IN THIS ISSUE

• Thank you Rob Brown
• ACSA website refresh – it’s all about you
• Breach reporting – new rules and reporting portal
• IBOR changes – consultation by the ATO on tax implications
• Portfolio Holdings Disclosure – a formal start date
• Digital assets – what’s new
  

THANK YOU ROB BROWN

ACSA'S REFRESHED WEBSITE

In late 2020 the ACSA Board set the Members & Services (M&S) Working Group the task of refreshing the ACSA website. Uplift in content, improved appearance and enhance navigation were key objectives. The website is an important communications channel for the ACSA community, and plays a key role in projecting who we are and what we stand for to external stakeholders.

Most importantly, the website provides a channel for information sharing relevant to our members. After great work by M&S contributors, led by Nicole Carnovale from Northern Trust and ably supported by ACSA’s executive assistant Kate Dent, the new website is up and running.

Check it out at www.acsa.com.au

Engagement is currently underway with the ACSA community, starting with Working Group sponsors, chairs and deputies to ensure the website remains “all about you” with relevant content, consistent with our brand, and reflective of our Association’s key advocacy positions. 

BREACH REPORTING

While breach reporting has been part of the financial services landscape for decades, some important changes came into force from 1 October 2021.

ASIC has provided regulatory resources at Breach Reporting.

ASIC consultation (CP 340) issued in April 2021 provides context and background for the changes. Previous reporting obligations are set out in s912D of the Corporations Act 2001 (Corporations Act), and apply to AFSL holders. The Financial Sector Reform (Hayne Royal Commission Response) Act 2020 (Financial Sector Reform Act) clarifies the breach reporting obligation that apply1 .

This legislation implements Recommendations 1.6, 2.8 and 7.2 of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Financial Services Royal Commission).

RG 78 - Breach reporting by AFS licensees and credit licensees issued in September 2021 provides guidance and outlines ASIC’s expectations regarding the current regulation. See RG 78.

1 The legislation also extends to application to Australian credit licensees.

IBOR CHANGES

The transition from inter-bank offered rates as benchmarks has accelerated internationally since the announced reforms on the demise of LIBOR in the late 2010’s. In Australia, reforms have been strongly supported by the Australian Prudential Regulation Authority (APRA) and the Reserve Bank of Australia (RBA). ASIC has also sought comfort on readiness for change from AFSL licensed entities via letter to chief executives in 2019. ASIC has also published an information sheet on conduct risk in managing the transition from LIBOR. See INFO 252.

Initial review by ACSA, including polling of members, concluded that the direct impact on custody was limited, but acknowledge the much greater impact on other financial services.

Financial instruments and commercial agreements that reference inter-bank offered rates must be amended to alternative risk-free rates. Areas of concern by industry include the regulatory interpretation of these changes including for valuation, accounting and tax purposes.

Earlier this month the ATO hosted an industry-wide meeting to further consultation on tax implications of IBOR reform and contractual changes. This followed earlier written submissions on approaches to this important change, including the following from peer associations:

At a high-level, AFMA, ABA and the FSC would support the ATO outlining a practical approach to the taxation consequences on IBOR-transition which leverages existing processes being undertaken by affected taxpayers and categorises the various affected contracts from a risk perspective. This would ensure that compliance resources are appropriately allocated. The approach adopted in PCG 2017/8 regarding internal derivatives would be an appropriate precedent for such an approach.

Practical Reliance on Accounting Treatment Under the approach outlined in the Discussion Paper, it is necessary for taxpayers to review each contract under which the reference rate has been changed from an IBOR to a different rate to determine whether there has been a legal form variation or rescission of the underlying contract. That is, the approach adopted in the Discussion Paper is that the source of truth for determining the taxation consequences of IBOR reform is the legal effect of the contractual changes.

ACSA was represented at the ATO industry meeting by Duncan Lyon and Doug McMeekin (chair and deputy chair of the ACSA Tax Working Group).

ACSA understand that the ATO’s view is that some level of legal analysis will need to be undertaken in order to determine whether contractual changes (resulting from reference change) amount to a recission or a variation - and this technical distinction will drive the taxation consequences.

The ATO is in the process of preparing guidance for release on their web site in this regard.

For more information, or to contribute to industry dialogue, please contact Duncan Lyon via admin@acsa.com.au

DIGITAL ASSETS

Prior editions of Industry Wrap have featured the evolving landscape of digital assets, and ACSA’s local involvement and change continues at pace.

A couple of recent development relevant to securities services: 

A subsidiary of the Swiss securities exchange, SIX Digital Exchange (SDX), announced that they have received approval from the Swiss Financial Market Supervisory Authority to operate a stock exchange and a central securities depository for digital assets in Switzerland.

SDX says that this allows them to go live with a fully regulated, integrated trading, settlement, and custody infrastructure based on distributed ledger technology for digital securities. See SDXannouncement for details.

A recently released white paper from Citi shares survey results and views on distributed ledger technology.

The topics include settlement cycle compression (to T+1 and potentially T+0) against the back drop of a rapidly changing global securities landscape and focus by both regulators and market participants on the impacts of the pandemic including spikes in volatility, remote working.

The paper is available at Citi Securities Services Evolution.

You can also view a recorded update by ACSA Chair Sally Surgeon and Alternate Director Sinclair Scholfield at Digital Assets ACSA Update.

PORFOLIO HOLDINGS DISCLOSURE (PHD) FOR SUPERANNUATION FUNDS

Background

Government policy requiring granular disclosure of portfolio holdings to members was first articulated in 2013, and a number of funds have moved to voluntary adoption. Most recently, PHD regulatory refinement of rules and reporting formats was included in the Your Super Your Future package of legislation.

From Treasury’s explanatory Memorandum:

The Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 1) Act 2019 (the Act) introduced measures to increase the amount and quality of information available to superannuation fund members and other stakeholders.

These measures have subsequently been amended by the Treasury Laws Amendment (Your Future, Your Super) Act 2021. These included amendments to the ‘portfolio holdings disclosure’ regime to ensure that information is available to members about the portfolio holdings of superannuation funds.

Treasury issued a call for public consultation in August 2021 through the release of an Exposure Draft, to which ACSA responded .

The key points raised by ACSA deal with practical implementation issues, including:

• The need for further industry guidance, in particular data definitions that are clear given the high granularity of data points, including, as an example, in respect of derivative instruments;
• Alignment and harmonization, where appropriate, with other regulatory data disclosure and collections, such as the APRA Superannuation Data Transformation reporting.

While the ultimate purpose of the two regulatory verticals (APRA and ASIC) are different, there are compelling practical reasons for the data taxonomy to be aligned, especially for asset classification. Consistency assists both producers and consumers of the information.

Current Regulatory Status

Whilst the Your Future, Your Super regulations are now finalised and a commencement date of 31st December for PHD disclosure being confirmed, Treasury has yet to finalise specific PHD regulations. As a result, regulatory guidance is yet to be provided by ASIC.

The format being proposed within Schedule 8D of the Exposure Draft can be found at Treasury PHDRegulations.

Practical challenges What we know in terms of definitions, prescribed formats and data definitions (at the time of publication):

• Categorisation of asset classes is broadly in line with existing reporting required to support the APRA 530 series, but does not reflect recent changes to requirements adopted as part of APRA’s Superannuation Data Transformation project. As far as possible, the preference would be for these requirements to fully align.
• A formal response to the public consultation as well as final regulation from Treasury and regulatory guidance from ASIC is pending. As a result, challenges are likely to be faced in developing solutions in time for the first reporting date of 31st December 2021 (albeit with a 90 day lag before the information needs to be made available to members on websites).

The ‘look-through’ requirements are slightly less onerous than existing APRA reporting in that disclosure of underlying holdings is required for associated entities and PSTs. A look into nonassociated entity holdings is not required. The depth or layers of look-through is potentially greater under PHD as the APRA reporting practice of reporting the most proximate investment is not recognised within the PHD regulations.

In addition, the prescribed format within the Exposure Draft poses a number of specific challenges:

• There is an increased granularity required in relation to disclosure of derivative positions, including credit ratings (which are not required for non-derivative positions).
• Furthermore, there was previously an expectation that similar ‘types’ of assets could be grouped together. The expectation now is that each individual holding requires disclosure individually. This includes both derivative and non-derivative positions, as well as those previously deemed eligible for non-disclosure. This is likely to significantly increase the volume of data being reported. 

ACSA’s role

A subgroup of the ACSA Regulatory Working Group is leading review of the regulations, including liaison with the broader industry on challenges and encouraging common market practice.

Work in progress and next steps include the preparation of a ‘white paper’ highlighting proposed best practice in regard to the foundational principles of look-through, asset class groupings and data elements. In addition, the subgroup will continue direct engagement with Treasury and ASIC to promote adoption of the changes in a measured and consistent manner.

For more information, or to contribute to industry dialogue, please contact Adam Taxakis, Chair of the ACSA Regulatory Working Group, via admin@acsa.com.au.