Final Regulations for single-sided reporting

What you need to know

• The final Regulations on single-sided reporting have some notable differences to the original proposals which were previously released for public consultation.
• A foreign counterparty need not be a "Reporting Entity" under the Australian reporting regime for the single-sided reporting exemption to be available in respect of a transaction with that foreign counterparty, provided certain conditions are met (eg, tagging).
• The Regulations include a safe harbour for the entity relying on the single-sided reporting exemption from the risk that the Reporting Counterparty fails to report the required information, provided that regular and reasonable enquiries have been made.

What you need to do

• Consider the extent to which you may be able to take advantage of the single-sided relief and put in place procedures to ensure that you have the benefit of the safe harbour provisions.
• Liaise with your OTC derivatives counterparties to ensure there is a clear allocation and understanding of each party's responsibilities and expectations around trade reporting.

On 8 September 2015, the Corporations Amendment (Central Clearing and Single-Sided Reporting) Regulations 2015 (Regulations) were registered to implement the mandatory clearing regime in Australia.

The Regulations also implement a single-sided reporting exemption (Exemption), which is an exemption for certain Phase 3 reporting entities from trade reporting obligations under the ASIC Derivatives Transaction Rules (Reporting) 2013 (DTR).

The Regulations follow a public consultation process (see our briefing from June on that consultation package). A number of changes have been made to the Regulations from the consultation draft form to address a number of issues raised through the consultation process, particularly on the single-sided reporting aspects. This is the focus of this briefing.

Transactions covered by the Exemption

A notable change in the final form Regulations is the extension of the Exemption to situations where the reporting counterparty (Reporting Counterparty) may not even be a Reporting Entity under the DTR.

The Exemption is subject to certain conditions designed to ensure that ASIC is still able to have access to the reported information. The conditions differ depending on the nature of the Reporting Counterparty, although there is a common theme running through each of the different scenarios, which require the entity relying on the exemption (Exempt Entity) to obtain certain representations from the Reporting Counterparty, and make due diligence enquiries to validate those representations.

The Regulations are silent as to the form that the representation from the Reporting Counterparty should take, but we would expect that the representation could be included in an effective written communication between counterparties, or in the trade confirmation.

Safe harbour

The conditions of the Exemption are designed to ensure that that the Exempt Entity can rely on a safe harbour from the risk that the Reporting Counterparty may for some reason fail to report the required information. The safe harbour is only available where the Exempt Entity has undertaken reasonable due diligence to check that the Reporting Counterparty is complying with its obligations.

The relevant standard specified in the Regulation is to "make regular enquiries reasonably designed to determine whether" the representations are true or being met. What is reasonable will be determined by consideration of a number of circumstances relating to Exempt Entity, the Reporting Counterparty, and the level of their OTC derivatives activities.

The frequency of the enquiries will also depend on the number of transactions the Exempt Entity enters into. The nature of the enquiry will likely consist of obtaining details of reported trades or positions, and comparing them with the Exempt Entity's own records to verify that all the required information is being reported.

Exempt Entities should implement a framework to ensure that the required level of enquiries are made to rely on the exemption.

Thresholds to rely on the Exemption

The general approach to Phase 3 Reporting Entities that can rely on the Exemption has not changed from the draft proposals – ie, an entity must remain below the $5 billion threshold for two consecutive quarters in order to gain the benefit of the exemption, but also has to remain above the threshold for two consecutive quarters in order to lose the exemption.