(4) Foreign company that is required to be registered under Div 2 of Pt 5B.2 of the Corporations Act

A foreign company required to be registered under the Corporations Act must report information about all derivative transactions booked to the profit and loss account of the foreign company, or entered into by the foreign company, in Australia (subject to the proposed single-sided reporting relief for certain transactions/positions for certain entities – see our separate article “Single-sided trade reporting – how will this help?”).

Such a reporting entity can report to a licensed trade repository or a prescribed trade repository on an ongoing basis (subject to certain conditions being met) – see below.

For a reporting entity referred to in (2), (3) or (4) above, such entity may (instead of reporting to a trade repository licensed by ASIC) report to a prescribed trade repository on an ongoing basis by reporting information under the requirements of a foreign jurisdiction, where those requirements are substantially equivalent to the requirements that would otherwise apply to the reporting entity.

As at Feb 2015, the jurisdictions that ASIC considers to have implemented reporting obligations that are substantially equivalent to the derivative transaction rules (reporting) are:

  • Canada;
  • the European Union;
  • Hong Kong;
  • Japan;
  • Singapore; and
  • the United States.

On 25 June 2015, ASIC made a determination prescribing several overseas trade repositories. These are:

  • DTCC Data Repository (U.S.) LLC
  • Derivatives Repository Ltd
  • DTCC Data Repository (Japan) KK
  • DTCC Data Repository (Singapore) Pte Ltd
  • UnaVista Limited, and
  • the Monetary Authority appointed under section 5A of the Exchange Fund Ordinance of Hong Kong.

 

A Trade Repository is an entity that centrally collects and maintains the records of over-the-counter (OTC) derivatives. These electronic platforms, acting as authoritative registries of key information regarding open OTC derivatives trades, provide an effective tool for mitigating the inherent opacity of OTC derivatives markets.

Australian issuers of OTC derivatives (with less than A$5 billion gross notional outstanding positions as at 30 June 2014) will need to report for the first time from 4 December 2015. Regulations in relation to single-sided reporting relief will assist those issuers – but only to a limited extent in relation to some transactions/ positions.

What is single-sided reporting?

Single-sided reporting is where only one party is required to report under the ASIC Derivative Transaction Rules (Reporting) (Reporting Rules). Without single-sided reporting relief, the Reporting Rules require both parties to report.

Who does the single-sided reporting relief apply to?

The single-sided reporting relief will apply to:

(a) authorised deposit-taking institutions (ADIs);
(b) Australian financial services licensees (AFSLs);
(c) clearing and settlement facility licensees; and
(d) exempt foreign licensees,

with total gross notional outstanding positions across all OTC derivatives of less than A$5 billion at the end of each of two consecutive calendar quarters.

This is particularly relevant to the “Phase 3B entities” (with less than A$5 billion gross notional outstanding OTC derivative positions as at 30 June 2014), who become subject to the Reporting Rules for the first time on 4 December 2015.

When does the single-sided reporting relief apply?

To obtain the benefit of the relief, the other party to the OTC derivative must be:

(a) a reporting entity required to report information about the trade under the Reporting Rules and not relieved from that requirement under the single-sided relief;
(b) a reporting entity who otherwise reports information about the trade under the Reporting Rules; or
(c) a foreign entity reporting under a ‘substantially equivalent’ foreign regime to an offshore prescribed repository and designates or tags the information reported as reported under the Reporting Rules.

The relief requirements are similar for transaction reporting and position reporting.

This means that no relief is available where the other party does not satisfy the above (eg end customer not a reporting entity).

This also means that, where an OTC derivative transaction is between two parties potentially entitled to the single-sided reporting relief, the parties will need to agree which of them will report the transaction.

When is the relief effective?

Currently the relief is in draft form. Treasury consultation closed on 26 June, and there is some mention in a briefing by ASIC/ Treasury of possible final regulations in August. It is indicated that the relief will commence in October 2015, prior to the 4 December deadline.

Single-sided reporting is where only one party is required to report under the ASIC Derivative Transaction Rules (Reporting) (Reporting Rules). Without single-sided reporting relief, the Reporting Rules require both parties to report.

The single-sided reporting relief will apply to:

(a)        authorised deposit-taking institutions (ADIs);
(b)        Australian financial services licensees (AFSLs);
(c)        clearing and settlement facility licensees; and
(d)        exempt foreign licensees,

with total gross notional outstanding positions across all OTC derivatives of less than A$5 billion at the end of each of two consecutive calendar quarters.

This is particularly relevant to the “Phase 3B entities” (with less than A$5 billion gross notional outstanding OTC derivative positions as at 30 June 2014), who become subject to the Reporting Rules for the first time on 4 December 2015.

To obtain the benefit of the relief, the other party to the OTC derivative must be:

(a)        a reporting entity required to report information about the trade under the Reporting Rules and not relieved from that requirement under the single-sided relief;
(b)        a reporting entity who otherwise reports information about the trade under the Reporting Rules; or
(c)        a foreign entity reporting under a ‘substantially equivalent’ foreign regime to an offshore prescribed repository and designates or tags the information reported as reported under the Reporting Rules.

The relief requirements are similar for transaction reporting and position reporting.

This means that no relief is available where the other party does not satisfy the above (eg end customer not a reporting entity).

This also means that, where an OTC derivative transaction is between two parties potentially entitled to the single-sided reporting relief, the parties will need to agree which of them will report the transaction.

A “Reporting Entity” needs to report information about its “Reportable Transactions” under the ASIC Derivative Transaction Rules (Reporting) 2013.

Assuming that a broker is an Australian entity or foreign subsidiary of Australian entity in respect of a transaction with a customer, the Reporting Entity is the counterparty with the customer.

The counterparty will be the issuer of the derivative. This is identified in the relevant Product Disclosure Statement.

Where the broker does not have an AFSL and is part of an intermediary authorisation arrangement under s911A(2)(b) of the Corporations Act with an AFS Licensee, and the broker is the issuer of a derivative with a customer under the intermediary authorisation arrangement, the broker is the counterparty to the customer and the Reporting Entity for the derivative.

Where the broker is only the authorised representative of an AFS Licensee and the AFS Licensee (including where the AFS Licensee uses a registered business name) is the issuer of a derivative with the customer, the AFS Licensee is the counterparty to the customer and the Reporting Entity for the derivative.

With the cost of leads increasing steadily as more brokers enter the market, service offerings standardise and spreads become thinner, and protecting the relationship with the client is paramount for brokers. In cases that the client is an individual, the ASIC reporting rules require a unique ID and the client’s legal name. No phone numbers, emails or addresses are required in the reports.

No. Most brokerages have elected to use the “snapshot reporting” provisions of the trade reporting legislation for their transactions. This means that you are effectively only reporting transactions open at the end of the day. If a transaction is opened and closed before the end of day it is not required to be reported. In these circumstances, the data won’t capture the total trade volume of your firm or individual clients.

No. Again, due to closed transactions not being reported there is no possible way to ascertain the profitability or revenue of a reporting entity.

We take your privacy seriously and are bound by terms and conditions that only allow us to disclose data to a licensed Australian Derivative Trade Repository (ADTR) or where required to do so by law.

There isn’t one. We suggest you choose an end of day that aligns with the end of day on your servers and your current reporting processes and stick to it (subject to daylight savings which shifts the end of day for many brokers twice a year by one hour).

No. Again, due to closed transactions not being reported there is no possible way to ascertain the profits or losses of your clients.

No. Due to an anomaly in the legislation, brokers with retail clients or clients that are not Reporting Entities don’t have to report how much collateral was posted by the client. Brokers only have to report the collateral that they post for trades, i.e. hedging trades. Again, single-sided relief may apply to your hedging trades meaning the collateral you have posted with your hedging counterparty doesn’t get reported to any trade repository. Similarly it is not possible for ASIC to know from the reported trades whether you have posted client money (under the Corporations Act provisions allowing you to do so) or firm capital with your hedging counterparties.

No, as most brokers will benefit from single sided relief, therefore not having to report all or some of their hedging trades (trades done with another reporting entity), there would be no possible way to extract or calculate the ‘risk model’ of the broker from the data provided to TRAction.

 

Single Sided Reporting

Australian issuers of OTC derivatives (with less than A$5 billion gross notional outstanding positions as at 30 June 2014) will need to report for the first time from 4 December 2015. Regulations in relation to single-sided reporting relief will assist those issuers – but only to a limited extent in relation to some transactions/ positions.

What is single-sided reporting?

Single-sided reporting is where only one party is required to report under the ASIC Derivative Transaction Rules (Reporting) (Reporting Rules). Without single-sided reporting relief, the Reporting Rules require both parties to report.

Who does the single-sided reporting relief apply to?

The single-sided reporting relief will apply to:

(a) authorised deposit-taking institutions (ADIs);
(b) Australian financial services licensees (AFSLs);
(c) clearing and settlement facility licensees; and
(d) exempt foreign licensees,

with total gross notional outstanding positions across all OTC derivatives of less than A$5 billion at the end of each of two consecutive calendar quarters.

This is particularly relevant to the “Phase 3B entities” (with less than A$5 billion gross notional outstanding OTC derivative positions as at 30 June 2014), who become subject to the Reporting Rules for the first time on 4 December 2015.

When does the single-sided reporting relief apply?

To obtain the benefit of the relief, the other party to the OTC derivative must be:

(a) a reporting entity required to report information about the trade under the Reporting Rules and not relieved from that requirement under the single-sided relief;
(b) a reporting entity who otherwise reports information about the trade under the Reporting Rules; or
(c) a foreign entity reporting under a ‘substantially equivalent’ foreign regime to an offshore prescribed repository and designates or tags the information reported as reported under the Reporting Rules.

The relief requirements are similar for transaction reporting and position reporting.

This means that no relief is available where the other party does not satisfy the above (eg end customer not a reporting entity).

This also means that, where an OTC derivative transaction is between two parties potentially entitled to the single-sided reporting relief, the parties will need to agree which of them will report the transaction.

When is the relief effective?

Currently the relief is in draft form. Treasury consultation closed on 26 June, and there is some mention in a briefing by ASIC/ Treasury of possible final regulations in August. It is indicated that the relief will commence in October 2015, prior to the 4 December deadline.

Single-sided reporting is where only one party is required to report under the ASIC Derivative Transaction Rules (Reporting) (Reporting Rules). Without single-sided reporting relief, the Reporting Rules require both parties to report.

The single-sided reporting relief will apply to:

(a)        authorised deposit-taking institutions (ADIs);
(b)        Australian financial services licensees (AFSLs);
(c)        clearing and settlement facility licensees; and
(d)        exempt foreign licensees,

with total gross notional outstanding positions across all OTC derivatives of less than A$5 billion at the end of each of two consecutive calendar quarters.

This is particularly relevant to the “Phase 3B entities” (with less than A$5 billion gross notional outstanding OTC derivative positions as at 30 June 2014), who become subject to the Reporting Rules for the first time on 4 December 2015.

To obtain the benefit of the relief, the other party to the OTC derivative must be:

(a)        a reporting entity required to report information about the trade under the Reporting Rules and not relieved from that requirement under the single-sided relief;
(b)        a reporting entity who otherwise reports information about the trade under the Reporting Rules; or
(c)        a foreign entity reporting under a ‘substantially equivalent’ foreign regime to an offshore prescribed repository and designates or tags the information reported as reported under the Reporting Rules.

The relief requirements are similar for transaction reporting and position reporting.

This means that no relief is available where the other party does not satisfy the above (eg end customer not a reporting entity).

This also means that, where an OTC derivative transaction is between two parties potentially entitled to the single-sided reporting relief, the parties will need to agree which of them will report the transaction.

UK and Europe

Yes under MiFID if the value of the bet is derived from, or dependent upon, an equity or debt-related financial instrument which is admitted to trading on a regulated/prescribed market.

Rolling Spot Forex transactions are reportable under EMIR.nnThe EU Commission (EC) has stated that: “As opposed to spot trading where there is immediate delivery, a rolling spot FX contract can be indefinitely renewed and no currency is actually delivered until a party affirmatively closes out its position. This exposes both parties to fluctuations in the underlying currencies.nnHence rolling spot foreign exchange contracts are a type of derivative contract (i.e. either a forward or a financial contract for difference) relating to currencies and are considered financial instruments as defined under MiFID (see Section C(4) or (9) of Annex I of Directive 2004/39/EC).”

A Legal Entity Identifier (or LEI), is a unique 20-character code that identifies distinct legal entities that engage in financial transactions.

Counterparties which are subject to reporting obligations may delegate reporting, however it must be ensured that there is no reporting duplication. When counterparties delegate reporting, they retain the responsibility for the accuracy and timely submission of the reports.

The T stands for transaction date, which is the day the transaction takes place. The number 1 denotes how many days after the transaction date the initial report of the transaction must be submitted to a Trade Repository. In effect, the report must be submitted no later than the working day following the event.

A Trade Repository is an entity that centrally collects and maintains the records of over-the-counter (OTC) derivatives. They play a central role in enhancing the transparency of derivative markets and reducing risks to financial stability. Trade Repositories are registered and supervised in Europe by the European Securities and Markets Authority (ESMA) under the European Market Infrastructure Regulation (EMIR).

No. The EMIR reporting obligation covers most participants involved in a trade other than natural persons and non-EU and non-EEA entities.

The European Market Infrastructure Regulation (EMIR) is European legislation for the regulation of over-the-counter (OTC) derivatives. The regulations include requirements for reporting of derivative contracts and implementation of risk management standards. It established common rules for central counterparties and trade repositories. The objective of the legislation is to reduce systemic counterparty and operational risk, and help prevent future financial system collapses.