In response to recent G20 discussions on derivatives transactions, the Australian Government has introduced the Corporations Legislation Amendment (Derivative Transactions) Bill 2012 (Bill).
The Bill, if passed, will create a framework for the Minister and the Australian Securities and Investment Commission (ASIC) to impose measures on entities that deal in a prescribed class of derivatives (Participants). The Bill also establishes a new licensing and compliance regime for derivative trade repositories.
The Bill is the first step in the Government's attempts to force OTC derivatives to be cleared through central counterparties. By forcing prescribed derivatives onto listed markets, the Bill will have significant implications for Participants who will have to comply with the rules of the relevant exchanges and may be forced to register as participants on those markets. Participants may also face more stringent reporting requirements in relation to a prescribed class of derivatives.
How the framework operates
The Bill outlines a high level framework for the development and implementation of specified rules for different derivatives transactions. The Bill does not prescribe any class of derivatives and does not provide any relevant rules, but instead provides a basis for which rules may be made.
The Minister may prescribe a class of derivatives and ASIC will then develop rules in relation to that class of derivatives (known as derivative transactions rules (DTRs)). The Minister then consents to the DTRs and ASIC supervises and enforces compliance with the relevant DTRs. The Minister may limit the class of derivatives and persons to which the rules will apply.
Broadly, the Bill empowers ASIC to prescribe mandatory obligations on Participants to:
● report derivatives transactions to a licensed derivatives trade repository;
● clear derivatives transactions through a licensed clearing and settlement facility; and
● enter into derivatives transactions only on a licensed market.
The Bill allows ASIC to prescribe different DTRs for each class of derivative, as well as exemptions from those DTRs.
The DTRs may specify the derivatives trade repository, clearing and settlement facility or licensed market a class of derivative is to be reported on, executed on or cleared through.
The Bill defines derivatives transactions broadly to mean entry into a derivatives contract, amendment or termination of a derivatives contract or assignment of the benefit and/or obligations of a derivatives contract or any other transaction which relates to a derivative and is prescribed by the regulations. Derivative will have the meaning that is currently given to it under the Corporations Act 2001 (Cth).
This broad definition allows the Minister and ASIC a wide discretion in relation to DTRs, with the intention that they will narrow the scope of derivative transaction in the relevant DTRs.
Derivative trade repositories
The Bill will also establish a licensing and compliance regime for derivative trade repositories. The licensing regime is based on the current market licensing and clearing and settlement licensing regime. A derivatives trade repository is required to apply for and obtain a derivatives trade repository licence. The licence may impose conditions on the derivatives trade repository.
Derivative trade repositories will also be subject to the derivative trade repository rules, which may be made by ASIC.
ASIC is responsible for the supervision and enforcement of the DTRs and the derivative trade repository rules. While civil penalties may apply to breaches of the DTRs, or derivative trade repository rules, the regulations may also set out alternative sanctions (such as requiring remedial action or accepting an enforceable undertaking). Failure to comply with the DTRs, or derivative trade repository rules, will not invalidate a transaction.
As part of the reporting requirements, entities who provide information to derivative trade repositories, or otherwise in accordance with the Bill, will not as a result of that reporting breach other obligations of confidence (for example under Anti-money laundering and counter-terrorism financing rules).
We will continue to publish new real-time legal updates as they become available. These updates will include action taken by the Minister and ASIC in relation to the Bill.