Relationship between domestic obligations and foreign regulatory requirements

Stakeholders have raised concerns that Australian privacy laws (in particular the Privacy Act 1998) and confidentiality provisions in contract or under equitable banker‐client or fiduciary‐client obligations could restrict data reporting in some circumstances, including mandatory data reporting required under foreign laws.

This concern could also arise with respect to electricity derivatives, where it is proposed that no decision be taken until after review processes are completed, if active financial entities are required under foreign laws to report data relating to cross-border transactions in electricity derivatives.  Such transactions may occur in respect of the NEM or foreign electricity markets.

Status quo

Some stakeholders have reported that they are working to address these concerns by obtaining client consent and/or to seeking relief under foreign regulatory requirements (for instance, allowing masking of counterparty identities pending consent being obtained).  However, the extent of any relief necessary would depend upon the extent of any duties of confidence; for example, some contractual obligations may preclude disclosure of even anonymous data.

In the absence of any statutory override of clients’ privacy or confidentiality rights, persons subject to a foreign reporting obligation would appear to need to obtain the consent of each client (or in the case of Australian privacy law, to report data identifying individuals only in an anonymous form).  Requiring the obtaining of this consent may be difficult and costly.

In some circumstances such as data relating to former clients, it may be even more difficult, or impossible, to obtain client consent for data to be reported.

Support of foreign trade reporting requirements

The Act enables rules to be made to support compliance with foreign trade reporting requirements.  The regulations (in conjunction with the ability to prescribe non-licensed trade repositories) provide a means of tightly constraining ASIC’s derivative transaction rule making powers to facilitate such compliance.

However, it may be questioned whether the imposition of any rules overriding clients’ privacy or confidentiality rights is appropriate.

Additionally the Act only allows for mandating of future derivative transactions and so this approach could not be used to authorise or require the reporting of transaction or position data prior to the establishment of the rule making power.

If ASIC was provided with a rule making power to support compliance with foreign trade reporting requirements, it would need to assess the appropriateness of the use of this power in light of, amongst other considerations, the alternatives available to industry to achieve compliance with foreign laws.

Regulations would need to prescribe which trade repositories ASIC could require reporting to (in addition to any domestically licensed trade repositories).  It would be open for the regulations to prescribe classes of trade repository (for example  trade repositories licensed under the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act).

Resolving what trade repositories to prescribe, in circumstances where they are not licensed, could also take considerable time.  The trade repository licensing regime is flexible in allowing for the entry of foreign-based licensees with only limited regulation in Australia and in practice considerations for recognising an overseas trade repository would require examination of some, if not all, of the same matters as for licensing.

Proposed approach – Implementing domestic requirements (and, if necessary, obtaining mutual recognition)

Implementing the mandatory reporting regime for internationally active financial institutions as quickly as possible will assist to address these concerns.  However, there are necessary steps to be taken prior to the operation of mandatory trade reporting in Australia.  If the regulatory framework can be in place by mid-2013 and trade repositories can be licensed in Australia shortly thereafter, a trade reporting mandate to licensed trade repositories would be unlikely to commence until late 2013.

The Australian regime will also need to be recognised for ‘substituted compliance’ under each relevant foreign regime.  This could take further time.

Along with concerns about privacy and confidentiality laws, a number of other concerns are emerging with respect to the extra-territorial application of foreign laws, such as potentially inconsistent data fields and timing for trade reporting.  The regulators will monitor the situation closely and make regular recommendations following their market assessments.  Urgent recommendation could also be provided in between assessments in response to unexpected market developments.