Coming soon: OTC derivative reporting for Phase 3B entities

If you are a Phase 3B entity (ie have gross notional OTC derivative positions of less than $5 billion), from 4 December 2015 you will need to report to a licensed repository (or prescribed repository if there is no licensed repository):

1. each time you enter into a new reportable transaction, unless relief applies; and
2. reportable positions you are in as at 4 December 2015.

Relief from reporting obligations under the single-sided reporting exemption will apply to you if the counterparty to the reportable transaction or reportable position is otherwise obliged or agrees to report.

Background

At the 2009 G-20 Pittsburgh Summit, the Australian Government joined other jurisdictions in committing to substantial reforms to the over-the-counter (OTC) derivative markets with respect to transaction reporting, clearing and trade execution. The result of this summit was the Derivative Transaction Rules (Reporting) 2013 (DTR).

On 8 September 2015, the Corporations Amendment (Central Clearing and Single-Sided Reporting) Regulation 2015 (Regulation) came into effect, which provides for central clearing and a single-sided reporting exemption.

Phase 3B entities, that is, those entities with less than $5 billion gross notional outstanding OTC derivative positions, are due to start reporting under the DTR on 4 December 2015.

What information must be reported, when, to whom and how?

Under the DTR, reporting entities must report on every ‘reportable transaction’ which it enters into. A ‘reportable transaction’ includes the entry into, the modification, termination or assignment of an OTC derivative within the prescribed class where the reporting entity is a counterparty, regardless of where the OTC derivative is entered into.¹ The prescribed classes of derivatives that may have reporting requirements imposed are commodity derivatives, credit derivatives, equity derivatives, foreign exchange derivatives and interest rate derivatives.

In addition to reporting on a ‘reportable transaction’, a ‘reportable position’ must also be reported. A ‘reportable position’ is an outstanding position in an OTC derivative that would have been, at the time of entering into it, a reportable transaction.²

The DTR contain tables of ‘common data’ that are common to all OTC derivatives in the prescribed class and that must be included in a report.³ Some of the common data includes the economic terms of the transaction, product, transaction and entity identifiers, and information on whether the transaction is centrally cleared. The DTR also contain specific information for the prescribed classes that additionally must be included in a report.⁴

A reporting entity must report the information change no later than the end of the next business day after the requirement to report the information or change arises.⁵ If the licensed or prescribed repository to which the information or change is to be reported is not available to accept the report of information or changes, the reporting entity must report the information or changes as soon as practicable after the licensed or prescribed repository becomes available to accept the report.

Reporting entities that are Australian entities must report to a trade repository that is licensed by ASIC under the Corporations Act 2001. Where there is no licenced repository, an Australian entity must report to a prescribed repository. At the time of publication of this article, there are two licenced repositories: DTCC Data Repository (Singapore) Pte Ltd, and Chicago Mercantile Exchange Inc. The full and up-to-date list of licensed and prescribed repositories can be found on the ASIC website.⁶

Foreign entities have slightly different reporting requirements. These requirements apply to reporting entities other than Australian entities or foreign responsible entities or trustees which enter into reportable transactions in their capacity as the responsible entity or trustee of an Australian entity. These entities are able to report to a prescribed repository by reporting information under the requirements of a foreign jurisdiction, if the reporting requirements are substantially equivalent as the requirements that would otherwise apply to that entity.

For entities that do not currently hold OTC derivatives, there will be no present reporting obligations. If, however, the entity enters into any ‘reportable transaction’ or a ‘reportable position’, the DTR will apply to that entity and they will be required to report unless an exception applies.

Central clearing

The clearing-related regulations enable ASIC to make rules requiring certain OTC derivatives to be centrally cleared. These requirements will generally only apply to the major domestic and foreign banks active in the Australian OTC derivatives markets, as entities must hold more than $100 billion gross notional outstanding OTC derivative position to be captured. As a result, the central clearing requirements will not generally apply to phase 3B entities.

Under the Regulation, central clearing can only occur though all central counterparties (CCPs) licensed in Australia. To provide some flexibility with respect to overseas CCPs that are not required to be licensed in Australia, but through which Australian dealers may wish to clear, there is also provision in the legislation to prescribe such CCPs so that they can be used to fulfil mandatory clearing requirements

Single-sided reporting exemption

The Regulation provides relief from the trade reporting requirements under the DTR by allowing ‘single-sided reporting’ for entities with less than $5 billion gross notional outstanding OTC derivative position for two successive quarters (generally, phase 3B entities).

For the relief to apply to a phase 3B entity, the counterparty to the transaction must be an entity that is required to report the transaction. The counterparty may be required to report the transaction under Australian reporting rules (ie. a phase 1, 2 or 3A entity), otherwise reports the transaction under the Australian reporting rules, or is a foreign entity reporting under the Australian alternative reporting regime. If the counterparty is another phase 3B entity, one of the two parties to the transaction will have to agree to report and the other party will delegate the reporting to that party.

How this affects you

If you are a Phase 3B entity (ie have gross notional OTC derivative positions of less than $5 billion), from 4 December 2015 you will need to report to a licensed repository (or prescribed repository if there is no licensed repository):

1. each time you enter into a new reportable transaction, unless relief applies; and
2. reportable positions you are in as at 4 December 2015.

Relief from reporting obligations under the single-sided reporting exemption will apply to you if the counterparty to the reportable transaction or reportable position is otherwise obliged or agrees to report.

This article was written with the assistance of Elliot Roberts, Graduate Lawyer.

¹Rule 1.2.5
²Rule S1.2
³Tables S2.1(1) and S2.2(1)
⁴Tables S2.1(2)-(5) and S2.2(2)-(5)
⁵Rule 2.2.3
⁶<https://asic.gov.au/regulatory-resources/markets/otc-derivatives-reform/derivative-trade-repositories/>