As Australia’s regulator mulls how to divvy up responsibilities for the reporting of over-the-counter derivative transactions, market participants have warned that current proposals could be unworkable.
The main issues appear to be that some feel there is too great a reporting burden and that reporting and clearing obligations should be introduced together rather than in stages.
A one-month consultation process on proposed rules covering the reporting of derivatives transactions ends next Friday (August 29).
Like several other regulators, the Australian Securities and Investments Commission advocates third-party, or delegated, reporting of trades.
This arrangement allows fund managers to appoint a delegate – such as a bank counterparty to an OTC trade – to fulfil reporting requirements on their behalf. Asic argues that this process would reduce compliance costs for fund firms.
In an earlier consultation, conducted in March last year, Asic had proposed that responsibility for ensuring the accuracy of reported information should lie with fund managers. If that were to be the case, argued some managers, there would be little point in outsourcing that function to a delegate.
As a result, under the current proposals, that responsibility has been shifted to service providers. Delegates must take “all reasonable steps” to ensure the accuracy of the information they report, said Asic.
The regulator further proposes that asset managers would not be liable if it took enforcement action against service providers working on their behalf.
The proposed obligations on delegates are greater than many financial institutions had expected, said Davin McPherson, counsel at law firm Allen & Overy in Sydney. That may lead to firms refusing to be delegates, he added.
Some companies have been preparing to assist with reporting. “But they are not making investments or pricing the service on the basis that they would be assuming responsibility for the accuracy, timeliness and completeness of the client’s reportable information,” said McPherson.
Like Hong Kong and Singapore, Australia is working towards compliance with commitments made by G20 countries to improve the transparency and supervision of the OTC derivatives market.
They are implementing the mandatory reporting and central clearing of OTC derivatives in stages.
But some observers say industry members would be better able to implement the changes if reporting and clearing were not separated, arguing that this would result in fewer compliance deadlines.
Asset managers with interest rate and credit derivative positions with a total notional value of A$5 billion ($4.6 billion) or more will need to report derivatives transactions from April 13, 2015.
Asic had originally planned to implement the change this October, but postponed that deadline under the current consultation proposals.
Managers with positions totalling less than A$5 billion will need to start reporting from October 12, 2015.
Asic has not given a deadline for mandatory clearing.
Implementing central clearing at the same time as reporting would help hedge fund managers, for instance, better manage their compliance costs, said Daniel Liptak, chief executive of ZG Advisors, a Melbourne-based hedge fund consulting and investment firm.
If transactions were cleared and reported simultaneously, managers would not have to build separate reporting systems, or appoint administrators or brokers to help them with separate reporting and clearing requirements.