House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Chapter 1 Summary of the Corporations Legislation Amendment (Derivative Transactions) Bill 2012

Outline of chapter

1.1 The Bill amends 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 provide a legislative framework to implement Australia's G-20 commitments in relation to over the counter (OTC) derivatives reforms.

1.2 Each amendment will commence on a date determined in accordance with the table in item 2 of the Bill.

Context of amendments

The Australian Government's G-20 commitment

1.3 At the G-20 summit in Pittsburgh in 2009, the Australian Government joined other jurisdictions in committing to substantial reforms to practices in over-the-counter (OTC) derivatives markets.

1.4 Three of the key G-20 commitments in this area were:

•

the reporting of all OTC derivatives to trade repositories;

•

the clearing of all standardised OTC derivatives through central counterparties; and

•

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

1.5 The reforms aim to bring transparency to OTC derivative markets and improve risk management practices.

1.6 In particular, trade reporting will increase transparency in the market. It will also give regulators and market participants access to valuable data with which to assess the risks associated with the OTC market.

1.7 Clearing of standardised OTC derivatives will reduce counterparty risk associated with OTC derivative transactions.

Consultation

1.8 Earlier this year the Australian Government consulted on the contents of the regulations to be made under the framework, and on the classes of derivatives that might be prescribed as being subject to the framework. Comments were also sought on the proposed legislative framework and licensing arrangements for trade repositories.

1.9 Treasury, in conjunction with the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investment Commission (ASIC) and the Reserve Bank of Australia (RBA) (hereafter the Agencies) conducted 43 face-to-face meetings with stakeholders and received 37 submissions to the consultation paper.

1.10 Stakeholders were generally supportive of the proposed legislative framework for the implementation of the G-20 OTC derivatives reforms. A wide range of stakeholders understood the need and supported the flexible approach taken by the Australian Government in implementing the reforms.

1.11 A number of stakeholders favoured mandating central clearing rather than relying on market forces to ensure central clearing of OTC derivativesoccurs in a timely manner.

1.12 Some stakeholders argued that their use of derivatives was primarily for the hedging of business risk and questioned the systemic importance of their derivatives trading activities.

1.13 The legislative framework will provide the flexibility for consideration of the matters raised before any future decision to mandate reporting, central clearing or on-exchange trading in respect of particular derivatives classes, transactions or parties.

1.14 The Council of Financial Regulators (the Council) had earlier been considering the implementation of reforms for the Australian OTC derivatives market for some time. In 2009 the Council published a survey of the domestic OTC derivatives market, ^[1] and in June 2011 the Council released a discussion paper on central clearing as the basis for detailed consultation with interested stakeholders. ^[2]

1.15 Following that consultation, the Council provided a report to the Government on 20 March 2012, setting out advice and recommendations on implementing reforms in the Australian market. This report was released for comment as part of the consultation earlier this year.

1.16 A draft version of the amendments to the Corporations Act was consulted on during July and August of 2012. There was general support for the draft with a number of stakeholders calling for the Bill to be implemented as a matter of urgency, noting that in their view, the Bill will help to ensure Australia's compliance with international agreements and overseas requirements that impact across borders.

International developments

1.17 At an international level, in June 2012, the Financial Stability Board (FSB) published its third report on jurisdictions' progress towards meeting G-20 commitments regarding OTC derivatives. ^[3]

1.18 The report called on all jurisdictions to aggressively push ahead to achieve full implementation of market changes by the end of 2012 to meet the G-20 commitments in as many reform areas as possible.

1.19 The report noted that all jurisdictions should put legislation and regulations in place promptly, and in a form flexible enough to respond to cross-border consistency and other issues that may arise.

1.20 As of August 2012, the United States Commodities and Futures Trading Commission has recently published proposed guidance on the extra-territorial application of their implementations of the G20 commitments and their expectations of other jurisdictions, such as Australia.

1.21 The proposed guidance highlights the need for Australia to act quickly to ensure that Australian businesses and investors are able to demonstrate that they are subject to an equivalent regulatory regime and so be able to continue to participate in the major derivatives markets of the world while still being primarily regulated in Australia.

1.22 However, the guidance has also highlighted areas of inconsistency and further potential change so it is important for the Australian regime to remain flexible to ensure that future developments can be accommodated.

Summary of new law

1.23 This Bill provides for the implementation of graduated measures to respond proportionally in managing risks in Australian OTC derivatives markets. In outline, the framework will operate as follows:

•

The responsible Minister will be empowered by the Corporations Act 2001 (the Act) to prescribe a certain class of derivatives (in relation to a mandatory obligation).

•

A derivatives transaction rule (DTR) may in turn be issued by ASIC to establish one or more mandatory obligations (reporting, clearing or execution) for participants transacting in this prescribed class of derivatives.

•

Any rule must be consented to by the Minister before taking effect. The scope of rules and other technical features of the scheme may be further limited by Regulation.

•

A new licensing regime will be introduced for a new kind of financial infrastructure entity? trade repositories.

1.24 The establishment of the framework will not in itself introduce any trade reporting, central clearing or trade execution obligations for OTC derivatives transactions. Rather, the framework creates a mechanism by which such obligations may be implemented by supporting regulations and rules.

1.25 ASIC's decisions to prescribe or make rules for a class of derivatives will be subject to public consultation, which will provide opportunities for input from other agencies. Rules will require the consent of the Minister and will be disallowable legislative instruments. The Bill also contains a regulation-making power to narrow the scope of the mandatory obligations (including the parties who will be required to comply with the obligations under the DTRs). These regulations will provide a means of limiting the classes of persons and transactions to which the rules can be applied. That is, the regulations may provide carve outs and exceptionsfor any potential trade reporting, clearing or execution mandates.

1.26 It is expected that the Minister will make such regulations at the same time as prescribing a class of derivatives as being subject to ASIC's trade reporting, clearing or execution rule-making power.

1.27 Under the rule-making power, ASIC will also be able to specify cases in which certain persons or certain transactions would not be required to report, clear or execute trades in accordance with the DTRs. That is, within the limitations of the rule making power, ASIC may provide for additional carve outs and exceptions.

1.28 While some stakeholders have suggested that some carve outs and exceptions should be hardwired into the primary legislation, the Bill reflects the need to maintain flexibility, particularly in order to adapt our requirements to international developments, to be able to tailor the nature of any carve outs to the requirements for any particular derivative classes and the need to adapt to changing market practices and concerns (including but not limited to avoidance activities). Carve outs and exceptions can be provided under regulations and rules, if it is considered appropriate to do so. Internationally there are a range of carve outs and exceptions that are becoming generally accepted (in adopted G-20 related legislation and in various G-20 related reform proposals) as necessary and appropriate.

1.29 As there is no existing regulation of trade repositories in Australia, trade reporting DTRs will be complemented by a licensing regime for trade repositories. There are no operators of trade repositories (as the term is contemplated by the G-20 commitments)in Australia; therefore no existing operators will be affected. Clearing facilities and trading platforms are already subject to separate licensing regimes.

1.30 The trade repository licensing regime is modelled on the current licensing regimes for Australian market licence holders (AMLs, Part 7.2 of the Act) and Australian clearing and settlement facility licence holders (CSFLs, Part 7.3 of the Act). It has a similar structure to Part 7.2 and Part 7.3, however, no separate overseas licensing regime is necessary as the requirements for licensing will be limited to what would be appropriate for either a domestic or overseas based trade repository.

1.31 The licensing regime will be established at a high level in the amended Act, with regulations and conditions on licences filling in detail (as is the case with the AML and CSFL regimes). ASIC will be given powers to make rules governing the operation of a trade repository in addition to issuing and imposing conditions on individual TR licensees. Similar checks and balances exist in relation to this rule making power to those in relation to the derivative transaction rules set out above.

1.32 It is important that the regime established for licensing and supervising any domestic facility is sufficiently equivalent to the regimes in place in major overseas jurisdictions such as the European Union and the United States of America to facilitate mutual recognition and therefore Australian facilities' access to intermediaries located in those jurisdictions.

1.33 Where the DTRs oblige a person to utilise the services of a trade repository, clearing facility or trading platform, the rules can impose a duty upon the relevant facility to provide non-discriminatory access. Such a requirement is important, given that there may be only one facility offering services for a given derivative class. ASIC will also have power to make additional rules to determine the obligations of trade repositories, clearing facilities or trading platforms in relation to any requirements imposed upon parties to transactions.

1.34 The Bill provides for the protection of trade data through imposing restrictions on the use and disclosure of reported data. The derivative trade repository rules may also impose requirements in relation to the integrity and security of a trade repository's systems.

1.35 ASIC will be given the function of supervising trade repositories, however, it will be able to perform this function in respect of overseas TR licensees by satisfying itself that the home regulator has adequate regulations in place or that adequate arrangements are in place with the home regulator.

1.36 Licensing and associated powers will be exercised by ASIC, although, as with AMLs and CSFLs, the Minister will have a directions power operating in parallel to ASIC's directions power.

1.37 The Bill also provides for consequential amendments to related legislation. These changes will:

•

allow for other legislation that contemplates licensed markets and clearing and settlement facilities to also deal with trade repositories, where appropriate; and

•

clarify the legislative framework under which ASIC, the Reserve Bank and APRA can receive and share information received from trade repositories.

Comparison of key features of new law and current law

Detailed explanation of new law

Item 1 Short Title

1.38 This item provides that the Act may be cited as the Corporations Legislation Amendment (Derivative Transactions) Act 2012 .

Item 2 Commencement

1.39 This item provides that the amendments effected by the Act, as set out in Schedule 1, will take effect 28 days after the Act receives Royal Assent.

1.40 While the amendments commence at this time, ASIC's derivative transaction rule making power will not be enlivened unless and until the Minister prescribes a derivative class in respect of one or more of the trade reporting, clearing or execution mandates. [ Schedule 1, item 32, Division 2 of Part 7.5A - Regulation of derivative transactions : derivative transaction rules ]

1.41 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 satisfying itself of the criteria for registration (and therefore be unable to grant a licence) until derivative trade repository rules (which set out the operational requirements of a licensee) are finalised. [ Schedule 1, item 32, Division 6 of Part 7.5A - Regulation of licensed derivative trade repositories : licensing ]

1.42 Prohibitions on operating an unlicensed trade repository will only arise once regulations are made providing that specified classes of trade repository must be licensed. [ Schedule 1, item 32, Section 905A ]

1.43 Prohibitions 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) will apply from the date of commencement. [ Schedule 1, item 32, Section 907A ]

Item 3 Schedule

1.44 This item provides that the Acts specified in Schedule 1 are amended as set out in that Schedule.

Schedule 1 - Amendments relating to derivatives transactions

Part 1 - Amendments to the Corporations Act

Corporations Act 2001

1.45 Items 1 to 3 amend section 9 of the Corporations Act.

1.46 It is clarified that Australian derivative trade repository licence, derivative trade repository rulesand derivative transaction rules , when used in a provision outside Chapter 7, have the same meaning as in Chapter 7. [ Schedule 1, items 1, 2 and 3, section 9 ]

1.47 These new terms are defined in section 761A.

Item 4

1.48 A reference to the new Part 7.5A is inserted into the outline of Chapter 7. [ Schedule 1, item 4, section 760B ]

1.49 The Bill will introduce a new Part 7.5A ?Regulation of derivative transactions and derivative trade repositories.

Item 5 to 17

1.50 Items 5 to 17 amend section 761A of the Corporations Act. This section sets out a number of definitions used throughout Chapter 7.

1.51 An Australian derivative trade repository licence is defined as a licence referred to in the new section 905B, which authorises a body corporate to operate a derivative trade repository. [ Schedule 1, item 5, section 761A ]

1.52 The Bill creates definitions of execution, clearing and reporting requirements. Clearing requirements in relation to derivative transactions are defined as requirements for derivative transactions to be cleared through specified facilities or a specified class of facilities. [ Schedule 1, item 6, section 761A ]. The other requirements are explained further below, in the order in which they appear in the Bill.

1.53 Derivative trade data is defined as information about derivative transactions or positions relating to derivative transactions, or information including statistical data that is created or derived from information about derivative transactions or positions. [ Schedule 1, item 7, section 761A ]

1.54 The inclusion of created or derived statistical data within the meaning of this term should be noted. Provisions in the Bill that govern derivative trade data (such as privacy and confidentiality provisions) must therefore be read as also extending to such statistical data.

1.55 It should also be noted that the definition also applies to a snapshot of position data in addition to transaction specific data, andalso affects the meaning of provisions dealing with derivative trade data throughout the Bill.

1.56 A derivative trade repository is defined as a facility to which information about derivative transactions or derivative positions can be reported[ Schedule 1, item 8, section 761A ]. A facility may still be a derivative trade repository even if other kinds of data are reported to it.

1.57 The term is very widely defined and may potentially apply to a wide range of facilities. This provision is kept broad to ensure that there is flexibility for ASIC to coordinate its approach with other jurisdictions and to accommodate future market innovations.

1.58 A facility will not be subject to the provisions of the new Part 7.5A unless there is a prescription that the Part applies to a class of trade repositories that includes the facility. In addition, a facility will not be subject to regulation as a trade repository under the new Part 7.5A unless it applies for and obtains a licence (and therefore must conform to the other requirements for trade repositories set out in the Act, regulations and rules); it is of a class prescribed by regulation as a prescribed trade repository; or it is prescribed by regulations as a class of trade repository that must be licensed. Any prescribing regulations will more specifically define the types of facility to which they will apply. A derivative trade repository per se is not required to be licensed.

1.59 A person may not comply with a trade reporting rule by reporting to a trade repository unless it is prescribed or licensed.

1.60 A derivative trade repository licensee is defined as a person who holds an Australian derivative trade repository licence. [ Schedule 1, item 9, section 761A ]

1.61 The trade repository licensing regime is set out at Division 6 of Part 7.5A.

1.62 There will be two types of rules that may be made pursuant to the new Part 7.5A: derivative trade repository rules and derivative transaction rules.

1.63 Derivative trade repository rules are defined as rules governing the conduct of derivative trade repositories, which are made by ASIC as authorised by subsection 903A(1). [ Schedule 1, item 10, section 761A ]. The provisions that set out the process by which these rules may be made, varied or revoked are set out at Division 4, Subdivision C of Part 7.5A. Enforcement mechanisms are set out at Division 4, Subdivision B of Part 7.5A.

1.64 A definition of derivative transaction is given. It covers entry into a derivative arrangement, modification, assignment or termination of such an arrangement. The definition also allows for other types of transaction to be included through regulations. This flexibility is required to ensure that the Act can potentially apply to transactions dealt with in the laws of other jurisdictions - to enable rules that facilitate compliance with foreign laws and mutual recognition under foreign laws of compliance with our requirements. [ Schedule 1, item 11, section 761A ]

1.65 The scope of ASIC's derivative transaction rule-making powerislimited in part by boththis definition and the definitions of clearing requirements, execution requirements and reporting requirements.

1.66 When made, the trade reporting, clearing or execution rules will provide specific detail on various requirements and to which transactions these requirements will apply.

1.67 Derivative transaction rules are defined as rules governing derivative transactions, which subsection 901A(1) authorises ASIC to make. [ Schedule 1, item 12, section 761A ]. The provisions that set out the process by which these rules may be made, varied or revoked, are set out at Division 1, Subdivision C of Part 7.5A. Enforcement mechanisms are set out at Division 1, Subdivision B of Part 7.5A.

1.68 Execution requirements in relation to derivative transactions are defined as requirements to execute derivative transactions on specified trading platforms or a specified class of platforms. [ Schedule 1, item 13, section 761A ]

1.69 Involved in a derivative trade repository licensee or applicant means acting as a director, secretary or senior manager of the licensee or applicant, or a holding company, or holding more than 15 per cent of the voting power in a licensee, applicant or holding company [ Schedule 1, item 14, section 761A ]. This is the same definition of involvement as that which applies to market licensees and CS facility licensees. This term is utilised in the new section 903A, which obliges a licensed trade repository to take all reasonable steps to ensure that no disqualified individual becomes, or remains, involved in the operator; and a corresponding requirement in the new section 904D for ASIC when granting a licence to form the view that no disqualified individual appears to be involved in the applicant.

1.70 The new Part 7.5A provides that trade reporting mandates may require reporting to a licensed or prescribed trade repository. The former will be subject to the licensing regime, including derivative trade repository rules and the information use and restriction obligations in Divisions 3, 4, 5 and 6 of Part 7.5A. The latter is subject to the regulation making power in the proposed new 906A.

1.71 A licensed derivative trade repository is defined as a derivative trade repository that is authorised by an Australian derivative trade repository licence. [ Schedule 1, item 15, section 761A ]

1.72 A prescribed derivative trade repository is defined as a facility prescribed by the regulations as the facility to which a class of derivative transactions are to be reported, or that belongs to the class of facilities that is prescribed by the regulations for this purpose. While normally trade reporting obligations can only be satisfied by reporting to a licensed repository, the Bill provided the potential for obligations to be satisfied by reporting to non-licensedbut prescribed facilities. Section 906A provides the mechanism for the creation of regulations to govern their operation. It is expected that prescription (rather than licensing) will be used in very limited circumstances. For example, a government agency may be prescribed for certain reporting obligations; or trade repositories licensed under foreign regimes may be prescribed for the purpose of rules directed at facilitating compliance with foreign trade reporting obligations. [ Schedule 1, item 16, section 761A ]

1.73 Reporting requirements in relation to derivative transactions are defined as requirements to report derivative transactions to specified facilities, or a specified class of facilities. [ Schedule 1, item 17, section 761A ]

Item 18

1.74 While it is unlikely that this would be the case, the Bill includes a derivative trade repository in the list of explicit exceptions from the definition of a financial product. Exceptions are already provided for a facility that operates a financial market, clearing and settlement facility or a payment system operated as part of a clearing and settlement facility. [ Schedule 1, item 18, subparagraph 765A(1 )( l )( iv )]

Items 19 to 23

1.75 Section 793B is amended to provide that, in the event of any inconsistency between the derivative transaction rules or derivative trade repository rules and the operating rules of a financial market, the derivative transaction rules or derivative trade repository rules prevail to the extent of the inconsistency. [ Schedule 1, item 19, subsection 793B(2 )]

1.76 Section 798H is amended to provide that, if derivative transaction rules or derivative trade repository rules and market integrity rules are inconsistent, the market integrity rules prevail. [ Schedule 1, item 20, subsection 798H(3 )]

1.77 Section 822B is amended to provide that, in the event of any inconsistency between the derivative transaction rules or derivative trade repository rules and the operating rules of a CS facility, the derivative transaction rules or derivative trade repository rules prevail to the extent of the inconsistency. [ Schedule 1, items 21 and 22, subsection 822B(2 )]

1.78 Section 827D is amended to provide that, in the event of any inconsistency between the derivative transaction rules and the Reserve Bank of Australia's (RBA) financial stability standards, the financial stability standards will prevail to the extent of the inconsistency. [ Schedule 1, item 23, subsection 827D(2A )]

1.79 Elsewhere, the new section 901E provides that, in the event of any inconsistency between the derivative transaction rules and the derivative trade repository rules, the derivative transaction rules prevail to the extent of the inconsistency. [ Schedule 1, Item 32, subsection 901E(2 )]

Items 24 to 31

1.80 Division 2 of Part 7.4 provides a regime for the disqualification of certain persons from being involved in the operation of an Australian Market Licence (AML) holder or a Clearing and Settlement Facility Licence (CSFL) holder. The Bill amends this regime to apply also to trade repository licence holders.

1.81 An individual may be disqualified from involvement in an Australian derivative trade repository licensee or applicant if ASIC makes a declaration that the individual is unfit, or if they are disqualified from involvement in a corporation. An individual is involved in a licensee or applicant if that individual is a director, secretary or senior manager of the licensee or applicant, or if the individual has more than 15 per cent of the voting power in the licensee or applicant. [ Schedule 1, item 24 section 953B, Schedule 1, item 25 subsection 853C(1) and Schedule 1, item 26, subsection 853C(1 )]

1.82 When ASIC makes a declaration, it must follow a prescribed procedure, which is the same as that for disqualifying an individual from involvement in anAML or CSFL. If ASIC intends to make a declaration that an individual is disqualified from involvement in a derivative trade repository licensee, ASIC must notify that licensee or applicant within 42 days after receiving either an application for a derivative trade repository licence, or information relevant to the disqualification. Notice must also be given to the individual and the Minister, and must state the grounds on which ASIC proposes to make the declaration. ASIC must then conduct a hearing before deciding whether to make the declaration. [ Schedule 1, item 27 paragraphs 853D(2 )( a) and (b )]

1.83 Disqualified individuals must not become involved in a derivative trade repository licensee, and if already involved, must take reasonable steps to cease to be involved in the licensee. [ Schedule 1, item 28, subsection 853F(1) and Schedule 1, item 29, subsection 853F(2 )]

1.84 If ASIC becomes aware of a disqualified individual who is involved in a derivative trade repository licensee, it must notify the individual, the licensee and the Minister as soon as possible. [ Schedule 1, item 30, section 853G ]

1.85 These provisions operate in parallel to any derivative trade repository rules that ASIC may make. These rules may impose requirements in relation to the governance of a trade repository ( see paragraph 903A(2 )( c )) and are not limited only to dealing with conflicts of interest issues.

1.86 The rules may bind licensees and their officers. In contrast, the amended Division 2 imposed obligations upon disqualified individuals (who may be directors, secretaries or senior managers) not to maintain any involvement with a licensee; and the new section 903A obliges a licensed trade repository to take all reasonable steps to ensure that no disqualified individual becomes, or remains, involved in the operator. The definition of involved in is referred to above.

1.87 Regulations under the new section 906A may impose obligations, confer powers and provide for offences in relation to a wide range of matters in relation to prescribed trade repositories. These may include regulations dealing with the disqualification of persons involved with a prescribed repository.

1.88 The regulations may require a person to keep and maintain records that will assist in determining whether any disqualified individual is involved in a derivative trade repository licensee. [ Schedule 1, item 31, paragraph 854A(1 )( b )]

1.89 In the event of any inconsistency between the Act and the regulations or rules, the Act will prevail in accordance with general principles of statutory interpretation.

Item 32

1.90 Item 32 inserts into the Corporations Act the new Part 7.5A - Regulation of derivative transactions and derivative trade repositories.

Part 7.5A, Division 1 - Application of Part

1.91 The new section 900A states that Part 7.5A applies to derivatives, derivative transactions, facilities, persons, bodies and other matters located in Australia or outside Australia, unless otherwise stated. This provision states that it does not affect the interpretation of provisions which do not relate to Part 7.5A. That is, this express statement of the Part's application should not be read as implying that existing parts of the Act that are silent on this issue do not have such a broad application. [ Schedule 1, item 32, section 900A ]

1.92 The broad territorial reach of the provision is required to ensure that ASIC is able to coordinate its rule-making with foreign jurisdictions to aid in consistency of regulatory approaches and to assist in ensuring that international capital markets remain open to cross-border participation.

1.93 The definition seeks to address any potential loss of referred State legislative power upon which the Part relies, by providing that the Part does not purport to apply to non-referring States.

Part 7.5A, Division 2 - Regulation of derivative transactions: derivative transaction rules

Subdivision A - Power to make derivative transaction rules

1.94 Once the Minister has made a determination regarding a particular class of derivatives, ASIC may make rules ( derivative transaction rules ) dealing with execution requirements, reporting requirements or clearing requirements. Derivative transactionrules are legislative instruments and are subject to disallowance by Parliament. [ Schedule 1, item 32, section 901A ]

1.95 Derivative transaction rules may also specify the classes of transactions that are subject to particular rules, the persons who are subject to rules, the manner in which persons must comply with requirements imposed by the rules, how persons may be exempted from complying with the rules, keeping of records, and other matters. [ Schedule 1, item 32, subsection 901A(3 )]

1.96 Derivative transaction rules are not limited in their application to the parties to a transaction. For example, a person involved in arranging a transaction may be made subject to a rule.

1.97 The rules would be expected to contain precise detail specifying who in relation to a given transaction must (or may) comply with a requirement.

1.98 While the modification and exemption powers in the new sections 907D and 907E are also sufficiently broad to apply to the rules (in addition to the Act and any regulations), the rules may also specify the circumstances in which a person may be exempted from complying with the rules (obviating the need to rely on these powers, except in unexpected circumstances).

1.99 The rules may require persons to keep records in relation to their compliance with the rules. It would be expected that any regulation limiting the persons or transactions that may be subject to ASIC's rule making power in relation to a prescribed derivative class would not limit ASIC's power to make rules that impose record keeping requirements in relation to whether the limits have been met or not.

1.100 Rules may also deal with matters that are incidental to execution requirements, reporting requirements or clearing requirements. For example, they may impose obligations upon licensed or prescribed trade repositories to facilitate compliance with trade reporting obligations. The given example of a rule in the section could also be imposed under the derivative trade repository rules in relation to a licensed repository. A regulation to the same effect could also be made in relation to a prescribed trade repository. [ Schedule 1, item 32, section 901A ]

1.101 Derivative transaction rules may specify a penalty amount, which must not exceed 1000 penalty units. The same penalty shall apply to bodies corporate and individuals. The penalties are imposed by way of the civil penalty regime set out at section 1317E of the Corporations Act [ Schedule 1, item 32, subsection 901A(4 )]

1.102 Rules concerning execution requirements may specify a particular facility (or class of facilities) on which a particular class of derivative transactions must be executed. [ Schedule 1, item 32, paragraph 901A(3 )( b )]

1.103 Rules concerning reporting requirements may specify the regulated derivate trade repository (or class of repository) to which information must be reported, and specify the information that must be reported. [ Schedule 1, item 32, paragraph 901A(3 )( b )]

1.104 Rules concerning clearing requirements may specify the CS facility (or class of facilities) through which transactions in a particular class must be cleared, and the time in which transactions must be cleared [ Schedule 1, item 32, paragraph 901A(3 )( b )]

1.105 The rules may require trade reporting, clearing and execution to or on prescribed facilities (in addition to licensed facilities). The ability to prescribe facilities will provide flexibility to: (a) enable non-licensed domestic facilities to be utilised, such as to enable trade reporting in respect of certain classes of derivatives to a non-licensed government body such as a regulator; and (b) to enable rules to be made to support compliance with foreign trade reporting, clearing or execution laws (where such laws involve non-domestically licensed facilities). [ Schedule 1, item 32, subsections 901A(5) to (7 )]

1.106 The derivative transaction rules do not impose requirements retrospectively. They are limited in the obligations they can impose prospectively in relation to transactions entered into prior to their creation. The derivative transaction rules:

a)

cannot impose an execution requirement on a person in relation to a transaction entered into before the requirement started to apply to the person; and

b)

cannot impose a reporting requirement on a person in relation to a transaction entered into before the requirement started to apply to the person, or in relation to a position as it was at a time before the requirement started to apply to the person; and

c)

cannot impose a clearing requirement on a person in relation to a transaction entered into before the requirement started to apply to the person, unless the transaction has not been cleared by the time the requirement starts to apply to the person. [ Schedule 1, item 32, subsection 901A(8 )]

1.107 The Minister may determine the classes of derivatives to ASIC may impose requirements. Determinations are legislative instruments and are therefore subject to review by Parliament and, potentially, disallowance. Classes of derivatives may be defined with reference to any matter, including the underlying asset, or the time when the derivatives were issued. In making determinations, the Minister must consider certain matters (such as the impact on the stability, integrity and efficiency of the Australian financial markets) and consult certain bodies (such as APRA, ASIC and RBA). The Minister may amend or revoke a determination. [ Schedule 1, item 32, section 901B ]

1.108 These decisions are not reviewable by the Administrative Appeals Tribunal but are reviewable under the Administrative Decisions (Judicial Review) Act 1977 . [ Schedule 1, item 37, section 1317C ]

1.109 Regulations may limit the requirements which can be imposed on certain classes of derivative transactions. Regulations may also provide that requirements may only be imposed on certain classes of derivative transactions in certain circumstances. [ Schedule 1, item 32, section 901C ]

1.110 Regulations may limit the requirements which can be imposed on certain classes of persons. Regulations may also provide that requirements may only be imposed on certain classes of persons in certain circumstances. [ Schedule 1, item 32, section 901D ]

1.111 These regulations will provide the primary mechanism by which certain persons and transactions are carved out of the potential reach of the derivative transaction rules. For example, they may specify thresholds of activity that must be met before a person might become subject to one or other requirements. Likewise, they may provide that certain transactions for certain purposes cannot be made subject to a certain requirement.

1.112 The regulations (in conjunction with the ability to prescribe non-licensed trade repositories) will provide the means by which the regulator may be given tightly constrained derivative transaction rule making powers to facilitate compliance with foreign trade reporting, clearing or execution requirements.

Subdivision B - Compliance with derivative transaction rules

1.113 Failure to comply with the relevant provisions of the derivative transaction rules is subject to the Corporations Act civil penalty regime. [ Schedule 1, item 32, section 901E ]. The rules themselves will set out the maximum penalty amount that may be imposed for a breach of a provision (up to 1,000 penalty units). [ Schedule 1, item 32, subsection 901A(4 )]

1.114 In the event of any inconsistency between the derivative transaction rules and the derivative trade repository rules, the derivative transaction rules prevail to the extent of the inconsistency. [ Schedule 1, Item 32, subsection 901E(2 )]

1.115 The regulations may allow for alternatives to civil penalty proceedings for a person who is alleged to have breached the derivative transaction rules. The section imposes limits on the alternatives which may be allowed by the regulations. The potential alternatives that may be provided for are limited to: processes forpaying a penalty to the Commonwealth (limited to one-fifth the penalty amount specified in the rules]; undertaking or instituting remedial measures (including education programs); accepting sanctions other than the payment of a penalty to the Commonwealth; or entering into a legally enforceable undertaking. This provision largely mirrors the existing section 798K which applies to enforcement of market integrity rules. [ Schedule 1, item 32, section 901F ]

1.116 For the sake of certainty for persons entering into derivatives transactions, the Bill provides that failure to comply with derivative transaction rules does not invalidate a transaction. [ Schedule 1, item 32, section 901G ]

Subdivision C - The process of making of derivative transaction rules

1.117 The method by which derivative transaction rules are made is similar to the manner in which market integrity rules are currently made.

1.118 In deciding whether to make a rule, ASIC must have regard to certain matters, including the likely effect of the proposed rule on the economy and the financial system and the likely regulatory impact of the proposed rule. It is expected that ASIC would comply with the requirement to have regard to the likely regulatory impact of a proposed rule by conducting a regulatory impact assessment. It may have regard to other relevant matters, such as any relevant international standards, and matters raised in consultation, if consultation occurred. [ Schedule 1, item 32, section 901H ]

1.119 The amendments will require ASIC toconsult with the publicprior to making a derivative transaction rule. It must also consult with APRA, the RBA, and other bodies as required by the regulations. It is expected that the regulations may prescribe consultation with specified bodies where the underlying assets upon which a derivative is based falls with the regulatory responsibilities of that body. A failure to consult does not invalidate a derivative transaction rule. [ Schedule 1, item 32, section 901J ]

1.120 ASIC would be expected to rely upon the advice of the RBA in making any assessment on the likely impacts of rules on the stability of the Australian financial system, given ASIC's limited role and the RBA's primary role in regard to such matters.

1.121 Assessments may take place in the absence of full quantitative data and may be largely qualitative in nature. Indeed, a primary objective of imposing trade reporting requirements is to improve transparency in relation to derivative markets and to enable regulators to properly monitor and assess risk.

1.122 There may be limitations on the extent to which some details of any assessments may be able to be made publicly available, given that regulators may be drawing upon confidential and/or sensitive data.

1.123 Ministerial consent is required for ASIC to make derivative transaction rules. A consent is not a legislative instrument. [ Schedule 1, item 32, section 901K ]. This provision is included to assist readers; as such a consent would not in any event be a legislative instrument within the meaning of section 5 of the Legislative Instruments Act 2003 (LI Act). The provision is not a substantive exemption from the ordinary operation of that Act. While the consent is not disallowable by Parliament, it can only have the effect of changing a person's rights by way of the rules, which are disallowable..

1.124 A decision to give a consent is not reviewable by the Administrative Appeals Tribunal but is reviewable under the Administrative Decisions (Judicial Review) Act 1977 . [ Schedule 1, item 37, section 1317C ]

1.125 ASIC has a power to make emergency rules without consultation or Ministerial consent, in particular circumstances. If ASIC does so, it must justify the decision to the Minister on the following day, and follow any written directions of the Minister to vary or revoke the rules. A direction is not a legislative instrument. This provision is included to assist readers; as such a direction is not a legislative instrument within the meaning of section 5 of the LI Act. The provision is not a substantive exemption from the ordinary operation of that Act. While the direction is not disallowable by Parliament, it can only have the effect of changing a person's rights by way of the rules, which are disallowable.. [ Schedule 1, item 32, section 901L ]

1.126 A decision to give such a direction is not reviewable by the Administrative Appeals Tribunal but is reviewable under the Administrative Decisions (Judicial Review) Act 1977 . [ Schedule 1, item 37, section 1317C ]

1.127 ASIC may amend or revoke a derivative transaction rule. In doing so, ASIC is subject to the same requirements that apply to the making of derivative transaction rules. The requirements to consult, have regard to certain matters, and obtain Ministerial consent do not apply when ASIC amends emergency rules at the direction of the Minister. These requirements do not apply as ASIC is bound to act in accordance with the Minister's directions. [Schedule 1, item 32, section 901M ]

Part 7.5A, Division 3 - Regulation of licensed derivative trade repositories: supervision by ASIC

1.128 The amendments charge ASIC with the responsibility for supervising licensed derivative trade repositories.

1.129 However, the law will recognise that derivative trade repositories could operate across borders and simultaneously be licensed or at least regulated by other jurisdictions. Regulation in respect of these entities will involve cross-border cooperation between regulators. It is recognised that a given trade repository may be, in practice, primarily regulated by the law of its 'home country'. The law explicitly recognises that ASIC may therefore partially meet its overall responsibilities in respect of a licensed facility by satisfying itself that another country'sregime provides satisfactory regulation or that adequate cooperative arrangements are in place. Generally, it would be expected that, in practice, ASIC would (for most aspects of supervision) need to satisfy itself of both. [ Schedule 1, item 32, section 902A ]

1.130 This allowance must be seen in light of the fact that the licensing regime for trade repositories does not provide for separate domestic and overseas categories of licences (unlike the regime for AMLs and CSFLs). A single kind of licence applies, but ASIC may tailor its regulatory approach and intensity on a case-by-case basis with regard to the circumstances of each licensee, including the various regulatory arrangements to which they are subject to globally and the arrangements and level of cooperation in existence between various regulators.

1.131 ASIC's information sharing and authority to cooperate with foreign regulators is also amended to support this approach.

1.132 The licensing regime provides a high degree of flexibility in imposing licensing requirements upon facilities, such as through licence conditions and derivative trade repository rules. This will facilitate alignment of domestic requirements with those imposed in foreign jurisdictions (in particular the requirements imposed under the laws of the European Union and the United States of America). This in turn will enhance opportunities for ASIC to adopt a cooperative approach to the regulation of trade repositories operating in multiple jurisdictions.

1.133 The law allows ASIC to rely upon foreign regulation to ensure that licensed bodies comply with domestic requirements. This provision enables ASIC to recognise, where appropriate, that compliance with foreign law would have the effect of ensuring compliance with domestic law.

Part 7.5A,Division 4 - Regulation of licensed derivative trade repositories: derivative trade repository rules

Subdivision A - Power to make derivative trade repository rules

1.134 Unlike under the AML and CSFL regime, the trade repository regime does not contemplate that licensed facilities will be required to create operating rules, changes to which are subject to disallowance by the Minister. It is recognised that such a regime may create difficulties for a facility operating in multiple jurisdictions and being subject to multiple licensing regimes. Instead, ASIC will be empowered to make rules dealing with the operation of licensed derivative trade repositories ( derivative trade repository rules ).

1.135 It is not intended that these rules would generally go into the level of detail that operating rules would. Any procedures or arrangements that a trade repository operates under would need to be subject to these higher level requirements.

1.136 While the Act will not impose any requirements to have operating rules, nor impose vetting and disallowance or consent requirements in respect of changes to such, it is open for the derivative trade repository rules to impose such requirements. Requirements of this kind need not apply across the board, but might be imposed by the rules only in relation to areas of particular concern.

1.137 A trade repository operating in another jurisdiction which did have a licensing regime which involved disallowable operating rules could (if appropriately licensed here) operate in Australia in accordance with those operating rules, provided that they were consistent with Australia's derivative trade repository rules.

1.138 Rules can be tailored to operate in a coordinate and consistent way to varying overseas requirements.

1.139 The Division limits the matters that ASIC may make rules regarding; and the penalties which may be set for any breach. [ Schedule 1, item 32, section 903A ]

1.140 The Bill itself does not directly provide ASIC with the power to make rules in relation to non-licensed but prescribed trade repositories; with section 906A allowing regulations instead to impose obligations, grant powers and create offences in relation to such facilities.

1.141 The derivative trade repository rules may provide for the manner in which licensed derivative trade repositories provide their services. This may include rules that ensure that services are provided in an open and non-discriminatory manner. This may also include rules regarding the 'bundling' or pricing of services, or about the manner in which licensees may deal with property rights associated with data.

1.142 Rules may govern the handling or use of derivative trade data by licensed derivative trade repositories and their officers and employees. They may govern the acceptance and retention of derivative trade data.

1.143 These rules may require licensed trade repositories to create statistical data from derivative trade data. It should be noted that the Bill defines derivative trade data to include statistical data. The rules also may deal with the use and disclosure of, and provision of access to, derivative trade data.

1.144 The rules might therefore impose an obligation on licensed facilities to create and publish period statistical reports on derivative activities reported to it.

1.145 Regulations may impose limits on the derivative transaction rules that may be made in relation to the acceptance, retention, use, creation and disclosure of data. [ Schedule 1, item 32, section 903C ]

1.146 Further detail on how the Act, regulations and rules collectively govern use and disclosure of derivative trade data is provided below at paragraph 1.169 onwards.

1.147 The rules may also impose requirements in relation to the governance, management and resources (including financial, technological and human resources) of licensed derivative trade repositories.

1.148 The rules may provide for:

(i)

the handling of conflicts of interest;

(ii)

the monitoring and enforcement of compliance with obligations;

(iii)

the resources that licensed derivative trade repositories should have (including requirements relating to the experience, qualifications or fitness for office of operators and their officers and employees);

(iv)

the integrity and security of computer systems and other systems;

(v)

operational reliability;

(vi)

business continuity planning;

(vii)

the operational separation of functions; and

(viii)

the outsourcing of functions to other entities.

1.149 Rules may impose requirements in relation to the disclosure of conditions (including fees) on which licensed derivative trade repositories provide their services.

1.150 Rules relating to the operational separation of functions includesthe separation of trade repository and non-trade repository functions conducted by a person holding a trade repository licence.

1.151 Rules may impose requirements in relation to the reporting to ASIC or other regulators of matters related to licensed derivative trade repositories. These may include both domestic and foreign regulators. No annual reporting requirementsare imposed by the primary legislation (unlike for AMLs (see section 792F)). The rules will enable flexibility in reporting arrangements. In part, this is directed at enabling domestic reporting requirements to leverage offforeign licensing reporting requirements (provided our domestic needs are also met by such reports).

1.152 The derivative trade repository rules may only impose requirements on operators of licensed derivative trade repositories and their officers of such operators. The ordinary section 9 definition of officers applies. [ Schedule 1, item 32, section 903B ]

1.153 While derivative trade repository rules do not apply directly to third parties providing services to a licensed operator, the rules may impose requirements on the operator in relation to the outsourcing of functions to other entities. While such requirements could potentially prohibit some kinds of outsourcing, it would be expected that they would generally only require the terms of outsourcing to address a range of specified matters in specified ways.

Subdivision B - Compliance with derivative trade repository rules

1.154 Failure to comply with derivative trade repository rules is a civil penalty provision. This mirrors the provision for derivative transaction rules in the new section 901E. [ Schedule 1, item 32, section 903D ]

1.155 The Bill allows the regulations to provide for alternatives to civil proceedings for a person who is alleged to have breached their obligations under the derivative trade repository rules, and limits the alternatives which may be allowed. This mirrors the provision for derivative transaction rules in the new section 901F. [ Schedule 1, item 32, section 903E ]

Subdivision C - The process of making derivative trade repository rules

1.156 In deciding whether to make a derivative trade repository rule, ASIC must consider certain matters including, the likely effect on the economy and on financial markets and the regulatory impact on any person who would be subject to the rule. ASIC may take into account other matters, such as any relevant international standards and matters raised in consultation with the public. ASIC may also have regard to any other matters it considers relevant. This mirrors the provision for derivative transaction rules in the new section 901H. [ Schedule 1, item 32, section 903F ]

1.157 ASIC must consult with the public before making any derivative trade repository rules. ASIC is also required to consult with certain bodies as prescribed by the regulations. It is contemplated that the regulations may prescribe relevant government agencies where rules that relate to derivatives in respect of underlying assets fall within the portfolio responsibilities of those agencies, for exampleelectricity or water. Where rules relate to trade reporting, other agencies that may be end users of the data may be prescribed, for example the Australian Bureau of Statistics. A failure to consult will not invalidate a derivative transaction rule. This mirrors the provision for derivative transaction rules in the new section 901J. [ Schedule 1, item 32, section 903G ]

1.158 Similar considerations apply as those specified in relation to the making of derivative transactions rules at paragraphs 1.121 to 1.123.

1.159 Ministerial consent, in writing, is required in order for ASIC to make derivative trade repository rules. A Ministerial consent is not a legislative instrument. This provisions is included to assist readers, as such a consent would not be a legislative instrument within the meaning of section 5 of the LI Act. This is therefore not a substantive exemption from the operation of that section. Although a consent is not a legislative instrument, it will only have effect through the operation of the rules. Rules are legislative instruments and will be subject to disallowance. This mirrors the provision for derivative transaction rules in the new section 901K. [ Schedule 1, item 32, section 903H ]

1.160 ASIC has a power to make emergency rules without consultation or Ministerial consent, in particular circumstances. If ASIC does so, it must justify the decision to the Minister on the following day, and follow any written directions of the Minister. A direction is not a legislative instrument. This provision is included to assist readers; as such a direction would be a legislative instrument within the meaning of section 5 of the LI Act. This is therefore not a substantive exemption from the operation of that section. Although a direction is not a legislative instrument it will only have effect through the operation of the rules made pursuant to it. Rules are legislative instruments and will be subject to disallowance. This mirrors the provision for derivative transaction rules in the new section 901L. [ Schedule 1, item 32, section 903J ]

1.161 ASIC may amend or revoke a derivative trade repository rule. If ASIC does so, it must follow the same process that is required to make derivative trade repository rules. This does not apply to any amendment or revocation of an emergency rule that the Minister directs, as ASIC must in any event follow such a direction. This mirrors the provision for derivative transaction rules in the new section 901M. [ Schedule 1, item 32, section 903K ]

1.162 Decisions in relation to derivative trade repository rule-making, consenting to rule-making and directions relating to rule-making are (as is the case with respect to derivative transactions) not reviewable by the Administrative Appeals Tribunal but are reviewable under the Administrative Decisions (Judicial Review) Act 1977 . [ Schedule 1, item 37, section 1317C ]

Part 7.5A, Division 5 - Regulation of licensed derivative trade repositories: other obligations and powers

Subdivision A - Obligations

1.163 Derivative trade repository licensees will be subject to certain obligations. In particular, licensees must comply with the conditions on the licence, and take all reasonable steps to ensure that no disqualified individual becomes, or remains, involved in the operator. A licensee which is a foreign body corporate must also be registered under Division 2 of Part 5B.2, which applies to foreign companies carrying on business in this jurisdiction. [ Schedule 1, item 32, section 904A ]

1.164 The new provision 904A imposes fewer obligations, compared to their equivalent existing provisions in relation to AMLs (section 792A) and CSFLs (section 821A).

1.165 Trade repositories' operations as trade repositories may be less complex than those of financial markets or clearing and settlement facilities. A different regulatory regime is therefore appropriate. Additionally, the current expectation that there will be fewer trade repositories which will operate in multiple jurisdictions, requires that any obligations be imposed upon them in a way that enable these obligations to be tailored (and subsequently, more easily adjusted) to ensure that any given trade repository is not subject to conflicting obligations and that duplication in compliance obligations is minimised.

1.166 Unlike the equivalent provisions for AMLs and CSFLs, section 904A does not impose obligations to enforce compliance with operating rules or put in place compensation arrangements. The provision does not distinguish between overseas and domestic facilities. There are no requirements for ownership to be widely held.

1.167 Much of the obligations of trade repositories will be imposed through the derivative trade repository rules, rather than hardwired in the Act. As stated elsewhere, the process of imposing obligations in this way will be subject to a range of checks and balances.

1.168 Section 904B imposes obligations relating to trade data on derivative trade repositories and their officers and employees. There are limits on when a repository may use or disclose information.

1.169 The use or disclosure of information is generally permitted if it is for the purpose of or occurs in the course of the provision of trade repository services (or for an employee, performance of their duties in that respect). However, given the potential for uncertainty as to the scope of services that this may entail and the potential for practices to develop that may not be a proper use of trade data, the scope of this permission may be curtailed by regulation.

1.170 It should be noted that subparagraph 904B(1)(a)(i) refers to services provided by the derivative trade repository (which is defined in the section 761A as a facility that carries on certain specified activities). The reference is therefore to the services provided by the facility and not the operator of the facility. It therefore must be read as referring to services provided as a trade repository (and not any other non-trade repository activities carried on by a person who operates a trade repository facility).

1.171 Other than for the purpose of providing trade repository services, the use and disclosure of trade data is prohibited unless required or permitted by the Corporations Act, regulations, rules or another law of the Commonwealth, State or Territory.

1.172 Section 904B should be read in conjunction with paragraph 903A(2)(b) and section 903C. The use and disclosure of information may be permitted by the Act, regulations or rules, but the regulations may restrict the ability of the rules to regulate use and handling (including disclosure).

1.173 Commercialisation of trade data is therefore not absolutely prohibited. The regulations or rules may potentially permit some kinds of commercialisation and may deal with the manner in which licensees may deal with property rights associated with data. The regulations may restrict the ability of the rules to permit some kinds of commercialisation.

1.174 Breach of section 904B is a criminal offence punishable by up to 1,000 penalty units (or 5,000 penalty units for a body corporate). The significant penalty is required given the potential financial rewards that may be gained or harm caused from misuse of derivative trade data.

1.175 While trade data must be protected from improper disclosure, a fundamental purpose of the trade reporting regime is to ensure that relevant regulatory bodies have access to trade data.

1.176 It is also intended that trade data might become available to non-regulators. For example, statistical data (which falls within the definition of 'derivative trade data') might become available to the market as a whole. Section 904B, therefore also provides that a derivative trade repository must comply with requests for information from certain bodies (ASIC, APRA, RBA or another licensed trade repository). Additional bodies may also be prescribed by the regulations for this purpose, but only if the Minister is satisfied that these bodies have adequate controls on the use or disclosure of any information provided to them. [ Schedule 1, item 32, section 904B ]

1.177 It is intended that the regulations will provide for the sharing of trade data with appropriate foreign financial markets regulators.

1.178 The regulations may provide that certain information must not be provided pursuant to requests or a class of requests. The regulations may excuse compliance or may prohibit compliance with requests in specified circumstances. For example, the regulations might provide that requests from other licensed trade repositories might be complied with only if it meets the reasonable costs of complying with the request for trade data.

1.179 The regulations may impose additional requirements relating to the creation of statistical data. Trade repositories may not merely be permitted to disclose statistical data, but may be obliged by regulation to create and provide statistical data. Provision of statistical data might be to specified persons, such as specified regulators, or generally disseminated. The regulations may provide for the creation of offences. Failure to properly provide mandated statistical data may harm the efficient operation of financial markets in derivatives and may have a significant impact on the participants in those markets. The ordinary limits on the penalties that may be imposed by regulation under the Corporations Act (in paragraph 1364(2)(w) - 50 penalty units) apply. [ Schedule 1, item 32, section 904B ]

1.180 This regulation power operates in parallel to the ability for derivative trade repository rules to impose obligations regarding the creation and disclosure of statistical data (section 903A). This rule making power is subject to any restrictions imposed by regulation (section 903C). Therefore, ultimately, all obligations to create and disseminate statistical data (and handling and use of trade data) are subject to powers to make regulations. This is appropriate to ensure that confidentiality and the privacy of data is protected.

1.181 A derivative trade repository licensee is obliged to notify ASIC if the licensee becomes aware that it may no longer meet its obligations under section 904A. This encompasses a failure to comply with conditions on its licence, failure to register under Part 5B.2 if it is a foreign body corporate or failure to ensure that no disqualified individuals becomes or remains involved in the operator. ASIC may give advice to the Minister about such a notification. [ Schedule 1, item 32, section 904C ]

1.182 There is no general obligation to notify ASIC of all breaches of obligations under the derivative trade repository rules. This is appropriate given that there may a wide range of minor obligations in those rules.

1.183 A derivative trade repository licensee must notify ASIC of any changes to directors, secretaries or senior managers. The regulations may prescribe the form in which this information may be given, and any consequential disclose that is required. Failure to notify ASIC is an offence, and a penalty of 100 penalty units applies (or 500 penalty units for a body corporate). It is important that ASIC becomes aware of changes in management, given its responsibility for enforcing the prohibitions on involvement in trade repositories by disqualified individuals. [ Schedule 1, item 32, section 904C ]

1.184 A derivative trade repository licensee must give assistance to ASIC, APRA and the RBA, if any of these regulators make a reasonable request which relates to the performance of its function. This assistance may include giving the regulator trade data or other information, or allowing the regulator to inspect the licensee's books. Failure to comply with this requirement is an offence, and a penalty of 100 penalty units applies. [ Schedule 1, item 32, section 904D ]

1.185 If ASIC requests access to a repository's facilities and the request is reasonable, the derivative trade repository licensee must give ASIC that access. Failure to comply with this requirement is an offence, and a penalty of 100 penalty units applies (or 500 penalty units for a body corporate). [ Schedule 1, item 32, section 904E ]

1.186 Section 904D applies in respect to the three primary financial regulators (APRA, RBA and ASIC). It is aimed at enabling them to perform their regulatory functions generally. Section 904E, in contrast, relates primarily to ASIC functions as the regulator of trade repositories.

Subdivision B - Powers of Minister and ASIC to give directions etc

1.187 This subdivision provides the Minister and ASIC with powers to ensure that licensed trade repositories conduct their operations appropriately.

1.188 The Minister may give a derivative trade repository licensee a written direction if the Minister believes that the licensee is not complying with its obligations. The direction may specify certain things that the Minister believes will promote compliance by the licensee with those obligations. The licensee must comply with the direction, and if the licensee fails to do so, ASIC may apply to the Court for an order that the licensee comply with the direction. While the Minister makes the direction, ASIC is responsible to enforce compliance with it. The Minister may vary or revoke a direction at any time by giving written notice to the licensee. This power is based on the Minister's powers of directions in relation to AMLs (section 794A) and CSFLs (section 823A). No criminal penalty applies for non-compliance. [ Schedule 1, item 32, section 904F ]

1.189 ASIC will also be give a power of direction. This mirrors the status quo in relation to AMLs (section 794D) and CSFLs (section 823D). ASICis given a power to give directions to a derivative trade repository licensee if ASIC believes that the licensee is not complying with its obligations. This is a narrower power than the power that exists in relation to AMLs and CSFLs. Those provisions may be utilised if ASIC forms the view that it is necessary to protect a person dealing in financial products. ASIC need not form a view that a breach has occurred under those provisions. ASIC's power is subject to requirements to provide notices and reasons. Recipients are provided with an opportunity to take steps to address the situation. Unlike the Minister's directions power, ASIC's directions have effect for only a limited period (up to 21 days). It is an offence not to comply with a direction, with a penalty of 100 penalty units per day or part therefore (or 500 penalty units per day for a body corporate). ASIC may also apply to Court for orders requiring compliance. ASIC may vary or revoke a direction at any time by giving written notice to the licensee. [ Schedule 1, item 32, 904G ]

1.190 ASIC may require a derivative trade repository licensee to give ASIC a report on specified matters. ASIC may give a copy of that report to the Minister. ASIC may also require the licensee to give ASIC an audit report of the special report, and may nominate a particular person or body to prepare the report. Failure to comply will be an offence, with a penalty of 100 penalty units (or 500 penalty units for a body corporate). This provision may be contrasted to the equivalent existing provision in relation to AMLs (section 794B) and CSFLs (section 823B) which provide the power to require special reports to the Minister. This is an another example of where the new trade repository regime transfers some licensing functions down from the Ministerial level to that of the regulator - see also the provisions regarding the granting etc of trade repository licences. [ Schedule 1, item 32, section 904H ]

1.191 ASIC may assess how well a derivative trade repository licensee is complying with its obligations. ASIC may take account of any information that it thinks is appropriate. ASIC must give a written report on the assessment to the licensee as soon as practicable after doing the assessment. ASIC may also give a copy to the Minister. [ Schedule 1, item 32, section 904J ]

1.192 In contrast to similar provisions relating to AMLs (section 792E) and CSFLs (section 823C), ASIC may take a risk based approach to the frequency of assessments and is not obliged to conduct annual assessments. One outcome of this approach is that it would be open to ASIC to conduct partial assessments each year, focussing only on certain aspects of the licensee (and potentially, with greater intensity than would otherwise occur).

1.193 ASIC may publish a report, or part of the report. If the assessment relates to a serious contravention of the law of the Commonwealth or a State or Territory, ASIC may also give a copy of the report, or the relevant part of the report to the Australian Federal Police, the Chief Executive Officer or staff of the Australian Crime Commissioner, the Commonwealth Director of Public Prosecutions or other persons or bodies prescribed by regulation. [ Schedule 1, item 32, section 904J ]

1.194 Potentially foreign law enforcement bodies may be prescribed by regulation; so might foreign regulators charged with licensing the trade repository in another jurisdiction, or otherwise regulating its conduct.

1.195 A report on an assessment is not a legislative instrument. This provision is included to assist readers, as the instrument is not a legislative instrument within the meaning of section 5 of the LI Act. This is therefore not a substantive exemption from the operation of that section. [ Schedule 1, item 32, section 904J ]

1.196 Trade repositories hold commercially sensitive derivative trade data. Therefore provision needs to be made to address the protection of that data in the event that a derivative trade repository ceases to be licensed.

1.197 If a derivative trade repository ceases to be licensed, ASIC may give the operator (or former operator), or any officers or employees (past or present), written direction relating to any data that was being retained while the repository was licensed. For example, a direction could require that a person destroy all data over which they have control, or transfer all data to another licensed derivative trade repository, or a prescribed trade repository. Failure to comply with a direction is an offence and a penalty of 100 penalty units will apply for each day or part thereof thatthe offence is committed (or 500 penalty units per day for a body corporate). ASIC may apply to Court for orders to enforce compliance with the direction. It may vary or revoke the direction by notice to the person to whom it is directed. [ Schedule 1, item 32, section 904K ]

Part 7.5A, Division 6 - Regulation of licensed derivative trade repositories: licensing

Subdivision A - Requirement for some trade repositories to be licensed

1.198 The Bill does not, by default, require any person falling within the definition of a derivative trade repository to be licensed. The ordinary effect of not being licensed (or specifically prescribed by regulation) is merely that a person subject to a trade reporting rule will not be able to meet their obligations by reporting to the unlicensed trade repository.

1.199 The regulations may identify certain classes of derivative trade repositories that are required to be licensed. A person must hold an Australian derivative trade repository licence if that person operates a derivative trade repository of a class that was identified by the regulations. A person must not hold out that they operate a repository in such a class unless they have a licence that authorises them to operate the repository. Failure to comply with this requirement is an offence, and a penalty of 500 penalty units applies (or 2,500 penalty units for a body corporate). [ Schedule 1, item 23, section 905A ]

1.200 This provision ensures that a facility which meets the definition of a trade repository but does not provide services with respect to a prescribed derivative product class will not be subject to the requirements of a licensed derivative trade repository. At the same time, the regulations can ensure that any facility providing repository services with respect to a prescribed class is subject to the supervision associated with the licensing regime.

1.201 Prescriptions by regulations will ensure various trade-repository-like data service providers are not inappropriately caught by an obligation to obtain a licence.

1.202 If a class of derivative trade repositories is not prescribed under section 904A, repositories of that class may operate without a licence. A derivative trade repository may be licenseddespite not being required to by the regulations.

Subdivision B - Granting of licences

1.203 The licensing regime which applies to derivative trade repositories is similar to the regime which applies to Australian market licences and clearing and settlement facility licences.

1.204 To apply for an Australian derivative trade repository licence, a body corporate must lodge an application with ASIC in the prescribed form. [ Schedule 1, item 32, section 905B ]

1.205 ASIC may grant a licence if it is satisfied that the application was made properly, that the applicant will comply with relevant obligations, and that no individual who is disqualified under Division 2 of Part 7.4 is involved in the applicant. If the applicant is a foreign body corporate, ASIC may only grant a licence if the applicant also meets the requirements in Division 2 of Part 5B.2, which apply to a foreign company carrying on business in Australia. [ Schedule 1, item 32, section 905C ]

1.206 ASIC may only grant an applicant a licence if 42 days have passed since the application was made and in that time ASIC has not given notice to the applicant that it intends to disqualify an individual who is involved in that applicant[ Schedule 1, item 32, subsection 905C(3 ]. This provision ensures that ASIC has adequate time to ensure that all individuals involved in an applicant are fit and proper for their role.

1.207 A non-exclusive list of matters that ASIC must take into account when considering a licensing application is set out at section 905P.

1.208 When ASIC grants an Australian derivative trade repository licence, it must publish a notice in the Gazette stating the name of the licensee, when the licence was granted, and the conditions on the licence. [ Schedule 1, item 32, section 905D ]

1.209 An Australian derivative trade repository licence may authorise a licensee to operate two or more derivative trade repositories.If a licensee holds a licence which authorises it to operate two or more derivative trade repositories, ASIC may suspend or cancel the licence for one or some of these repositories only. If a licensee holds a licence that authorises it to operate two or more derivative trade repositories, any reference in this Chapter to the repositories to which the licence relates refers to each of those repositories severally. [ Schedule 1, item 32, section 905E ]

1.210 ASIC may add another derivative trade repository authorisation by varying the conditions on the licence. In doing so, ASIC must have regard to the same matters that apply to the decision to grant a licence. [ Schedule 1, item 32, subsection 905E(3 )]

1.211 A person may hold a trade repository licence notwithstanding that they hold a CSFL or AML. There is no statutory reason why this would not be the case and it is therefore not expressly provided for in the Bill. If a person did hold multiple licences of different types, the derivative trade repositories could impose requirements in relation to matters such as: operational separation, governance arrangements including conflicts management and restrictions on bundling of services.

Subdivision C - The conditions on a licence

1.212 ASIC may impose, vary or revoke conditions on an Australian derivative trade repository licence at any time. ASIC may do so on a licence on its own initiative, or if the licensee lodges an application for the change. ASIC may impose, vary or revoke conditions if it considers it appropriate to do so given the licensee's obligations, any changes in the operations of the repository, or the conditions in which it is operating. A non-exclusive list of matters that ASIC must take into account is set out at section 905P. ASIC is required to take into account and give weight to these matters to the extent they are relevant to the nature of conditions contemplated. To impose, vary or revoke conditions on a licence, ASIC must give written notice to the licensee and publish a notice in the Gazette . [ Schedule 1, item 32, section 905F ]

1.213 Each derivative trade repository will be subject to conditions specifying the particular derivative repository that the licensee is authorised to operate, and the class of derivatives which the repository can provide services in relation to. This subsection does not prohibit trade repositories from voluntarily accepting data, or participants from voluntarily reporting data, outside of this class. It means that a person cannot meet a trade reporting obligation with regards to a class of derivatives by reporting to a person with a licence that does not cover that class. [ Schedule 1, item 32, subsection 905F(4 )]

Subdivision D - When a licence can be varied, suspended or cancelled

1.214 If a licensee changes its name, ASIC may vary that licence to take into account the change of name. ASIC may only do this after the licensee applies in the prescribed form. [ Schedule 1, item 32, section 905G ]

1.215 ASIC may immediately suspend or cancel a derivative trade repository licence if the licensee requests that ASIC does so, if the licensee ceases to operate the derivative trade repository, or if the licensee comes under external administration. To suspend or cancel a licence, ASIC must give written notice to the licensee. [ Schedule 1, item 32, section 905H ]

1.216 ASIC may suspend or cancel a derivative trade repository licence after a hearing and considering the report provided by the person who conducts the hearing, if ASIC considers that the licensee has breached or is in breach of one or more of its obligations. When ASIC proposes to cancel or suspend a licence, it must first give written notice to the licensee that it intends to do so, and outline the reasons why. The licensee must be given a chance to be heard at a hearing. Neither a notice that ASIC proposes to cancel or suspend a licence, or a report by the person conducting the hearing is a legislative instrument. This provision is included to assist the reader, as a notice or report would not be a legislative instrument within the meaning of section 5 of the LI Act. A report or a notice could only affect a person's rights through a decision to cancel a licence, which would be reviewable by the Administrative Appeals Tribunal. [ Schedule 1, item 32, section 905J ]

1.217 It should be noted that suspension or cancellation does not flow automatically from ASIC determining that a breach has occurred. Such a finding enlivens ASIC's discretion to do so. The exercise of this discretion is subject to review by the Administrative Appeals Tribunal. ASIC may decide to suspend or cancel a license if it considers it appropriate to do so. A non-exclusive list of matters that ASIC must take into account is set out at section 905P.

1.218 If ASIC suspends an Australian derivative trade repository licence, the licensee is taken not to hold that licence for the period that the licence is suspended. ASIC may give written notice that, for particular purposes, the person is still taken to hold that licence. For example, ASIC may provide for a phased wind down in activity in order to minimise disruption to market participants. [ Schedule 1, item 32, section 905K ]

1.219 ASIC may vary or revoke a suspension of a licence at any time. ASIC may do this by giving written notice to the licensee. [ Schedule 1, item 32, section 905L ]

1.220 When ASIC suspends or cancels an Australian trade derivative repository licence, or varies or revokes a suspension, ASIC must publish a note in the Gazette . The notice must also state when the action took effect. [ Schedule 1, item 32, section 905M ]

1.221 An Australian derivative trade repository licence can only be varied, suspended, or cancelled in accordance with the subdivision. [ Schedule 1, item 32, section 905N ]

Subdivision E - Other matters

1.222 There are particular matters which ASIC must take into account when it decides to grant a derivative trade repository licence, suspend or cancel such a licence, or impose, vary or revoke conditions on a licence. These matters are the size and structure of the derivative trade repository, the nature of activities conducted, the technology used, and the persons who are or may be required to report data to the repository. ASIC must also consider whether the action would be in the public interest. ASIC may take into account any other matters that it considers relevant. [ Schedule 1, item 32 section 905P ]

Part 7.5A, Division 7 - Regulation of prescribed derivative trade repositories

1.223 Trade reporting requirements may be satisfied by reporting to either a licensed trade repository or a repository that have been prescribed by regulation.

1.224 The regulations may impose obligations on operators of prescribed derivative trade repositories, and the officers and employees and confer powers on ASIC in relation to prescribed derivative trade repositories. The regulations may also create offences in relation to those obligations and powers.

1.225 Derivative trade repository rules only apply to licensed derivative trade repositories, while regulations apply only to prescribed derivative trade repositories. The regulations may cover similar matters to the derivative trade repository rules, such as the handling of data, the manner in which the licensee provides its services, and the governance arrangements. [ Schedule 1, item 32, section 906A ]

1.226 Among other matters, the regulations may require that prescribed derivative trade repositories do certain things to protect the data that they hold, and that prescribed derivative trade repositories provide access to their services in a fair, non-discriminatory way.

1.227 The regulations may provide that, under particular circumstances, information given to ASIC by the operator of a prescribed derivative trade repository is taken to have been given in confidence, and is therefore subject to the protections and restrictions on dissemination which apply to information given to ASIC in confidence [ Schedule 1, item 32, section 906A(3 )]. This provision ensures that persons who give information to a trade repository can be satisfied that the information will be subject to legal protections if the information is required by ASIC in the course of its functions. This provision does not limit the circumstances in which information given to ASIC by a prescribed derivative trade repository is regarded as having been given in confidence.

Division 8 - Other matters

1.228 A person must not falsely hold out that they hold a derivative trade repository licence if they do not, or that a particular derivative trade repository is licensed if it is not. A person must not hold out that the regulations prescribe that a class of transactions must be reported to, cleared on or executed on a particular derivative trade repository, if this is not the case. [ Schedule 1, item 32, section 907A ]. Failure to comply with this provision is an offence with a penalty of 500 penalty units (or 2,500 penalty units for a body corporate).

1.229 Determinations, regulations, derivative transaction rules and derivative trade repository rules may incorporate matters contained in writing as in force from time to time, or at a particular time. [ Schedule 1, item 32, section 907B ]. This provision is an exemption from subsection 14(2) of the LI Act. It is necessary as it enables regulations, rules and determinations to incorporate the requirements of foreign jurisdictions as applying to persons regulated in Australia.

1.230 This will help to ensure that requirements in Australia are harmonised with requirements in other jurisdictions to allow for a coordinated international approach and to help to facilitate open international capital markets.

1.231 A person will not be liable for any action, civil or criminal, in relation to disclosure of data or information that is required by the Act, the regulations, derivative transaction rules or derivative trade repository rules [Schedule 1, item 32, section 907C ]. The purpose of this provision is to clarify that if any disclosure is required by any relevant instrument, that disclosure shall not be considered to be a breach of any restriction on disclosure that would otherwise apply, including restrictions in a contract.

1.232 ASIC may exempt a person or class of persons from all or part of the provisions in this Part, the regulations made for the purpose of this Part, the derivative transaction rules and the derivative trade repository rules. ASIC may also exempt a facility or class of facilities, or a derivative transaction or class of derivative transactions from all or part of the provisions that apply to them. [ Schedule 1, item 32, subsections 907D(1) and 907D(2 )]

1.233 The exemption power has been included to ensure that there is sufficient power to address any unforeseen consequences of the implementation of the requirements under this Part. The amendments included in the Bill are of an innovative nature and due to the ongoing need for international alignment (in an environment of continuing uncertainty as to the final form that other countries' G-20 reform implementations will take, in particular their extraterritorial applications and mutual recognition regimes) require a high degree of flexibility. Given the rapidly evolving nature and the systemic importance of over-the-counter derivative markets it may be necessary to address issues arising from the application of this Part with immediate action.

1.234 The exemption power is also provided to deal with circumstances where the determinations, regulations or rules may operate inadvertently or in a perverse manner, contrary to the underlying intention of the regime. While the framework seeks to provide a high degree of flexibility, there may be cases where it cannot be adapted (without legislative reform) to an unanticipated scenario, or at least not adapted within a sufficiently short time frame to avoid the unintended result.

1.235 In contrast to other provisions existing in the Corporations Act, ASIC's powers under this section are more restricted and do not include a modification power.

1.236 When ASIC grants an exemption, the exemption may be subject to conditions. ASIC can impose conditions on an exemption if it considers it is appropriate to do so, by reference to the list of non-exclusive matters listed in section 905P. A person to whom an exemption applies must comply with any conditions on that exemption. ASIC may apply to the Court for an order that a person comply with the condition in a specified way. [ Schedule 1, item 32, subsection 9072D(3 )]

1.237 An exemption that applies to a class of persons, a class of facilities, or a class of derivative transactions is a legislative instrument, and therefore is disallowable by Parliament. For clarity, this applies even if the exemption also applies to one or more specified persons, facilities or transactions. [ Schedule 1, item 32, subsection 907D(4 )]

1.238 Exemptions that have a general effect on a class (that is, exemptions that do not just relate to a specific person or case) are therefore subject to Parliamentary scrutiny and potential disallowance. This is an important check upon ASIC's power of exemption.

1.239 If a declaration does not apply to a class of persons, facilities or derivatives, the exemption must be in writing and ASIC must publish notice of it in the Gazette . [ Schedule 1, item 32, subsection 907D(5 ]

1.240 This requirement ensures that there is transparency regarding the granting of exemptions and that ASIC's exercise of the power is open to public scrutiny.

1.241 The regulations may also grant exemptions to a person or class of persons from all or some provisions in this Part, the regulations made for this part, the derivative transaction rules and the derivative trade repository rules. The regulations may also grant exemptions to a facility or class of facilities, or a derivative transaction or class of derivative transactions from these provisions. The regulations may also modify or vary these provisions as they apply to a person, facility or derivative transaction, or a class of persons, facilities or derivative transactions. [ Schedule 1, item 32, section 907E ]

1.242 Regulations, as legislative instruments, are subject to Parliamentary scrutiny and potential disallowance.

Item 33

1.243 The Federal Court (or a State Supreme Court exercising cross-vested jurisdiction)will have the power to make such orders as it sees fit, if ASIC applies to the Court and it appears to the Court that a person has contravened the conditions of an Australian derivative trade repository licence. [ Schedule 1, item 33, subparagraph 1101B(1 )( a )( ii )]

Item 34

1.244 If a person has persistently contravened a condition on an Australian derivative trade repository licence, the Court may make an order restraining that person from carrying on a business in relation to financial products or financial services. [ Schedule 1, item 34, subparagraph 1101B(4 )( a )( iii )]

Item 35

1.245 If a person contravened a provision of the derivative transaction rules or the derivative trade repository rules, the Court may make an order that that person comply with the provision. If the person is a body corporate, an order may also be given to the directors of that body corporate. [ Schedule 1, item 35, paragraph 1101B(4 )( b )]

Item 36

1.246 If a person has contravened a provision of the derivative transaction rules or the derivative trade repository rules, the Court may make an order that that person disclose specified information to the public or specified persons. The Court may also require the person to publish advertisements at their own expense. [ Schedule 1, item 36, subparagraphs 1101B(4 )( c )( i) and 1101B(4 )( d )( i )]

Item 37

1.247 The following decisions will not be reviewable by the Administrative Appeals Tribunal:

a)

a decision by the Minister to make, amend or revoke a determination, to consent to the making of a derivative transaction rule or a derivative trade repository rule, or to direct ASIC to amend or revoke a derivative transaction rule or derivative trade repository rule;

b)

a decision by ASIC to make a derivative transaction rule or derivative trade repository rule; and

c)

a decision by ASIC whether or not to proceed with alternatives to civil proceedings allowed undersections 901F and 903E.

[ Schedule 1, item 37, paragraphs 1317C(gda ), 1317C(gdb) and 1317C(gdc )]

1.248 The decisions referred to in this item are subject to review under the Administrative Decisions (Judicial Review) Act 1975 .

1.249 Determinations by the Minister and derivative transaction rules and derivative trade repository rules made by ASIC are legislative instruments, and therefore also subject to other review mechanisms. Further detail is provided in the commentary to those aspects of the Bill.

1.250 A decision by ASIC whether or not to proceed with alternatives to civil proceedings, relates to alternative enforcement processes that may potentially be provided for by regulation. The regulations will set out any procedural protections in relation to a given alternative process. It should be noted that a number of possible alternatives are likely to relate to the respondent being able to consent to pay monies, undertake education etc. as an alternative to prosecution. It should be noted that decisions by regulators to take enforcement action are not generally subject to merits based review.

Item 38

1.251 Failure to comply with derivative transaction rules or derivative trade repository rules is a civil penalty provision. If the Court is satisfied that a person has failed to comply with either of these rules, the Court must make a declaration of contravention. [ Schedule 1, item 38, paragraphs 1317E(1 )( jaaca) and 1317E(1 )( jaacb )]

Item 39

1.252 If the Court makes a declaration of contravention by a person for a failure to comply with derivative transaction rules or derivative trade repository rules, the Court may order the person to pay a pecuniary penalty to the Commonwealth. The derivative transaction rules or derivative trade repository rules will specify the maximum amount payable for any contravention. [ Schedule 1, item 39, subsections 1317G(IDA) and 1317G(IDB )]

Item 40

1.253 If a corporation or listed scheme suffers damages as a result of a breach of the derivative transaction rules or derivative trade repository rules by another person, the corporation or the responsible entity for the listed scheme, may not apply to the Court for a compensation order [ Schedule 1, item 40, subsection 1317J(3B ]. ASIC may apply for a declaration on the corporation's behalf.

Item 41

1.254 The Bill corrects an omission in the relief provisions in the civil penalty regime, in relation to market integrity rule breaches. This item amends the Act so that, if proceedings for a failure to comply with market integrity rules are brought against a person, and it appears to the Court that the person has acted honestly, and that it would be fair to excuse the person for the contravention, the Court may relieve the person wholly or partly from a liability in relation to that convention. [ Schedule 2, item 5, subsection 1317S(1 )]

Item 42

1.255 If the Court is satisfied that a person has failed to comply with derivative transaction rules or derivative trade repository rules, the Court may make an order requiring that person to disclose specified information to a certain person, a certain class of persons, or the public, in a manner specified in the order. The Court may also make an order requiring that the person publish advertisements with specified materials, at that person's own expense. [ Schedule 1, item 41, subsection 1324B(1 )]

Item 43

1.256 Item 42 lists the offences created by this Bill, and inserts them into the list of offences at Schedule 3 of the Corporations Act. [ Schedule 1, item 42, Schedule 3 ]. The offences are as follows:

1.257 These amounts should be read as being subject to section 1312 of the Corporations Act which provides that where a body corporate commits an offence, the maximum penalty is five times the amount otherwise provided for the offence.

1.258 The significant penalties imposed for: a breach of the obligation in section 904B in respect of unauthorised use or disclosure of derivative trade data; or a breach of sections 905A or 907A in respect of the unauthorised operation of a trade repository or holding out as a trade repository, are appropriate given the potential financial rewards that may be gained or harm caused from misuse of derivative trade data and the potential impact on rights to privacy and commercial confidentiality.

Schedule 1 - Amendments relating to derivatives transactions

Part 2 - Amendments to other Acts

1.259 Cross-border cooperation and information sharing is an essential element of the new regime for improving transparency and managing risk in derivatives markets. This is because derivatives markets are generally global in nature. Parties to derivative transactions may be located in different countries. Parties may use financial market infrastructures (such as trade repositories, clearing facilities or trading platforms) fully or partially located in different countries, and which are subject to supervision by different regulators under different regulatory regimes.

1.260 At its core, the G-20 commitments are directed at different jurisdictions adopting harmonised and cooperative arrangements to ensure transparency and manage risk.

1.262 Therefore, reforms to facilitate appropriate sharing of information between domestic regulators and sharing between regulators in different jurisdictions form a key part of these reforms.

1.263 A number of the amendments to other Acts relate to the sharing of information between regulators and the protection of information in possession of those regulators. These reforms should be read in light of the various protections on trade information contained in Part 7.5A itself.

Australian Prudential Regulation Authority Act 1998

Items 44 to 45

1.264 The Bill extends APRA confidentiality and information protection provisions to data provided pursuant to the new regime.

1.265 A document given to APRA under the new Part 7.5A of the Corporations Act, other than a document which has already been lawfully made available to the public from other sources, is included in the definition of a protected document [ Schedule 1, item 44, subsection 56(1 )]. This means that it is an offence for any person who is, or has been an officer of APRA to produce such a document to any person or a court, unless the disclosure is in accordance with an exemption in the APRA Act.

1.266 Any information that is given to APRA under the new Part 7.5A of the Corporations Act, other than information which has already been lawfully made available to the public from other sources, is also included in the definition of protected information [ Schedule 1, item 45, subsection 56(1 )]. This means that it is an offence for any person who is, or has been, an officer of APRA to disclose such information to any person or a court, unless the disclosure is in accordance with an exemption in the APRA Act.

Australian Securities and Investments Commission Act 2001

Items 4V6 to 47

1.267 The Bill clarifies that a derivative trade repository is not a financial product for the purpose of the unconscionable conduct provisions in Division 1 of the ASIC Act. [ Schedule 1, items46, paragraph 12BAA(8 )( g )]. Financial markets and clearing and settlement facilities are also not financial products for the purpose of this Division.

1.268 The Bill also clarifies that the operation of a derivative trade repository is not a financial service for the purpose of the unconscionable conduct provisions in Division 1 of the ASIC Act. [ Schedule 1, item 47, paragraph 12BAB(1 )( g )]

Items 48 to 49

1.269 The Bill expands the following existing investigatory arrangements that apply specifically to financial market and clearing and settlement facilities to trade repositories as well. Other regulatory powers available to ASIC that apply generally in relation to its areas of responsibility will also apply to the new regulatory responsibilities provided for in the Bill.

1.269 The Minister may direct ASIC to investigate a matter relating to the provision of a derivative trade repository, if he or she is of the opinion that such an investigation would be in the public interest. [ Schedule 1, item 48, paragraph 14(2 )( g )]. If the Minister makes such a direction, ASIC must comply. ASIC must prepare a report on the investigation and give a copy for the Minister. The report may also be distributed to other agencies (the Australian Federal Police, the Australian Crime Commission, the Director of Public Prosecutions, or a prescribed agency) and to any person whose affairs the report relates to, and may be published if the Minister chooses to do so.

1.270 ASIC may give written notice to a derivative trade repository, or a member of the board of its operator, requiring that the person give to ASIC specified books relating to the business or affairs of the derivative trade repository. [ Schedule 1, item 49, paragraphs 31(1 )( a ), ( b) and (g )]

Items 50 to 51

1.272 The Bill clarifies and modifies the application of ASIC's confidentiality and information protection provisions to data provided pursuant to the new regime.

1.273 Any information given to ASIC under the new Part 7.5A of the Corporations Act is taken to be given to it in confidence. ASIC's general confidentiality protection laws then apply. ASIC must take all reasonable steps to protect such information from unauthorised use or disclosure. This provision protects derivative trade data given to ASIC under the framework. [ Schedule 1, item 50, subsection 127(1 )]

1.274 The existing confidentiality provisions are modified so that regulations may authorise disclosure of confidential information by ASIC to a body corporate that holds a derivative trade repository licence or that operates a prescribed derivative trade repository. ASIC may disclose this information if the Chairman is satisfied that the information will enable or assist the body corporate to monitor compliance with, enforce, or exercise powers under the Corporations Act, the business laws of another country, or the operating rules (if any) of the body corporate. [ Schedule 1, item 51, subsection 127(4C )]. ASIC may impose conditions on the disclosure to be complied with by the body corporate. The Bill imposes restrictions on the use or disclosure of that information by the body corporate. This provision enables the disclosure of information provided to one trade repository to another trade repository, where such disclosure is necessary, while applying strong protections to that data. All bodies corporate to which such information could be disclosed are required to have strict controls on any information given to them.

Items 52 to 53

1.275 The Financial Transactions Reports Act 1988 imposes restrictions on disclosure of information by cash dealers. If a cash dealer reports certain information to AUSTRAC, they are prohibited from communicating to any other person that they have given that information to AUSTRAC, or that they have formed a suspicion that gave rise to such a report. This amendment to the ASIC Act states that despite the Financial Transactions Reports Act, a cash dealer may disclose information to a licensed or prescribed derivative trade repository [ Schedule 1, item 52, paragraph 243D(ca )]. This provision ensures that a person who reports information to a trade repository in accordance with requirements under the derivative transaction rules will not be in breach of the Financial Transaction Reports Act 1988 .

1.276 Under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 , if a reporting entity Vcommunicates information to AUSTRAC, whether because a suspicious activity reporting obligation or because of a request from AUSTRAC, the reporting entity is prohibited from communicating to any other person that they have given this information to AUSTRAC. This amendment to the ASIC Act states that, despite the Anti-Money Laundering and Counter-Terrorism Financing Act, a reporting entity may communicate information to a licensed or prescribed derivative trade repository [ Schedule 1, item 53, paragraph 243E(ca )]. This provision ensures that a person who reports information to a trade repository in accordance with requirements under the derivative transaction rules will not be in breach of the Anti-Money Laundering and Counter-Terrorism Financing Act.

Mutual Assistance in Business Regulation Act 1992

Item 54

1.276 The Mutual Assistance in Business Regulation Act 1992 (MABRA) and Mutual Assistance in Business Regulation Regulations 1992 (MABRR) permit Australian business law regulators, ASIC, APRA and the Australian Competition and Consumer Commission (ACCC) as prescribed in regulation 4 of the MABRR, to respond to requests of foreign counterparts. The MABRA permits a foreign regulator to request that that an Australian business law regulator obtains information, documents or evidence from a person in Australia and then transmit such information or documents to a foreign regulator relating to a matter specified in the request.

1.277 Prior to responding to any request from a foreign regulator to obtain information, documents or evidence, the Australian business law regulator must seek ministerial authorisation under section 8 of the MABRA.

1.278 Under section 22 of the MABRA, the Minister has the power to delegate his authorisation function to the Treasury Secretary or an APS employee in the Treasury. The Bill amends section 22 to permit the delegation of the ministerial authorisation function to members, or members of the board, of Australian business law regulators, such as ASIC Commissioners. The Bill also permits this ministerial authorisation function to be delegated to senior officers employed by the regulators, namely: SES (or acting SES) employees; Executive Level 2 (or acting Executive Level 2) employees; or employees who, whilst not having an APS classification, hold a position at one of the Australian business law regulators that is equivalent to an SES or EL2 officer. This would include senior employees of APRA who are employed under the Australian Prudential Regulatory Authority Act 1988 .

Reserve Bank Act 1959

Items 55 to 64

1.279 The Bill extends the RBA's confidentiality and information protection provisions to data provided pursuant to the new regime.

1.280 Items 55 and 56 insert new definitions of financial sector supervisory agency and foreign central bank. These definitions are utilised in the new subsection 79A(4) and will include supervisory agencies with any financial supervisory responsibilities, or all such responsibilities

1.281 A document given to the RBA in relation to the performance of its functions under Part 7.5A of the Corporations Act will be a protected document[ Schedule 1, item 57, subsection 79A(1 )]There are restrictions on when an officer or former officer of the RBA can provide such a document to any person or Court, and to whom such a document may be provided. This provision ensures that any documents provided to the RBA under the new Part 7.5A are subject to legal protection.

1.282 Information given to the RBA in relation to the performance of its functions under Part 7.5A of the Corporations Act will be protected information [ Schedule 1, item 58, subsection 79A(1 )]There are restrictions on when an officer or former officer of the RBA can disclose such information to any person or Court, and to whom such information may be disclosed. This provision ensures that any information disclosed to the RBA under the new Part 7.5A is subject to legal protection.

1.283 Subsection 79A(2) allows a person who is, or has been, an officer of the RBA to reveal protected information or protected documents for the purposes of the RB Act, the Banking Act 1959 , Part 7.3 of the Corporations Act, section 62ZZD of the Insurance Act 1973 , the Payment Systems and Netting Act 1998or the repealed Banks (Shareholdings) Act 1972 . Unless an exception in another subsection applies, it is an offence if an officer of former officer reveals such information or documents to any person or a court and it is not for this purpose. The RBA's duties under Part 7.5 of the Corporations Act are included in this list of allowable disclosures [ Schedule 1, item 59, subsection 79A(2 )]

1.284 Notwithstanding subsection 79A(2), a person may disclose protected information or a protected document if the person to whom the information relates is their employer, or has given written permission for that disclosure. There is an error in this section that the Bill corrects. A reference to 'prohibited information,' a term which is not defined in the RB Act, is replaced with a correct reference to 'protected information,'[ Schedule 1, item 60, subsection 79A(3 )]

1.285 Notwithstanding subsection 79A(2), the Bill will provide that a person may disclose protected information or produce a protected document to a financial sector supervisory agency or a foreign central bank if the person is satisfied that this disclosure will assist the agency or central bank to perform its functions or exercise its powers [ Schedule 1, item 61, subsection 79A(4 )]. This amendment enables the RBA to share information with other regulatory authorities, including for the purpose of ensuring financial system stability, as it relates to derivative transactions.

1.286 Notwithstanding subsection 79A(2), a person may disclose protected information or produce a protected document, to ASIC if that information or document will assist ASIC in performing its functions or exercising its powers under Part 7.5A of the Corporations Act [ Schedule 1, item 62, subsection 79A(6A )]. This provision currently permits information sharing with ASIC to assist it to perform its functions or exercise its powers in relation to clearing and settlement facilities.

1.287 This amendment enables the RBA to share information with ASIC, including for the purpose of ensuring financial system stability as it relates to derivative transactions. ASIC officers are subject to restrictions on the circumstances in which they may disclose information obtained in the course of their duties, so information provided to ASIC by the RBA is subject to appropriate legal protections.

1.288 A person may disclose protected information or protected information that is obtained under Part 7.5A of the Corporations Act to the Minister, the Secretary of the Department, or an authorised officer of the Department[ Schedule 1, item 63, subsection 79A(6B )]. This amendment enables the RBA to share information with the Minister or the Department, including for the purpose of ensuring financial system stability as it relates to derivative transactions.

1.289 A person who is or has been an officer of the RBA can only be required to disclose protected information or produce a protected document to a court if it is necessary to do so for the purpose of the RB Act, the Banking Act, Part 7.3 of the Corporations Act, the Payment Systems (Regulations) Act 1998 , the Payment Systems and Netting Act or the repealed Banks (Shareholdings) Act. This section is amended so that an officer or former officer may also be required to disclose protected information or produce protected documents to a court if it is necessary for the purpose of Part 7.5A of the Corporations Act [ Schedule 1, item 64, subsection 79A(8 )]. This subsection ensures that documents or information held by the RBA can be disclosed to a court where it is necessary for the purpose of Part 7.5A of the Corporations Act.