Key insights into the ASIC new derivatives transaction reporting rules

What you need to know 

• The ASIC Derivative Transaction Rules (Reporting) 2013 have been remade into the ASIC Derivative Transaction Rules (Reporting) 2022 without any changes.  This is to preserve the operation of the reporting regime until new rules commence in October 2024. 
• ASIC has made the ASIC Derivative Transaction Rules (Reporting) 2024 (the 2024 Rules), which will come into effect on 21 October 2024.  The 2024 Rules substantially amend the reporting regime in Australia with a number of key changes including to: 
  • reflect internally adopted technical standards for reporting under ISO 20022, standards for other identifiers and other data elements; 
  • remove outdated transitional provisions and consolidate exemptions within the 2024 Rules;
  • remove the safe-harbour for delegated reporting;
  • extending the reporting deadline to generally T+2 (previously T+1);
  • to require "lifecycle" reporting for all product types (previously only applied to equities derivatives, CFDs and margin FX); and
  • introduce new small-scall buy-side exemption to provide relief from certain reporting requirements.

What you need to do

• Reporting entities will need to review the 2024 Rules and assess the impact and changes required to their reporting processes that may need to be implemented.
• Consider if the small-scale buy-side entity exemptions could apply.
• Any delegated reporting arrangement should be reviewed to ensure all reportable transactions are being reported.  Reporting entities should also ensure that any delegate is able to report in accordance with the 2024 Rules.  The safe harbour is no longer available to reporting entities, and any failure of delegates to report could expose reporting entities to breaches of the reporting rules. 

Background

In line with the development of various international standards adopted across a number of jurisdiction to streamline and simplify reporting requirements, ASIC conducted a two-stage consultation process to propose changes to the Australian derivatives transaction reporting rules. Consultation Paper 334 was released in November 2020, and Consultation Paper 361 was released in May 2022, in which ASIC suggested a number of changes to align the Australian regime with international standards, and to recognise many redundant provisions in the existing rules.   

Following conclusion of the consultations, ASIC made the 2024 Rules which will commence on 21 October 2024.  In the meantime, before the 2024 Rules take effect, the ASIC Derivative Transaction Rules (Reporting) 2013 were repealed and replaced, without amendments, with the ASIC Derivative Transaction Rules (Reporting) 2022 to preserve their operation before the 2024 Rules commence. 

The purpose of the 2024 Rules is to align the Australian reporting regime with internationally adopted standards.  This will enable regulatory authorities to more readily aggregate information about internationally traded OTC derivatives and better understand the multiple cross-border connections between counterparties.  The intention of these changes is to improve data quality for Australian regulators, including more comprehensive and fit-for-purpose transaction details, and advance inter-jurisdictional data handling and aggregation.

Key changes

Given the nature of some of the changes which reflect technical standards and prescribed format for reporting, the 2024 Rules should be reviewed in detail from an operational perspective to ensure relevant data can be reported in accordance with the requirements.  

We set out below a high level overview of the key changes to the reporting regime under the 2024 Rules.

International and technical standards

The 2024 Rules are intended to reflect the harmonised international standards for legal entity identifiers (LEIs), unique transaction identifiers (UTIs), unique product identifiers (UPIs) and critical data elements (CDEs) supplemented with other important data elements.  Specifically, the 2024 Rules introduce a UTI waterfall of steps to determine which entity should generate the UTI.  It starts with market infrastructures, then steps into cases of single-jurisdiction reporting, with one or both entities reporting, and then multi-jurisdictional reporting.

The 2024 Rules also reflect internationally adopted technical standards for reporting under ISO 20022 Financial services – Universal financial messaging scheme (ISO 20022).

Removal of delegated reporting safe harbour

Presently, a reporting entity who has delegated its reporting to another party is taken to have complied with its reporting obligations if it has a documented agreement with the delegate, and if it makes "regular inquiries reasonably designed" to determine if the delegate is complying with the terms of the agreement.  

Under the 2024 Rules, this safe harbour has been removed, and ASIC has stated that it intends to provide regulatory guidance in terms of:

• ASIC's expectations in relation to a reporting entity outsourcing its transaction reporting; and
• ASIC's approach and expectations in respect of transaction reporting errors and significant breaches – in particular, by reference to the established principles of the Markets Disciplinary Panel (which considers alleged breaches of the Market Integrity Rules), which take a scaled assessment approach to the character and consequences of the conduct, compliance culture and the promptness and permanence of remediation.

Small-scale buy-side entities

ASIC has recognised the increased burden of reporting under the 2024 Rules.  The concept of "small-scale buy-side entities" has been introduced to exempt those entities from certain reporting requirements which are considered onerous (e.g. reporting on a lifecycle basis and reporting certain data elements).  

A small-scale buy-side entity means a reporting entity that is a responsible entity, trustee, a non-bank body regulated by APRA, or a corporate director of a CCIV, but which is not an Australian financial services licensee who can make a market in derivatives or an exempt foreign licensee.  To rely on the exemption, the entity must hold A$12 billion or less of total gross notional outstanding non-centrally cleared derivatives. 

Lifecycle reporting

Presently, only equities derivatives, CFDs and margin FX are subject to "lifecycle reporting" – where each reportable transaction intra-day (including each modification of an OTC derivative) is reported.  Other products are subject to "snapshot reporting", which is the reporting of an OTC derivative as at the end of the day (e.g. non-zero net transactions arising from transactions or lesser notional amount within the same day).

The 2024 Rules require all products to be reported on a lifecycle basis.  A small-scale buy-side entity is exempt from this requirement, and is able to report on a snapshot basis or lifecycle basis (except for equities derivatives which a small-scale buy-side entity must also continue to report on a lifecycle basis). 

This was introduced on the basis that it increases transparency to regulators who are able to better detect and prevent market abuse. 

T+2 reporting

Presently, the ordinary deadline for reporting is on a T+1 basis.  The 2024 Rules extend this deadline to T+2.  In addition, the deadline for reporting "structured" transactions is extended to T+4.  The extended timeframe for reporting is to accommodate the generation of a UTI. 

Reportable transactions for foreign entities

All OTC derivatives transactions by a foreign reporting entity with Australian retail clients are reportable by the foreign reporting entity under the 2024 Rules, regardless of where the transaction has been entered into or booked.  

The nexus exemption to which foreign entities can opt-in to apply a "sales and trader nexus" test (as an alternative to considering whether a transaction has been entered into in this jurisdiction) has not been included in the 2024 Rules, but remains available under the ASIC Derivative Transaction Rules (Nexus Derivatives) Class Exemption 2015.

These changes under the 2024 Rules are significant and substantial.  It is important that reporting entities review the 2024 Rules and assess the impact and changes required to their reporting processes.  Please get in touch if you would like to discuss or require any assistance. 

Authors: Jonathan Gordon, Partner and Nicky Thiyavutikan, Senior associate.