Draft rules published for mandatory central clearing of derivatives and single-sided reporting

In brief

ASIC has published draft rules for mandatory central clearing of certain derivatives, while Treasury has published draft regulations that would permit single-sided reporting of Over-the-Counter Derivatives in some situations. Partner Tom Highnam and Lawyer David Lewis discuss the implications of these draft rules and regulations.

Clearing Entities

On 28 May 2015, ASIC released a consultation paper on its proposal to implement mandatory central clearing. It also released the draft ASIC Derivative Transaction Rules (Clearing) 2015 (the Draft Clearing Rules).

Under the Draft Clearing Rules, the following entities would be regarded as Clearing Entities and would thus be subject to the central clearing mandate:

• Authorised Deposit-taking Institutions;
• Australian Financial Service Licensees; and
• Exempt Foreign Licensees.

However, to be subject to the central clearing mandate, an entity must hold total gross notional outstanding positions across all Derivatives of at least A$100 billion at the end of each of two consecutive calendar quarters.

This amount is calculated separately for each of the entity's personal capacity and any managed investment scheme of which it is the responsible entity, or other trust of which it is the trustee.

This amount also disregards:

• Derivatives entered into with related bodies corporate; and
• Derivatives booked to a profit or loss account of a branch outside Australia or entered into outside Australia, if the entity (or in the case of a responsible entity or trustee, the managed investment scheme or trust) is incorporated or formed outside Australia.

Entities can also opt-in to being Clearing Entities.

Clearing Transactions

Under the Draft Clearing Rules, clearing entities are only required to centrally clear derivatives entered into with other Clearing Entities or with swap dealers or securities-based swap dealers under the US regime. These are Clearing Transactions.

Where both parties (or in the case of a responsible entity or trustee, the managed investment scheme or trust) to the Derivative are incorporated or formed outside Australia, the Derivative is subject to the central clearing mandate only if one of parties books the Derivative to a profit or loss account of a branch in Australia, or opts-in to the regime, or if the Derivative is entered into in Australia.

Clearing Derivatives

Under the Draft Clearing Rules, the central clearing mandate applies to interest rate swaps denominated in Australian dollars, US dollars, euros, British pounds or Japanese yen. These interest rate swaps must be:

• basis swaps;
• fixed-to-floating swaps;
• forward rate agreements; or
• overnight index swaps.

These interest rate swaps must also be based on certain floating rate indices, and terminate within specified periods from the date of entry. These are Clearing Derivatives.

The central clearing mandate does not apply to Derivatives under which one party has an option that allows it to affect the amount, timing or form of consideration, or under which the notional principal amount depends on a future contingency.

The central clearing mandate also does not apply to:

• Derivatives where not all payments are denominated in the same currency; and
• Derivatives entered into on an appropriately licensed Australian market, such as ASX, or an approved foreign market, including 'designated contract markets' under the US Dodd-Frank regulation, and 'regulated markets' under the EU Markets in Financial Instruments Directive.

Implications of the central clearing mandate

Under the Draft Clearing Rules, if a Clearing Entity is required to centrally clear a Clearing Transaction it must ensure that the transaction is cleared through a licensed or prescribed clearing and settlement facility 'as soon as practicable' after the transaction is entered into, and in any event, no later than the end of the first business day after the day on which the transaction is entered into.

However, Clearing Entities do not have to clear centrally Clearing Transactions entered into with related bodies corporate, as long as ASIC is appropriately notified in advance.

Single-sided reporting

The ASIC Derivative Transaction Rules (Reporting) 2013 (the Reporting Rules) provide for 'two-sided' reporting, so that each party to an OTC Derivative must assess separately its obligation to report, regardless of whether its counterparty has an obligation to report the OTC Derivative.

On 28 May 2015, Treasury released a consultation package proposing a form of 'single-sided' reporting to be implemented by a draft Corporations Amendment (Central Clearing and Single-Sided Reporting) Regulation 2015.

The proposal would provide an exemption from transaction reporting for:

• Authorised Deposit-taking Institutions;
• Australian Financial Services Licensees;
• Clearing and Settlement Facility Licensees; and
• Exempt Foreign Licensees,

with total gross notional outstanding positions across all OTC Derivatives of less than A$5 billion in the relevant capacity at the end of each of two consecutive calendar quarters.

However, to obtain the benefit of the exemption, the other party to an OTC Derivative would need to be:

• subject to the Reporting Rules and not exempt; or
• a foreign entity reporting under a 'substantially equivalent' reporting requirements (such as Dodd-Frank or EMIR) that reports the OTC Derivative and 'tags' it as reported under the Reporting Rules.