In submissions and in meetings many stakeholders have noted that there would be benefits to their business from Australia implementing a comprehensive trade reporting obligation, especially as it clarifies confidentiality restrictions that are currently in place. Implementing a reporting mandate in Australia would also assist relevant Australian market participants to seek mutual recognition or substituted compliance with regulatory requirements in other jurisdictions.
Assisting Australian businesses to meet international requirements and improve their risk management practices
The Report notes that an impediment to the larger firms reporting trades on a voluntary basis could be the duty of confidentiality that banks and other larger market participants owe to clients under Australian law and under contract. Without the express consent of clients, banks may be unable to report the details of client trades to trade repositories in the absence of a regulatory provision that would allow the banks or market participants to report data without breaching such duties. This ‘opt in’ requirement could substantially slow the uptake in trade reporting in Australia, delaying the system-wide benefits discussed previously.
The issue of confidentiality is also relevant with respect to the reporting obligations that are being implemented in other jurisdictions. Many Australian and foreign participants active in the domestic market are also active in major overseas markets. There is a strong likelihood that, depending on the counterparties involved, some transactions undertaken in the Australian OTC derivatives market will have to be reported to trade repositories in accordance with offshore reporting obligations. In this regard, the legislative framework provides legal protections to entities that report to trade repositories in accordance with a mandatory obligation imposed under Australian law. However this would require that the Minister make a Determination mandating a derivative. ASIC rule making or regulations could limit the effect of the mandate to those seeking compliance with international regimes.
Cost of reporting
Concerns have been raised about the burden of reporting, especially where international standards are not settled. For instance the Australian Financial Markets Association (AFMA) submitted earlier this year:
While industry understands and accepts the importance of trade reporting and the need to take on the responsibility for catalysing this, it will require a major commitment of time, resources and money to achieve. There is a broad universe of derivatives data on which the authorities here and overseas want to capture through trade reporting. Combined with the nascent state of development for trade repositories, or complete lack of existing infrastructure for many classes of asset, it would not be practicable to prescribe at this time a broad range of derivatives classes to be subject to the mandate for trade reporting.1
The energy sector in particular has raised concerns about the costs of trade reporting of electricity derivatives. For instance the Energy Supply Association of Australia (ESAA) submitted earlier this year:
Even the lightest approach suggested in the consultation paper – reporting all OTC derivatives to trade repositories – could result in a substantial cost to the industry for little benefit. While standardised contracts are relatively easy to report, OTC contracts are more flexible and can be more complex. Treasury should not underestimate the difficulties associated with the design and implementation of the systems necessary to monitor and analyse all OTC market transactions between participants…
The compliance cost will be significant and will ultimately need to be borne by the consumer.2
The Report noted that provision of data to a trade repository requires that a market participant either has some direct connectivity to the trade repository, or can use an agent or other intermediary arrangement to transmit and access necessary information. Once a connection is made, it is likely that the ongoing marginal cost of utilising this connection will be low.
However, there may be some costs associated with establishing systems that can efficiently capture the necessary information and transmit this to and from trade repositories. A market participant’s unit cost of reporting trades is therefore likely to be a function of its overall scale and level of activity. To address this concern some global trade repositories have offered flexible reporting methods, for example the Depository Trust & Clearing Corporation (DTCC) offers web-based uploads in the comma-separated values (CSV) format, which is supported by almost all spreadsheets and database management systems.
Globally, trade repositories exist for interest rate, FX, credit, equity and commodity derivatives, with trade repositories currently in operation across a number of jurisdictions including Brazil, the EU, India, Korea and the US. The preferred business model of many of these trade repositories would appear to be to broaden the product classes for reporting and the markets in which they operate, while remaining physically located in just one jurisdiction.
It is likely that a number of trade repositories will apply for Australian trade repository licences in the next calendar year.
For most OTC derivatives product classes, the vast bulk of transactions will typically involve at least one counterparty from the group of larger market participants. These larger firms may therefore be well positioned, operationally, to act as agents for counterparties in using trade repositories.
1. Do you have comments on the costs and benefits of complying with the trade reporting obligation, as outlined above, from the point of view of your business and/or that of your customers?
- Implementation of a Framework for Australia’s G-20 Over-the-Counter Derivatives Commitments, Australian Financial Markets Association, June 2012
- Implementation of a framework for Australia’s G-20 over-the-counter derivatives commitments, Energy Supply Association of Australia, June 2012