Aligning with international standards 6 min read
The ASIC Rules on Derivatives Trade Reporting are being renewed and revised to be simpler and more consistent with international standards. The final revised rules were made this week and are due to take effect on 21 October 2024. The current rules have been extended until then.
- We foreshadowed these rules in our recent Financial Services Regulatory update webinar which is available here.
- The new rules have revised a number of aspects of reporting, including removing the delegated reporting safe harbour and increasing the time for reporting. For those reporting entities such as many in the funds sector who typically rely on delegated reporting, the removal of the safe harbour places a significantly greater burden on them to monitor any delegates.
- Don't wait until October 2024 before implementing these rules. Start preparing for the transition. Many of the changes will have systemic and operational impact so the final rules have been deliberately released well ahead of time to give participants time to adjust.
Users of derivatives, investment teams, trading desk teams, legal counsel and compliance.
In the wake of the GFC in 2009, the G20 agreed to put in place new regulations governing OTC derivatives. Key among them is the requirement for users of OTC derivatives to report their trades to allow regulatory monitoring of the OTC derivatives market. Each jurisdiction was left to implement its own rules. In Australia this resulted in the adoption of the ASIC Derivative Transaction Rules (Reporting) 2013.
More than 10 years on this approach has resulted in a fragmented global regulatory landscape.
In recent years global efforts have been made to reset this trend. The issue has been recognised. International standards have been developed for certain types of reportable information. Major regulators around the world are now revising their reporting rules to harmonise them across jurisdictions.
In Australia, after two consultations over more than two years and extensive dialogue with key industry bodies like ISDA and fellow regulators, ASIC's efforts have resulted in the publication at the end of last week and earlier this week of:
- the ASIC Derivative Transaction Rules (Reporting) 2024 (2024 Rules); and
- the ASIC Derivative Transaction Rules (Reporting) 2022 (2022 Rules).
The key features of these new rules are:
- single-staged implementation: the substantive changes to the existing rules are all contained in the 2024 Rules which are due to take effect on 21 October 2024. The 2022 Rules are merely an extension of the existing rules until the 2024 Rules take effect. This is an improvement on the initially proposed two-staged implementation under which there would have been two lots of changes. A single-staged implementation means lower cost for participants as they would only need to update systems and processes once;
- increased timing for reporting: in response to industry concerns, the ordinary deadline for reporting has been extended under the 2024 Rules from T+1 to T+2 which is line with reporting deadlines in Singapore, Hong Kong and Japan. In addition, the deadline for reporting structured transactions has been extended to T+4; and
- removal of delegated reporting safe harbour: under the 2024 Rules there is no longer a 'safe harbour' provision deeming a reporting entity to have complied with reporting obligations by virtue of having a documented agreement with their delegate and making regular reasonably designed inquiries. ASIC has said it is sceptical that all reporting entities are capable of subjecting, and do subject, their delegation to the required level of oversight and rigour. It also sees the removal of the safe harbour as more aligned with international requirements for delegation of reporting. As a result, and despite significant concerns from participants during consultations, it has removed the safe harbour. This places the burden on reporting entities to ensure that—at all times—their delegates are correctly discharging their reporting obligations and accurately meeting the reporting requirements.
The 2024 Rules also provided:
- clarification to definition of 'reportable transactions': which now expressly includes the scenario when a reporting entity changes the way they record a derivative in their books and records, from representation as a transaction to representation as a position;
- clarification of scope of reportable transactions: it has been clarified that reportable transactions include OTC derivative transactions of a corporate collective investment vehicle;
- partial exemption for small-scale buy-side entities: certain smaller buy-side entities are exempt from reporting certain types of information, including collateral amounts, delta and next floating rate reset dates. These entities are also subject to lifecycle reporting requirements only in limited circumstances (see next dot point below);
- broadening of lifecycle reporting: under the 2024 Rules for non-small-scale buy-side entities, lifecycle reporting now applies to all transactions, unlike previously when snapshot reporting generally applied except in limited circumstances. So where a reportable OTC Derivative has multiple transactions taking place on the same day, the reporting entity will need to report each such transaction. Small-scale buy-side entities are only subject to lifecycle reporting for equity derivatives;
- reportable data elements: the required list of data has been streamlined and fall into one of three categories: transaction information, valuation information and collateral information. In particular, the following data will need to be reported:
- UTIs: a UTI is a globally unique transaction identifier for each reportable transaction that ensures such transactions are identifiable and consistently reported by each party to the transaction;
- UPIs: a UPI is a globally unique product identifier in the form of a 12-character code to identify the type of derivative that is reported; and
- LEIs: current LEIs are required to be reported to identify reporting entities, counterparty 1s and central counterparties. Where LEIs are required for other entities (such as brokers or the execution agent of counterparty 1), they need not be current; and
- change to reporting format: reporting entities are required to report information in an ISO 20022 XML message, in line with four major jurisdictions which have decided (or proposed) to require such a technical format.
These are all positive developments which will hopefully help clarify some doubts in the application of the existing rules and provides enough time for participants to implement these changes.
Participants should make use of this opportunity to be prepared for the changes ahead of time. Depending on the size and nature of your derivative book, there may be significant operational and systemic changes which will need to be made. So it pays to start early.
Please get in touch with the Allens expert team to learn more about how we can assist with your derivatives transaction reporting or compliance, or answer any other questions in relation to derivatives more generally.