Status of Australian OTC Derivative Reforms
The Australian Government joined other jurisdictions at the 2009 G20 Pittsburgh Summit in committing to undertake significant reforms to the functioning of over-the-counter (OTC) derivative markets (G20 Commitments) including requiring that:
(a) all OTC derivative contracts should be reported to trade repositories (mandatory trade reporting);
(b) all standardised OTC derivative contracts should be cleared through central counterparties (CCPs) (mandatory clearing by a CCP);
(c) all standardised OTC derivative contracts should be traded on exchanges or through electronic trading platforms (mandatory execution on a trading platform); and
(d) non-centrally cleared OTC derivatives should be subject to higher capital requirements (margin and capital requirements for non-centrally cleared OTC derivatives). Further, in November 2011, G20 leaders agreed that international standards on the margining of non-centrally cleared OTC derivatives should be developed
We outline below the key regulatory developments which have occurred to date in Australia in direct response to those G20 Commitments.
1. Legislative framework
The Australian legislative framework to implement these reforms commenced in January 2013 when the new Part 7.5A of the Corporations Act 2001 (Corporations Act) came into effect. Under that legislation, the Minister has the power to prescribe certain classes of derivatives as being subject to an Australian Securities and Investments Commission (ASIC) rule-making power concerning mandatory trade reporting, mandatory clearing by a CCP or mandatory execution on a trading platform.
2. Mandatory trade reporting
On 9 July 2013, ASIC issued the ASIC Derivative Transaction Rules (Reporting) 2013 (DTRs) specifying a timetable for the phased implementation of the reporting requirement: an opt-in reporting phase, a phase for Australian entities registered as "Swap Dealers" with the CFTC commencing 1 October 2013, a phase for major financial institutions (such as ADIs and AFSL holders with notional OTC derivatives transactions of greater than AUD 50 billion) commencing 1 April 2014; a phase for other financial institutions (such as ADIs and AFSL holders with notional OTC derivatives transactions below the AUD 50 billion threshold) commencing 1 October 2014. End-users of OTC derivatives are not covered by the current DTRs and ASIC and are consulting on their reporting obligations.
3. Mandatory clearing by a CCP
Australia's Council of Financial Regulators (the Australian Prudential Regulation Authority, ASIC and the Reserve Bank of Australia) released a report in July 2013 recommending that the Australian Government consider a central clearing mandate for interest rate derivatives denominated in U.S. dollars, Euros, Pounds Sterling and Yen. While the Council of Financial Regulators noted strong "in-principle benefits" from the clearing of Australian dollar-denominated interest rate derivatives, certain foreign exchange derivatives, cross-currency swaps and potentially Australian reference-entity credit derivatives, there is not a current recommendation to require clearing of these derivatives.
At this stage, there has been no formal response to the report from the Australian Government, which is necessary in order to commence consultation on a proposed clearing determination and the preparation of draft rules.
4. Mandatory execution on a trading platform
Australia's Council of Financial Regulators has not made a specific recommendation regarding a mandatory platform obligation, however, it will continue to monitor developments.
5. Margin requirements for non-centrally cleared derivatives
Australia's Council of Financial Regulators will provide advice to the Australian Government on the implementation of international principles on margin requirements for non-centrally cleared derivatives transactions.