The long and short of it: ASIC consults on disclosure rules for derivative positions
Ahead of the Deal - Australian M&A briefing
Key insights
- Recent law reform has brought equity derivatives into Australia’s substantial holding regime through “deemed economic interest” (DEI) concepts.
- ASIC has been consulting on the practical aspects of this new regime, daily recalculation requirements, the consolidated notice form, and exemptions for market makers.
- There are many tips and traps that will challenge market participants: from pricing model ambiguity and the “no netting” rule, to the demanding exemption conditions.
- ASIC's consultation closed on 21 April 2026 however we expect there will be further discussions between market participants and ASIC before ASIC announces its proposed changes (scheduled to be in July 2026).
Background
On 10 March 2026, ASIC released Consultation Paper 387 (CP 387), setting out how it proposes to implement the enhanced beneficial ownership disclosure reforms introduced by the Treasury Laws Amendment (Strengthening Financial System and Other Measures) Act 2025 (Cth) (Amending Act).
The Amending Act represents a significant development in Australia’s market disclosure framework in recent times, shifting the substantial holding regime from a framework focused primarily on legal ownership to one that also captures economic exposure, and effectively bringing the Takeovers Panel Guidance Note 20 (GN 20) requirements into law.
As covered in our previous article, cash-settled derivatives, previously outside the statutory substantial holding disclosure regime, are now brought within it through the new concept of a “deemed economic interest” (DEI).
While the deadline for submissions responding to CP 387 closed on 21 April 2026, further engagement between ASIC and market participants is expected on the details and implementation of the new regime before it commences on 4 December 2026.
How are deemed economic interests calculated?
Anyone holding the “long” side of an equity derivative will have a DEI in the underlying securities. The calculation methodology depends on the derivative type:
- Physically settleable derivatives: The DEI equals the full notional amount – this is straightforward as the holder can call for the underlying securities.
- Linear, symmetric derivatives (e.g. total return swaps, CFDs): The same approach applies – the DEI equals the full notional amount of underlying securities, reflecting the economic equivalence to holding the shares directly.
- Non-linear derivatives (e.g. vanilla options): The calculation is more nuanced. The DEI equals the derivative’s delta (calculated using a “generally accepted standard pricing model” such as Black-Scholes) multiplied by the notional amount. This captures the probability-weighted economic exposure.
- Basket and index derivatives: The DEI is based on the weight of the relevant security in the basket or index. However, it is deemed to be zero if: (a) the interest represents less than 5% of the class; or (b) the securities represent less than 20% of the basket/index value. This de minimis approach recognises that broad index exposure is qualitatively different from targeted holdings.
Treatment of short positions
Offsetting short positions must be disclosed, but separately from long positions. Importantly, a holder cannot net short positions against a long exposure when determining whether thresholds are crossed, since each is disclosed independently. This represents a deliberate policy choice to provide the market with a complete picture of derivative exposure in both directions.
Daily recalculation and 1% triggers
Derivative-based interests must be recalculated daily. Disclosure is triggered by movements exceeding 1%. For compliance teams, this has significant operational implications – it requires building monitoring systems capable of tracking positions in real-time and lodging notices within a compressed two business day timeframe (which becomes even more compressed where a takeover bid is on foot – see more below).
Exemptions for market-facing activities
ASIC proposes exemptions for market makers and client-facing derivative activities, recognising that positions held for these purposes have different market implications. The proposed exempt categories include:
- AFS licensees: dealing in derivatives to facilitate client exposure;
- Market makers: who hold positions to provide liquidity; and
- Clearing and settlement: facilities operating in the ordinary course of business.
However, these exemptions come with conditions. The licensee must have adequate systems to identify exempt transactions, and the dealing must not give (or be capable of giving) the licensee any capacity to influence the listed entity’s affairs.
The exemption also extends to foreign licensees, though ASIC is considering whether to limit this to entities operating in jurisdictions with “equivalent” regulatory regimes.
The 20% backstop
Exempt licensees are not entirely free from disclosure obligations. If their “as-if-no-exemption” holding crosses 20%, they must disclose their exempt DEIs and offsetting short positions. ASIC is also seeking views on whether a lower threshold (5% or 10%) based on net economic exposure would be appropriate. This backstop ensures market transparency is preserved even where exemptions apply.
The new substantial holding notice
ASIC proposes that forms 603, 604 and 605 be replaced by a single consolidated notice, requiring disclosure of:
- Overall holding percentage (combining non-derivative and derivative-based holdings)
- Disaggregated derivative-based holdings, separated into relatable, physically settleable and non-physically settleable categories
- Offsetting short positions (separately disclosed)
The draft revised substantial holding notice is intended to feature standardised drop-down menus for transaction categories, which should improve consistency and reduce errors. ASIC is also exploring options for a machine-readable web portal and potentially simplified forms for holders whose positions do not include derivative-based interests. Clearly, a transitional period enabling market adaptation will be critical in ensuring the prescribed form(s) capture the right information in a manner that is easily digestible for others.
Other notable changes
- Standard form exclusions: ISDA Master Agreements and similar standard documents will not need to accompany notices (though summaries may still be required for securities lending agreements).
- Updated regulatory guides: RG 5 becomes “Relevant interests and deemed economic interests”; RG 222 becomes “Substantial holding disclosure and tracing requirements”; RG 86 will be withdrawn.
- Foreign equivalence: Disclosure regimes in New Zealand, the United Kingdom and the United States are proposed as equivalent. This means that entities already subject to those regimes may be exempt from duplicative Australian disclosure requirements.
- Freezing orders and increased penalties: ASIC will have significant new powers to freeze positions where there has been a contravention of substantial holding requirements. Such powers will have force against offshore holders as well. Maximum penalties under the Corporations Act will also be doubled for failures to comply with the substantial holding notice information requirements and requirements to maintain tracing notice registers.
- Section 606 unchanged: The takeover prohibition threshold remains tied to relevant interests only. DEIs do not count towards the 20% (or 90%) threshold.
Tips and traps: Practical challenges to watch
Beyond the headline reforms, CP 387 raises several practical issues that warrant careful attention:
For non-linear derivatives (options and similar instruments), the DEI depends on delta calculated using a “generally accepted standard pricing model”. ASIC has adopted a principle-based approach (the model must be generally accepted in the Australian financial services industry and take into account relevant pricing factors - i.e. interest rates, dividends, time to maturity, underlying price and volatility), but tension will arise if reasonable models produce different deltas? The consultation paper acknowledges this but offers limited guidance on how differences and disputes would be resolved. Market participants using bespoke structures should consider whether their chosen model will withstand regulatory scrutiny.
The requirement to recalculate DEIs daily, combined with the two business day disclosure window (or 9:30am the next trading day during a bid period if a takeover bid has been made), puts significant operational pressure. Delta can shift materially with market movements, meaning a position that was comfortably below threshold on Monday could breach on Tuesday and require disclosure by Thursday. Systems will need to flag potential breaches with enough lead time to prepare and lodge notices.
A holder cannot net short positions against long positions when determining whether a threshold has been crossed. This means a holder with a 4% long position and a 4% short position still has a disclosable substantial holding if the long position increases to 5% – even though the net economic exposure is just 1%. The policy rationale is transparency, but the practical effect is that hedged positions may still trigger disclosure obligations that seem disproportionate to actual market risk.
The market maker and client-facing exemptions are not automatic. Two key conditions apply: (a) the licensee must have “adequate systems” to identify which transactions are exempt; and (b) the dealing must not give (or be “reasonably capable of giving”) the licensee any capacity to influence the listed entity’s affairs. The second limb in particular may be difficult to satisfy, given any holding could, in theory, give rise to a "capacity" to so influence (separate to the question of whether such influence could in practice actually be exerted). Market participants should document their internal processes carefully and consider whether information barriers are sufficient.
The draft substantial holding notice replaces three existing forms but is significantly more detailed. It requires disclosure of holding percentages broken down into non-derivative, relatable derivative, deemed physically settleable and deemed non-physically settleable components. Each derivative position requires identification of the specific statutory provision under which the DEI arises (with standardised drop-down options). Compliance teams will need to familiarise themselves with the new form well before December 2026. A holder that does not acquire economic interests via derivatives (which we would argue constitutes the majority of holders) may face difficulties in navigating through this form the first few occasions.
The new regime does not change the existing rules around associates and aggregation – but it adds complexity. A holder must aggregate not only their own relevant interests and DEIs, but also those of their associates. For corporate groups with multiple entities entering into derivatives across different desks or jurisdictions, this requires careful coordination to ensure nothing falls through the cracks. For physically settled derivatives, the need to understand "relatable" interest positions creates a new dynamic in the relationship between the writer and taker. Submissions have been made to ASIC on this point and the associated issues, in the course of ASIC's CP 387 feedback process.
Listed entities will be required to maintain a register of relevant interests, consolidating tracing notice responses in a “readily understandable” format. This is not simply a compilation of raw responses – it must be a proper register kept in a delimited file format.
The register must be open at all times for inspection by members, academics and journalists without charge. Members of the public may also inspect the register but may be required to pay a fee to do so. Separately, any person may request to be given a copy of the register, which must generally be provided within 21 days (or within 21 days of fee payment, if applicable). Company secretaries (and registry services providers) should start planning now for how this obligation will be met.
Practical implications
For bidders and strategic investors: Derivatives will now have additional disclosure consequences (namely, potential contravention of law) that need to be considered when they design and implement stake-building strategies involving derivatives.
While the thresholds for disclosure are effectively the same as GN 20, the legal consequences for non-compliance, as well as changes to the form and detail of the disclosure required, will inevitably trigger a careful re-think to such stake-building strategies.
For banks and derivative writers: There are material operational considerations, particularly around aggregate position reporting and reconciling new requirements with client confidentiality obligations, and providing visibility over relatable interests from time to time where the client is under an obligation to disclose such interests in its substantial holding notice. The exemption conditions warrant careful review (and we suspect will involve further engagement with ASIC).
For compliance teams: Systems for daily recalculation, real-time monitoring of 1% movements, and rapid lodgement will need to be in place. The technical and resourcing demands are likely to be significant for those market participants that write or otherwise make extensive use of derivatives.
For advisers: Now is the time to update transaction playbooks and consider how the new regime will affect structures used to build pre-bid stakes, and the terms of and disclosure requirements around derivative instruments.
Looking ahead
The new regime will not eliminate the utility of equity derivatives. Particularly at the sub-5% level, they remain valuable tools in Australian public M&A. However, from 4 December 2026, the approach to disclosure and compliance will change significantly for positions exceeding 5% and market participants (especially writers) may find the challenges of the transition weigh into the cost/benefit of such an approach.
Other authors: Romany Bailey Brown, Lawyer and Lucas Ryan, Lawyer.
