Taking a Bearing: From Compliance To Change Scott Farrell 2014 Risk Australia Conference

Transcription

1 Taking a Bearing: From Compliance To Change Scott Farrell 2014 Risk Australia Conference

2 Snapshot. Bilateral risk management : uncleared derivatives subject to additional requirements eg portfolio compression and reconciliation and trade valuation. OTC derivatives to be reported to trade repository Trade Reporting Capital and Margining G20 reforms Central Clearing Trade Execution OTC derivatives to be cleared through central clearing facilities (clearing houses) Uncleared OTC derivatives to be subject to higher capital charges and margin requirements OTC derivatives to be entered into through trade execution facility or exchange King & Wood Mallesons / 2

3 No Small Change 3

4 Critical path. Minister decides to prescribe classes of derivatives for mandatory obligation Input from agencies Public consultation ASIC prepares draft rules Determination prescribes class and regulations may narrow scope of rules Input from other agencies Minister consents to rules Final rules prepared Determination, rules and regulations not disallowed Rules and regulations in effect Public consultation King & Wood Mallesons / 4

5 10 points on Derivative Trade Reporting in Australia Trade Reporting is a G20 milestone At the G20 Pittsburgh Summit in 2009, the Australian Government committed to substantial reform to the OTC derivatives markets. This included introducing trade reporting rules. Australian Trade Reporting Rules apply to Reportable Transactions The Australian trade reporting obligations apply to any derivative activity that meets the definition of Reportable Transaction by any person that meets the definition of Reporting Entity. What is a Reportable Transaction depends on who you are What constitutes a Reportable Transaction under the Rules depends on what kind of Reporting Entity you are. If you are an Australian Entity (which includes a corporation, partnership, managed investment scheme or trust), all specified types of OTC derivatives which you are a counterparty to will be a Reportable Transaction, regardless of where they are entered into. Only certain types of OTC derivative need to be reported Interest rate, foreign exchange, credit, equity and commodity derivatives (excluding electricity derivatives), whether centrally cleared or not. Many exchange traded transactions are not included. Each Reporting Entity must report its Reportable Transactions Even if this means that both parties to a Reportable Transaction report it. A Reporting Entity can appoint a third party to report on its behalf eg a counterparty, trading platform, broker or service provider, but the Reporting Entity remains responsible for complying with the Trade Reporting Rules. King & Wood Mallesons / The reporting obligations are being phased in The Reporting obligations have already started to apply to Phase 1 and Phase 2 Reporting Entities but not yet to Phase 3 Reporting Entities (which will include buyside entities). Phase 3 Reporting Entities comprise Australian ADIs, AFS licensees, CS facility licensees, exempt foreign licensees or foreign ADIs who are not Phase 1 or 2 Reporting Entities (broadly those with less than AUD 50bn gross notional outstanding in OTC derivatives at 31 December 2013). ASIC has extended the start date for derivatives trade reporting by Phase 3 Reporting Entities Phase 3 Reporting Entities were going to have to start reporting derivatives from 1 October Now, if they meet certain conditions, this deadline has been pushed back. Reporting is to be provided to a licensed or prescribed trade repository At present there are no licensed trade repositories in Australia. Until ASIC licences a trade repository it has prescribed a list of 9 overseas trade repositories which data can be reported to. These include DTCC entities in the US, UK, Japan and Singapore, the CME and the HKMA. Deadlines for reporting apply Reporting is to be provided to an authorised trade repository no later than the business day after the day on which the execution, amendment, termination or assignment occurs. There is no real-time reporting obligation. There is an ASIC Regulatory Guide ASIC published Regulatory Guide 251 in August 2013 to help entities understand their trade reporting obligations and how to comply with the new rules.

6 10 points on Derivative Central Clearing in Australia Clearing is a G20 milestone At the G20 Pittsburgh Summit in 2009, the Australian Government committed to substantial reform of the OTC derivatives markets. This included introducing rules requiring central clearing of certain types of derivatives. Only applies to Interest Rate Derivatives Unlike the US which has already implemented mandatory clearing for IRS and certain CDS contracts, the Australian Government at present has only recommended that inter-dealer interest rate derivatives are cleared. To apply to AUD, USD, EUR, GBP, and JPY trades The Australian Government first proposed that IRS in USD, EUR, GBP and JPY should be cleared as internationally active participants were already clearing these products. Earlier this year the Australian Government also proposed that AUD IRS also be cleared now there are two CCPs (ASX Clear (Futures) and LCH.Clearnet) which have regulatory approval to offer clearing in Australia. Initially, only applies to large financial institutions The precise scope of which entities will be captured by the new rules is subject to further consultation, but entities are likely to be categorised according to a threshold of the gross notional of all OTC derivatives outstanding (currently proposed to be $100 billion). It is intended that the initial focus of the rules is on dealers with significant cross-border activity in the mandated derivative types. Thresholds will be calculated on a legal entity basis Comparisons against thresholds are not determined by reference to the positions of affiliates. Public entities (such as central banks) will also be excluded from the clearing requirement. King & Wood Mallesons / No requirement that clearing occur within Australia The proposal envisages that the Australian Government will prescribe certain overseas CCPs as well as domestic CCPs through which clearing can take place. No recommendation that the clearing obligation be extended to non-dealers Currently, there is no recommendation that the clearing obligation be extended beyond internationally active dealers. However, the Australian regulators have stated they will continue to keep this under review. There are no definite timeframes for implementation However, the Government s current proposal provides that a draft Ministerial determination and draft regulations should be released for comment in the third quarter of 2014 with a determination and regulations made in late The clearing mandate would then be intended to come into force in early Co-ordination with overseas jurisdictions The Australian Government also noted that the clearing mandate in relation to AUD interest rate derivatives may be coordinated with the introduction of similar obligations in key overseas jurisdictions. Clearing of other derivative types are subject to further review Regulators have stated that there are strong in-principle benefits from the central clearing of certain foreign exchange derivatives, cross-currency swaps and potentially Australian reference-entity credit derivatives too, but at present there is no current recommendation to clear these types of product. The Australian regulators will also continue to monitor the use of North American, European and Japanese referenced credit derivatives.

7 Market Infrastructure Aus. EU US HK Sing. ADI s, holders of Swap dealers, HK licensed Financial Trade Aus. licences, EU counterparties in banks institutions and Repository some foreign counterparties the US (interim large non-fis in entities (one-sided) obligation) Singapore Clearing House Internationally active dealers Financial counterparties and NFC+ Swap dealers, counterparties in the US (not end users)? Financial institutions and large non-fis in Singapore Trade Execution Facility Swap dealers,?? counterparties in the US? (not exempted) King & Wood Mallesons / 7

8 Chain reaction. King & Wood Mallesons / 8

9 Liquidity and segmentation. King & Wood Mallesons / 9

10 Zero tolerance. 10

11 Beyond the law. Unwanted commercial outcomes Default would cause systemic instability Application of ordinary insolvency laws to FMI would not result in an orderly outcome Unwanted legal outcomes Protection for FMI recovery and resolution from ordinary laws needed. Legal protection of FMI process on default King & Wood Mallesons / 11

12 From compliance to change. 12

13 Global network, local knowledge 13