On 2 February 2015, the Australian Securities and Investments Commission (“ASIC”) issued a class exemption which seeks to provide guidance to foreign entities about when they will be regarded as having “entered into” an OTC derivative in Australia for the purposes of the ASIC Derivative Transaction Rules (Reporting) 2013 (“Australian DTRs”), as such OTC derivatives must be reported by the foreign entity to a licensed repository in Australia.
The class exemption will be relevant to foreign ADIs that enter into OTC derivatives through branches located in Australia and to foreign companies that are required to be registered under the Corporations Act 2001 (Cth) but which do not book the profit or loss relating to the OTC derivatives to a branch of the entity located in Australia. The class exemption ends months of speculation and uncertainty as to how this aspect of the Australian DTRs will be interpreted by ASIC in practice and provides long awaited guidance to allow these foreign entities to develop practices and procedures to identify which OTC derivatives will need to be reported under the Australian DTRs.
In short, the class exemption provides that a foreign reporting entity will be regarded as having “entered into” an OTC derivative in Australia by reference to the location of persons performing particular sales or trading functions relating to the derivative. The relevant functions include determining the price, level, rate or other economic terms of the transaction, communicating the proposed terms to the counterparty, offering to enter into an OTC derivative, agreeing to enter into an OTC derivative and managing financial risk associated with an OTC derivative where such function is performed by a person or persons ordinarily resident/employed in Australia or who act as part of a desk, office or branch of the foreign entity located in Australia. Similar, but modified, rules apply where the OTC derivative is entered into via an automated trading facility.
The class exemption is subject to a number of conditions and requires the foreign entity to give ASIC an “opt-in” notice in order to take the benefit of the exemption contained within it. The class exemption also recognises that a foreign reporting entity does not need to comply with certain aspects of the Australian DTRs if it is complying with a substantially equivalent foreign reporting regime.
Foreign entities that conduct an OTC derivatives business in Australia should review the terms of the class exemption and consider whether they should take any action to “opt-in” before any obligation they may have to report an OTC derivative under the Australian DTRs kicks in. (for a foreign entity covered by “Phase 2”, this date is as early as 25 February 2015).”