The task of updating Australia’s derivative transaction reporting regime nears completion

In this article we detail the changes to the derivative transaction reporting regime in Australia as proposed by ASIC’s Third Consultation 375. With updated reporting rules commencing on 21 October 2024, the changes proposed in this final consultation are welcome.

How we got here

With the release on 15 February 2024 of Consultation Paper 375 Proposed changes to the ASIC Derivative Transaction Rules (Reporting): Third consultation (CP 375), reporting entities are close to having a landing on the revised derivative reporting obligations. With updated reporting rules commencing on 21 October 2024, the changes proposed in this final consultation are welcome.

This final consultation, follows on from CP 334 and CP 361, and will round off a review process that commenced in November 2020.

Note: In this article:

• We refer to the ASIC Derivative Transaction Rules (Reporting) 2022 as the ‘2022 Reporting Rules’ – these are the rules that are currently in place.
• We refer to the ASIC Derivative Transaction Rules (Reporting) 2024 as the ‘2024 Reporting Rules’. The 2024 Reporting Rules will repeal and remake the 2022 Reporting Rules with effect from 21 October 2024. While the 2024 Reporting Rules have not yet commenced, CP 375 proposes changes to those rules in advance of their 21 October commencement.

Why are further changes being consulted on?

As with the previous consultations, the purpose of the proposed amendments has been to harmonise the derivative reporting regime in Australia to international standards, remove outdated transitional provisions and more closely align the reportable data elements with those of other major jurisdictions. 

CP 375 proposes the following:

• simplifying the exclusion of exchange-traded derivatives;
• simplifying the scope of foreign entity reporting;
• removing alternative reporting provisions;
• clarifying the exclusion of FX securities conversion transactions; and
• adding additional allowable values for two data elements.

We have considered these changes below.

Excluding exchange-traded derivatives 

Currently, reporting entities must rely on a suite of legislative instruments and determinations, in addition to the 2022 Reporting Rules, to understand if a transaction is out of scope of the reporting regime as an ‘exchange-traded derivative’. ASIC has acknowledged that these sources have rarely kept pace with the continuously changing list of financial markets that may exempt a transaction from the reporting regime.

What is proposed?

To address this issue, ASIC proposes simplifying and permanently excluding exchange-traded derivatives from the reporting regime. This would be done through the introduction of a generic definition for ‘exchange-traded derivative’ and associated changes. In order to guard against any unanticipated uncertainties, ASIC will retain a residual determination power to make adjustments to the provisions.

I think I‘ve seen that definition before

The proposed definition of ‘exchange-traded derivative’ will be familiar to existing reporting entities, being derived from the definition of the same term in the ASIC Corporations (Derivative Transaction Reporting Exemption) Instrument 2015/844. That instrument currently exempts certain exchange-traded derivatives from the reporting regime. The definition proposed in CP 375 has slightly modified the version in the instrument to emphasise that for a derivative to be considered part of a ‘series’, the “amount or size of the derivative specified by the operator” of the financial market must also be the same as for every other derivative in the series. 

What about trading on non-public exchanges?

ASIC’s policy reason for excluding exchange-traded derivatives is that they are generally highly standardised in series with the same terms of underliers, expiration dates, contract or ‘lot’ sizes and/or ‘tick’ values. For this reason, ASIC has not extended the exclusion of exchange-traded derivatives to derivatives traded on financial markets that are not public exchanges. For example, the exemption does not extend to derivatives traded on Tier 2 financial markets in Australia, or their equivalent in the UK, EU or US. The reason for this is that in ASIC’s view, trading on these exchanges is not sufficiently standardised across all of the required fields.

Simplifying the scope of foreign entity reporting

According to ASIC, the current approach for defining the scope of foreign entity reporting has led to inconsistencies and narrower reporting and does not reflect the overwhelming use of reporting based on the definition of a ‘Nexus Derivative’ described below. 

Currently, the 2022 Reporting Rules prescribe the transactions that must be reported to ASIC as set out in Table 1 of Rule 1.2.5. However, the ‘Nexus Exemption’, set out in ASIC Derivative Transaction Rules (Nexus Derivatives) Class Exemption 2015, enables reporting entities to opt-in to alternative reporting requirements from those set out in the 2022 Reporting Rules. 
Specifically, the Nexus Exemption provides that a reporting entity is not required to report OTC derivatives:

1. entered into by the reporting entity in this jurisdiction; or
2. booked to the profit or loss account of a branch of the reporting entity located in this jurisdiction,

on the condition that the reporting entity reports Nexus Derivatives. 

Nexus Derivatives are broadly defined in the Nexus Exemption to mean OTC derivatives where a prescribed list of functions are, or will be, performed in Australia. 

In the 2024 Reporting Rules, ASIC had proposed removing the Nexus Exemption. However, following a review of market practice, in which it identified that nearly 95% of all reports made by foreign entities are made by foreign entities that have opted into the Nexus Exemption, ASIC has proposed to further vary the 2024 Reporting Rules to include an obligation to report ‘Nexus Derivatives’. 

The below table shows the evolution of reporting requirements for foreign entities from the 2022 Reporting Rules through the current version of the 2024 Reporting Rules and as proposed by CP 375. 

In the 2024 Reporting Rules, ASIC had proposed removing the Nexus Exemption. However, following a review of market practice, in which it identified that nearly 95% of all reports made by foreign entities are made by foreign entities that have opted into the Nexus Exemption, ASIC has proposed to further vary the 2024 Reporting Rules to include an obligation to report ‘Nexus Derivatives’.

The below table shows the evolution of reporting requirements for foreign entities from the 2022 Reporting Rules through the current version of the 2024 Reporting Rules and as proposed by CP 375.

Note: All capitalised terms are as defined in the relevant Rules.

The proposed definition of ‘Nexus Derivative’ is derived from the equivalent term in the Nexus Exemption and will require OTC derivatives to be reported where they are executed through a financial market where one or more of the functions are, or will be, performed in this jurisdiction. 

This approach is consistent with the approach taken in Singapore and Hong Kong and reflects ASIC’s core aim of more closely aligning Australia’s reporting regime with those of other major jurisdictions.   

These changes are due take effect from 1 April 2025 to allow impacted market participants time to prepare.

Alternative reporting proposed to be removed

ASIC proposes removing the carve-out for alternative reporting set out in Rule 2.2.1(3) of the 2024 Reporting Rules (Alternative Reporting regime). ASIC will also de-prescribe the list of ‘prescribed repositories’ that may be used as part of the Alternative Reporting regime. The Alternative Reporting regime currently allows reporting entities to report reportable transactions to a prescribed list of repositories in a foreign jurisdiction, in order to meet their Australian reporting obligations.

ASIC’s reasons for withdrawing this regime are that:

• ASIC is not required to be notified of reliance on the Alternative Reporting regime; and 
• ASIC has difficulties in obtaining information on transactions reported using the Alternative Reporting regime.

According to ASIC, the withdrawal will have a minimal impact on the 150 small-scale entities currently relying on single-sided reporting. These entities will still be able to rely on single-sided reporting, where their reporting counterparty reports to a licensed repository.

According to CP 375, the withdrawal of the Alternative Reporting regime is aligned with equivalent limitations to alternative reporting in the EU, US, Singapore, Hong Kong and Japan.

Other changes

In addition to those changes detailed above, ASIC has proposed the following:

• The carve-out from reporting foreign exchange contracts for foreign currency securities settlement purposes is proposed to be amended in the 2024 Reporting Rules. The 2024 Reporting Rules had been interpreted by industry as a prohibition on reporting such transactions. However, industry feedback was that it is not always clear if a transactions is to be carved out and industry has often taken an ‘if in doubt, report’ approach. Rule 1.2.4(6) is to be amended to apply a ‘reasonable belief’ qualification.
• ASIC will allow ‘PEXH’ as an optional allowable value for cross-currency interest rate swaps.
• ASIC proposes adding central counterparty’s valuation as an allowable value for the ‘Valuation method’ field.

Next steps

CP 375 is open for comment until 28 March 2024. A final version of the amended 2024 Reporting Rules is expected in Q3 2024. The 2024 Reporting Rules are due to substantively commence on 21 October this year. Some obligations have been deferred until April 2025 to allow impacted reporting entities time to prepare for those changes.