Corporations Legislation Amendment (Derivative Transactions) Bill 2012 awaiting assent

The Corporations Legislation Amendment (Derivative Transactions) Bill 2012 has passed through all its parliamentary stages and is awaiting assent. The legislation brings in measures that implement commitments made by the Australian Government and other G20 nations regarding the regulation of over-the-counter derivatives ('OTC') which comprise a very substantial global market. At end-2011 the Bank for International Settlements reported that total notional amount outstanding for OTC derivatives worldwide was $648 trillion.

The global financial crisis highlighted structural deficiencies in the OTC derivatives market and the systemic risks that those deficiencies can pose for wider financial markets and the real economy.

In many countries, these structural deficiencies contributed to the build-up of large, insufficiently risk-managed, counterparty exposures between some market participants in advance of the global financial crisis; and a lack of transparency about those exposures for market participants and regulators.

At the 2009 G20 summit, the Australian Government joined other nations in committing to substantial reforms to practices in the trading of the OTC derivatives market.

The three key G20 commitments the Government says this legislation addresses are the:

• reporting of OTC derivatives to trade repositories;

• clearing of standardised OTC derivatives through central counterparties; and

• execution of standardised OTC derivatives on exchanges or electronic trading platforms, where appropriate.

The effect of acting the commitments are according to the Government the:

•  increased transparency in the OTC derivatives market for regulators, market participants and the public; and

• a reduction in counterparty credit risks and operational risks associated with OTC derivatives.

The Bill proposes to amend various financial laws including the

• Australian Prudential Regulation Authority Act 1998,

• Australian Securities and Investments Commission Act 2001,

• the Corporations Act 2001,

• the Mutual Assistance in Business Regulation Act 1992, and the

• Reserve Bank Act 1959

to establish a legislative framework to implement the regulation of OTC derivatives reforms.

Once the Bill is assented it is intended to take effect on the 28th day after the Act receives Royal Assent. It should however be noted that while the amendments commence 28 days after assent, ASIC’s derivative transaction rule making power will not be enlivened unless and until the has Minister prescribes a derivative class in respect of one or more of the trade reporting, clearing or execution mandates.
 

In the second reading speech the minister also indicates that while trade repository licensing applications may be lodged from the date of commencement, subject to prescription or approval of the relevant form, ASIC would be unable to satisfy itself of the criteria for granting a licence until derivative trade repository rules setting out the operational requirements of a licensee are finalised.
 

Prohibitions on the other hand will apply from the date of commencement on a person holding themselves out to be a licensed or prescribed facility for the purpose of any of the three mandates, when they are not a licensed or prescribed facility. Prohibitions on operating an unlicensed trade repository will only come into effect once regulations are made providing that specified classes of trade repository must be licensed.

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