Derivative contracts are financial instruments that grant rights to a future payment. These payments are usually defined with reference to the value or amount of an underlying asset, rate or index. Derivative contracts can have a number of features or forms. One common example is a call option that gives one investor the right (as opposed to the obligation) to buy an asset from another at a future date for a price agreed today. Derivative contracts essentially allow investors to transfer risk, profit and price exposures between themselves without transferring legal ownership of the underlying asset. Derivatives can be traded on exchanges, such as the Australian Stock Exchange, or between counterparties directly (referred to as ‘over-the-counter’ (OTC) derivatives). A key feature of OTC contracts is that they are not reported on a public exchange, or cleared through a central counterparty. OTC derivatives are also able to be customised to the specific requirements of each counterparty. Collectively, these features may reduce transaction costs and maintain trader anonymity. On 2 May 2013 the Minister determined that the Australian Securities and Investments Commission (ASIC) can make trade reporting rules relating to the following derivative classes: interest rate, foreign exchange, credit, equity; and all commodities other than electricity. By requiring certain classes of derivatives to be reported to a trade repository (which maintains a central registry with a record of all transactions), the legislation is a significant change to the OTC derivatives market. The changes are primarily aimed at increasing transparency, both to the market and to regulators. This in turn is aimed at reducing systemic risk through more regulatory oversight – however, it should be noted that the Australian OTC derivative market has not experienced any systemic problems or institutional failures. The main direct cost to market participants is likely to result from the provision of data to a trade repository. This requires that a market participant either has some direct connectivity to the trade repository, or can use an agent or other intermediary arrangement to transmit and access necessary information. However, since most affected Australian entities already trade in overseas jurisdictions which have similar reporting requirements, any additional costs are likely to be minimal. A Regulation Impact Statement was prepared by the Treasury and assessed as adequate by the Office of Best Practice Regulation.
262 KB]
540 KB]