Commonwealth Numbered Regulations - Explanatory Statements
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CORPORATIONS LAWS AMENDMENT (2014 MEASURES NO. 3) REGULATION 2014 (SLI NO 185 OF 2014)
EXPLANATORY STATEMENT
Select Legislative Instrument No. 185, 2014
Issued by authority of the Treasurer
Corporations Act 2001; Competition and Consumer Act 2010; and the
Australian Securities and Investments Commission Act 2001
Corporations Laws Amendment (2014 Measures No. 3) Regulation 2014
Section 1364(1) of the Corporations Act 2001 (the Corporations Act), section 172 of the Competition and Consumer Act 2010 (the CCA) and section 251(1) of the Australian Securities and Investments Commission Act 2001 (the ASIC Act) each provide that the Governor-General may make regulations prescribing matters required or permitted by the Acts to be prescribed, or necessary or convenient to be prescribed for carrying out or giving effect to the Acts.
Subsection 904B(2)(d) of the Corporations Act provides for persons or bodies to be prescribed in regulations to allow them to request a derivative trade repository licensee to provide derivative trade data that is retained in the derivative trade repository.
The Corporations Laws Amendment (2014 Measures No. 3) Regulation 2014 (the Regulation) makes various amendments to the Corporations Regulations 2001, the Competition and Consumer Regulations 2010 and the Australian Securities and Investments Commission Regulations 2001 principally to prescribe new professional standards schemes at the Commonwealth level, make the end user exemption with respect to the regulation of over-the-counter derivatives permanent; and prescribe the Monetary Authority of Singapore (MAS) as an authority able to request derivative trade data from trade repositories licensed to operate in Australia.
Prescription of new professional standards schemes
Professional Standards legislation in each state and territory operates, where applicable, to limit the civil liability of professionals and others while still maintaining appropriate protection for consumers of professional services through such measures as compulsory insurance cover and complaints procedures.
Provision is made in the ASIC Act, the Corporations Act, and the CCA for the prescription of state and territory schemes. The effect of prescription is to limit occupational liability under certain federal legislation in the same way it is limited under relevant state legislation.
The Regulation amends the Competition and Consumer Regulations 2010, to prescribe the following professional standards schemes:
• The Institute of Chartered Accountants in Australia Professional Standards Scheme (ACT);
• The Institute of Chartered Accountants in Australia Professional Standards Scheme (NSW);
• The Institute of Chartered Accountants in Australia Professional Standards Scheme (NT);
• The Institute of Chartered Accountants in Australia Professional Standards Scheme (SA);
• The Institute of Chartered Accountants in Australia Professional Standards Scheme (Queensland);
• The Institute of Chartered Accountants in Australia Professional Standards Scheme (Victoria); and
• The Institute of Chartered Accountants in Australia Professional Standards Scheme (WA).
The prescription of the schemes has the effect of limiting the occupational liability of members of the schemes relating to an action for contravention of section 18 of the Australian Consumer Law (schedule 2 to the CCA) in the same way as occupational liability is limited under State and Territory laws.
• Section 18 of the Australian Consumer Law (schedule 2 to the CCA) prohibits misleading and deceptive conduct by persons in trade or commerce.
The Regulation also amends the Australian Securities and Investments Commission Regulations 2001 and the Corporations Regulations 2001 to prescribe the following professional standards schemes:
• The Institute of Chartered Accountants in Australia Professional Standards Scheme (ACT);
• The Institute of Chartered Accountants in Australia Professional Standards Scheme (NSW);
• The Institute of Chartered Accountants in Australia Professional Standards Scheme (NT);
• The Institute of Chartered Accountants in Australia Professional Standards Scheme (SA);
• The Institute of Chartered Accountants in Australia Professional Standards Scheme (Queensland);
• The Institute of Chartered Accountants in Australia Professional Standards Scheme (Victoria); and
• The Institute of Chartered Accountants in Australia Professional Standards Scheme (WA).
The prescription of the schemes has the effect of limiting the occupational liability of members of the schemes relating to an action for contravention of section 12DA of the ASIC Act, or section 1041H of the Corporations Act in the same way as occupational liability is limited under State and Territory laws.
Section 12DA of the ASIC Act deals with misleading or deceptive conduct in relation to financial services; and part 7.10 of the Corporations Act deals with market misconduct and other misconduct relating to financial products and financial services.
The Regulation also amends the tables in the Australian Securities and Investments Commission Regulations 2001, Corporations Regulations 2001 and Competition and Consumer Regulations 2010 to renumber the items.
The Commonwealth has not consulted on this measure. The Professional Standards Council seeks the opinion of independent actuarial consultants and calls for public comment on professional standards schemes via public notification in major newspapers circulating throughout the relevant jurisdictions prior to approving schemes. Further consultation was not considered necessary.
End user exemption
Regulation 7.5A.50 of the Corporations Regulations 2001 (the Principal Regulations) exempts end users from the legislative framework applying to over-the-counter (OTC) derivatives. The purpose of this provision is mainly to avoid subjecting corporate entities that use OTC derivatives from the regulatory burden of complying with the OTC derivatives rules. An example would be an airline that uses OTC derivatives to hedge its fuel and related foreign currency costs and exposures.
Without the exemption end users may be required to comply with reporting requirements imposed under rules determined by the Australian Securities and Investments Commission (ASIC). The Government has also proposed implementing a requirement for certain classes of OTC derivatives transactions to be centrally cleared. Without the end user exemption end users could also be affected by this obligation.
The exemption was originally made in July 2013. This was at an early stage in the development of the OTC derivatives reforms. While there was some awareness that end users were not major participants in OTC derivatives markets, there was at the time limited hard evidence available supporting this view.
Given the lack of a full understanding of conditions in the Australian OTC derivatives markets at that stage the Government was reluctant to implement a blanket and permanent exemption for end users. The Government accordingly agreed to a time-limited exemption which in its current form expires at the end of 2014.
Understanding of the participants and their roles in the Australian OTC derivatives markets has in the meantime improved considerably. Improved awareness of the role of non-financial end users has made it clear that it is not meaningful to include these entities within the scope of the OTC derivatives reforms. This reasoning is based on the low level of activities of end users, their use of OTC derivatives to hedge other commercial risks, and the high compliance costs that would be imposed on them if they were made subject to the OTC derivatives reforms.
The Regulation makes the end user exemption that is due to expire at the end of 2014 permanent.
The Government has consulted publicly on this measure in a Proposals Paper released in February 2014. Feedback received indicates that there is strong stakeholder support for making the end user exemption permanent.
MAS prescription
OTC derivative trade data refers to information concerning OTC derivatives transactions reported by businesses to data warehouses known as trade repositories. The information is then made available to regulators. Reporting of OTC derivatives transactional information to trade repositories is one of the global reforms addressing the lack of transparency in OTC derivatives markets that became apparent in the global financial crisis.
The Corporations Act imposes restrictions as to which persons may request access to data held by licensed trade repositories. The legislation also includes a power for entities to be prescribed by regulation as being permitted to obtain OTC derivatives trade data from a licensed trade repository.
On 15 September 2014 ASIC granted its first Australian trade repository licence to a Singapore-based entity called DTCC Derivatives Repository (Singapore) Pte Ltd (DDRS). DDRS will remain primarily located and regulated in Singapore by MAS. Certain regulatory functions in relation to DDRS's Australian operations will be shared between MAS and ASIC. ASIC and MAS have been discussing and finalising the detailed arrangements which will govern their shared supervision.
As part of these arrangements MAS and ASIC have negotiated a bilateral trade repository data sharing Memorandum of Understanding (MoU). Under the MoU MAS is providing access to ASIC to data reported in Singapore, and ASIC has committed to take all reasonable steps to provide MAS with access to data reported in Australia. ASIC has therefore approached the Government with a request to prescribe MAS in the Corporations Regulations 2001 as a foreign regulator allowed to access data held by an Australian licensed trade repository.
The Regulation designates MAS as a prescribed entity allowed to access derivative trade data in Australia. A number of safeguards are imposed on any requests by MAS. These place limits on the types of information which may be requested and the purposes for which it may be used. Access is also made subject to international principles relevant to this field.
Subsection 904B(3) of the Corporations Act stipulates that regulations must not be made prescribing a person or body for the purpose of accessing derivative trade data unless the Minister is satisfied that there are adequate controls on the use or disclosure of any derivative trade data provided to the person or body. The Minister has satisfied himself that there are adequate controls on the use or disclosure of any derivative trade data obtained by MAS.
Sections 7.5A.150A and 7.5A.150B of the Corporations Regulations 2001 previously prescribed a number of European Union authorities as persons authorised to request derivative trade data in Australia. The Regulation changes the current structure of these regulations without changing their substance. Minor amendments are made to ensure that these authorities are able to gain access to a slightly wider range of information with respect to the transactions in which they are interested than was the case under the previous provisions.
The Government has not consulted widely on this measure as it only directly affects one organisation, being DDRS.
Details of the Regulation are included in the Attachment.
The Regulation is a legislative instrument for the purposes of the Legislative Instruments Act 2003.
There are no statutory pre-conditions that need to be satisfied before the power to make the Regulation may be exercised.
ATTACHMENT
Details of the Corporations Laws Amendment (2014 Measures No. 3) Regulation 2014
Section 1 - Name of Regulation
This section provides that the title of the Regulation is the Corporations Laws Amendment (2014 Measures No. 3) Regulation 2014 (the Regulation).
Section 2 - Commencement
This section provides that sections 1 to 4 and Schedule 2 of this Regulation commences the day after it is registered and that Schedule 1 of this Regulation commences on 1 December 2014.
Section 3 - Authority
This section provides that the Regulation is made under the Corporations Act 2001 (the Corporations Act), the Competition and Consumer Act 2010 (the CCA) and the Australian Securities and Investments Commission Act 2001 (the ASIC Act).
Section 4 - Schedules
This section provides that each instrument that is specified in a Schedule to the Regulation is amended or repealed as set out in the applicable items in the Schedule concerned, and any other item in a Schedule to this instrument has effect according to its terms.
Amendments
Schedule 1 - Professional standards schemes
The overarching aim of professional standards schemes and liability caps is to maintain affordable levels of professional indemnity insurance, as well as to improve professional standards and consumer protection.
Professionals who are members of approved schemes are provided with an incentive (capped liability) to lift their standards and better manage their risks through a requirement to hold adequate levels of insurance and undertake risk management practices and professional development. Consumers are intended to benefit from schemes because they put downward pressure on insurance premiums, by limiting the liability of professionals and their insurers and, in the event of a claim, the prospects of recovery may be enhanced because the professional is required to hold insurance at levels that they otherwise may not have taken out in the absence of a scheme.
Generally, civil liability claims against professionals are governed by State law. All States have specific legislation which governs the prescription of professional standards schemes.
Each State has established a council to assess and approve State scheme applications. Each council has common membership and sits simultaneously; subsequently the councils are identified as one entity, the 'Professional Standards Council' (the Council). Occupational associations, for example barristers, make an application to the Council for approval of schemes. Once approved by the Council the schemes are published by the relevant State in their Government Gazette.
The Regulation amends the Competition and Consumer Regulations 2010, to prescribe the following professional standards schemes:
• The Institute of Chartered Accountants in Australia Professional Standards Scheme (ACT);
• The Institute of Chartered Accountants in Australia Professional Standards Scheme (NSW);
• The Institute of Chartered Accountants in Australia Professional Standards Scheme (NT);
• The Institute of Chartered Accountants in Australia Professional Standards Scheme (SA);
• The Institute of Chartered Accountants in Australia Professional Standards Scheme (Queensland);
• The Institute of Chartered Accountants in Australia Professional Standards Scheme (Victoria); and
• The Institute of Chartered Accountants in Australia Professional Standards Scheme (WA).
The Regulation has the effect of limiting the occupational liability of members of the schemes relating to an action for contravention of section 18 of the Australian Consumer Law (schedule 2 to the CCA).
• Section 18 of the Australian Consumer Law (schedule 2 to the CCA) prohibits misleading and deceptive conduct by persons in trade or commerce.
The Regulation also amends the Australian Securities and Investments Commission Regulations 2001 and Corporations Regulations 2001 to prescribe the following professional standards schemes:
• The Institute of Chartered Accountants in Australia Professional Standards Scheme (ACT);
• The Institute of Chartered Accountants in Australia Professional Standards Scheme (NSW);
• The Institute of Chartered Accountants in Australia Professional Standards Scheme (NT);
• The Institute of Chartered Accountants in Australia Professional Standards Scheme (SA);
• The Institute of Chartered Accountants in Australia Professional Standards Scheme (Queensland);
• The Institute of Chartered Accountants in Australia Professional Standards Scheme (Victoria); and
• The Institute of Chartered Accountants in Australia Professional Standards Scheme (WA).
The Regulation has the effect of limiting the occupational liability of members of the schemes relating to an action for contravention of section 12DA of the ASIC Act which deals with misleading or deceptive conduct in relation to financial services and section 1041H of the Corporations Act which deals with market misconduct and other misconduct relating to financial products and financial services.
Schedule 2 - Trade reporting and central clearing of OTC derivatives
Item [1]
Item 1 removes subregulation 7.5A.50(4) which provides that the end user exemption expires with effect from 31 December 2014. This ensures that the exemption becomes permanent.
Item [2]
Item 2 restructures the current regulations 7.5A.150A and 7.5A.150B prescribing a number of European Union (EU) authorities into one single regulation 7.5A.150A. However, the substance of the two previous regulations does not change.
Subregulation 7.5A.150A continues to prescribe a number of EU authorities listed in Article 81(3)(a) to (e), (g), (h) and (j) of Regulation (EU) No 648/2012 of the European Parliament and the Council of the European Union, dated 4 July 2012, as authorised by paragraph 904B(2)(d) of the Corporations Act. These entities are:
• the European Securities and Markets Authority;
• the European Systemic Risk Board;
• European authorities supervising central counterparties through which reportable transactions are cleared;
• European authorities supervising the trading venues on which the reportable transactions are executed;
• Relevant members of the European System of Central Banks;
• European supervisory authorities appointed under Article 4 of Directive 2004/25/EC of the European Parliament and of the Council on takeover bids;
• Relevant European Union securities and market authorities; and
• the European agency for the Cooperation of Energy Regulators.
Item 2 imposes a number of restrictions on the data that these agencies and authorities can access, as authorised by subsection 904B(4) of the Corporations Act. These restrictions were already applied by the previous provisions.
Subregulation 7.5A.150A(2) provides that the prescribed bodies listed above can only access derivative data if the information relates to an OTC derivatives transaction or position that is required to be reported under the Australian trade reporting regime or under an ASIC waiver provided under section 907D. In addition, one of subregulations 7.5A.150A(3) or 7.5A.150A(4) must apply to the information.
Former subregulation 7.5A.150B(2) stated the same requirement but applied it to information that was required to be reported, rather than to information related to a transaction or position that is required to be reported. The new wording is slightly broader in scope and allows a trade repository to disclose information it holds related to a transaction or position a prescribed EU body is interested in, even if that specific piece of information is not prescribed in the Australian trade reporting rules.
Under subregulation 7.5A.150A(3) access to information can be sought if it is related to a transaction or position that is required to be reported under certain EU trade reporting rules, but which has been reported to an Australian licensed trade repository under mutual regulatory recognition arrangements. The relevant EU rules are set out in detail in paragraphs 7.5A.150A(3)(a), 7.5A.150A(3)(b) and 7.5A.150A(3)(c). The same change to the previous wording is made as described in the last paragraph, allowing a prescribed EU body to seek any information as long as it is related to a transaction or position that is subject to European trade reporting requirements as specified in further detail in the subregulation.
Subregulation 7.5A.150A(4) applies if the information is not covered by subregulation (3) but relates to a EU or European Economic Area underlying asset, index, rate or currency.
Item 2 sets out a number of provisions in proposed regulation 7.5A.150B allowing the Monetary Authority of Singapore (MAS) to seek access to certain derivative trade data from an Australian licensed trade repository.
Subregulation 7.5A.150B(1) designates MAS as a prescribed body, as authorised by paragraph 904B(2)(d) of the Corporations Act. It is noted that regulation 7.5A.150B is framed in a manner that makes it applicable to any further bodies prescribed under subregulation 7.5A.150B(1). The regulation has been structured in this manner as it is expected that further international regulators may seek to be prescribed in a similar manner to MAS as the global OTC derivatives reforms are adopted in further jurisdictions.
Subregulation 7.5A.150B(2) makes any request submitted by MAS subject to relevant international standards. These standards are contained in the report "Authorities' access to trade repository data" issued by the Committee on Payment and Settlement Systems (CPSS) and the International Organisation of Securities Commissions (IOSCO), as amended from time to time (noting that CPSS has meanwhile changed its name to the Committee on Payments and Market Infrastructures). The standards set out the types of data that should be subject to sharing arrangements and the conditions under which they may be provided, including appropriate confidentiality protections.
These standards are not included in the conditions applying to EU bodies seeking information as prescribed in regulation 7.5A.150A. The reason is that those conditions form part of an overall package of measures relating to the exchange of information between EU and Australian regulators that have been negotiated and are now close to being finalised. The outcome achieved is, however, similar, as the CPSS-IOSCO standards cover matters that are dealt with separately under regulation 7.5A.150A.
Subregulation 7.5A.150B(3) clarifies that if a request is partly in accordance with the prescribed standards, then it may be fulfilled to the extent that it is compliant.
Subregulation 7.5A.150B(4) limits all requests to information that is related to transactions or positions that are subject to reporting requirements in Australia, as authorised by subsection 904B(4) of the Corporations Act. In addition, under subregulations 7.5A.150B(5) and 7.5A.150B(6) , the information must relate to a transaction or position that is subject to reporting requirements in Singapore, relates to a Singapore underlying asset, index, rate or currency, or is related to a counterparty located in Singapore. In addition, the information must be required by MAS as part of its official duties.
The restrictions imposed on MAS differ slightly from those applicable to the EU bodies listed in regulation 7.5A.150A. This results from differing outcomes of discussions with the regulatory authorities in the two jurisdictions, reflecting different circumstances, regulatory regimes and information requirements.
Statement of Compatibility with Human Rights
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
Corporations Laws Amendment (2014 Measures No. 3) Regulation 2014
This Legislative Instrument is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.
Overview of the Legislative Instrument
The purpose of the Corporations Laws Amendment (2014 Measures No. 3) Regulation 2014 (the Regulation) is to:
• prescribe new professional standards schemes at the Commonwealth level;
• make the end user exemption with respect to the regulation of over-the-counter derivatives permanent; and
• prescribe the Monetary Authority of Singapore (MAS) as an authority able to request derivative trade data from trade repositories licensed to operate in Australia.
Human rights implications
The first two measures in this Legislative Instrument do not engage any of the applicable human rights or freedoms.
The third measure, which prescribes MAS as an authority able to request derivative trade data from trade repositories licensed to operate in Australia, may have an impact on the right to privacy, as the information provided to MAS may include personal information as defined in section 6 of the Privacy Act 1988.
Effective regulation of the OTC derivatives market requires regulators to have detailed data on counterparty and beneficiary exposures where these will pose a systemic risk. A requirement to report transactions, and relevant information in relation to those transactions, is the most effective method of achieving this legitimate objective. The exchange of such information across borders is necessary to achieve the legitimate objective because OTC derivatives markets are global by nature. Access to relevant information in other jurisdictions is required to ensure that Australian and other regulators have the data they need to assess counterparty exposures and support the detection and prevention of market abuse.
It is furthermore noted that OTC derivatives transactions are rarely conducted by private individuals, as they are mostly used by corporate entities for hedging or speculative purposes. In addition, MAS is only allowed to access such information subject to a number of conditions, including international standards, ensuring that it can only do so for legitimate purposes related to its duties. Finally, MAS is, as verified by the Minister, subject to strict conditions with respect to the use and disclosure of protected information, including appropriate penalties for breaches of those conditions.
A Statement of Compatibility with Human Rights in relation to the derivatives trade reporting regime generally is provided under Chapter 2 of the Explanatory Memorandum to the Corporations Legislation Amendment (Derivatives Transactions) Bill 2012.
Conclusion
This Legislative Instrument is compatible with human rights because, to the extent that it may limit those rights, it does so where justified by legitimate reasons and only to the extent required by those reasons as well as subject to a range of appropriate protections.
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