ASIC today proposed draft rules to implement mandatory central clearing requirements (clearing requirements) for certain over-the-counter (OTC) derivatives. The proposals are the next stage in Australia meeting its Group of Twenty (G20) commitments to reform OTC derivatives markets following the global financial crisis (GFC).
The Government is consulting on a draft determination and regulations to implement a central clearing mandate in Australia. ASIC's draft rules would implement the Government's proposed central clearing mandate, which would cover trades between internationally-active dealers.
ASIC Commissioner Cathie Armour said, 'This is an important next step in Australia’s meeting of the G20 OTC derivatives commitments. The proposed mandatory clearing regime will improve the integrity and stability of Australia’s OTC derivative markets, while ensuring the reforms are implemented in a measured way.'
Consultation Paper 231 Mandatory central clearing of OTC interest rate derivative transactions (CP 231) and the draft ASIC Derivative Transaction Rules (Clearing) 2015 (draft derivative transaction rules (clearing)) propose the mandatory clearing of certain classes of OTC interest rate derivative transactions through a licensed or prescribed clearing and settlement facility. CP 231 covers issues such as the entities which will be subject to the clearing requirements, the cross-border application of the draft derivative transaction rules (clearing) and the transaction and asset classes subject to the clearing requirements.
Under ASIC's proposals:
- Australian and foreign clearing entities (financial entities with $100 billion or more gross notional outstanding in OTC derivatives measured on a rolling basis) will be subject to mandatory central clearing, for trades with each other and with foreign-internationally active dealers (swap dealers regulated by the CFTC or SEC).
- Only certain OTC interest rate derivatives, namely fixed-to-floating swaps, basis swaps, overnight index swaps and forward rate agreements, will be required to be cleared.
- The clearing requirements will start in April 2016, but there will be no obligation to backload open positions as at that date, subject to requirements applying to trades that are extended.
Commissioner Armour said, 'in framing the draft derivative transaction rules (clearing), ASIC has carefully considered international requirements on central clearing as well as the need to provide recognition where transactions are cleared in accordance with comparable foreign regimes. ASIC expects that the cross-border scope of the rules will assist Australian entities to seek substituted compliance and equivalence for these transactions under foreign regimes.'
Submissions to CP 231 are due Friday, 10 July 2015.
The Government is also consulting on regulations that would implement a single-sided OTC derivatives trade reporting regime for certain firms. This comes ahead of the start of Phase 3B OTC derivatives trade reporting commencing on 12 October 2015, which was delayed by ASIC in July 2013 for around 12 months.
Commissioner Armour said, 'reporting entities should carefully consider the scope of this draft regulation and take steps to ensure they will be fully compliant with their trade reporting requirements from the reporting start date of 12 October.
Our recent changes to the ASIC Derivative Transaction Rules (Reporting) 2013 make delegated reporting a particularly attractive option for reporting entities to use. We encourage Phase 3B reporting entities to continue to implement any delegated reporting arrangements necessary to comply with their regulatory requirements by 12 October.'
Background
Global commitment to OTC derivatives reform arose out of the GFC and involves increasing market transparency, financial stability and market integrity of OTC derivative markets. Australia signed up to these commitments in September 2009 at the Pittsburgh G20 Leaders' summit.
In July 2013, ASIC, the Australian Prudential Regulation Authority (APRA) and the Reserve Bank of Australia (RBA) recommended that the Government mandate central clearing of OTC transactions among internationally-active dealers in interest rate derivatives denominated in US dollars, euros, British pounds and yen (G4 interest rate derivatives).
On 9 July 2013, ASIC made the ASIC Derivative Transaction Rules (Reporting) 2013, which sets out the requirements for counterparties to report derivative transaction and position information to derivative trade repositories. This was later amended by ASIC on 9 February 2015, following industry feedback. The reporting obligation has been phased in from October 2013.
In April 2014, ASIC, APRA and the RBA released a further report recommending Government consider implementing a mandatory clearing obligation for OTC transactions in Australian dollar (AUD)-denominated interest rate derivatives for internationally-active dealers.
On 12 December 2014, the former Acting Assistant Treasurer Senator the Hon Mathias Cormann announced that the Government will implement a number of reforms to make OTC derivatives markets safer. The reforms include the mandatory central clearing of AUD and G4 interest rate derivatives. In line with this announcement, on Thursday, 28 May 2015, the Government released for consultation a draft determination and regulations to implement a central clearing mandate in Australia.