The Australian Parliament has just passed the Corporations Legislation Amendment (Derivative Transactions) Bill 2012.
The changes require the Minister and ASIC to have regard to the likely impact on the underlying physical markets when making a determination imposing a mandatory obligation or making a Derivative Transaction Rule (DTR) in relation to a commodity derivative.
Why have the changes been made?
The changes have been made in response to concerns expressed by stakeholders that limitations on the use of OTC derivatives may affect the operation of the underlying physical market.
Energy market participants have been particularly concerned to ensure that the operation of the National Electricity Market (NEM) is considered prior to the introduction of any determinations relating to electricity derivatives. These concerns stem from the fact that, unlike tangible commodities (such as oil, which can be stored in ships and tanks, or gold, which can be stored in bullion reserves), electric energy is very difficult to store or transfer between regions, which gives rise to volatile spot power prices. This can lead to very significant differences between the derivative price and the underlying spot commodity price, particularly for shorter term contracts.
Regulations that reduce the number of available participants in the electricity derivatives markets, or otherwise inhibit liquidity in those markets, could leave participants in the volatile underlying power price market considerably more exposed and ultimately increase rather than reduce systemic risk.
Several NEM participants made submissions to the Government highlighting these issues and indicating that, as a consequence, the derivatives reforms could potentially have led to less flexibility in the management of electricity market risks, and a consequent price increase for customers.
Next steps
The Bill is expected to be assented soon, with the substantive changes to come into effect on the 28th day after assent.
There are still important pieces of the puzzle that have not yet been finalised. It is not yet known if or when the responsible Minister will prescribe a class or classes of derivatives under the new laws. However, if this occurs, the Australian Securities and Investments Commission will consult publicly in relation to any rules that will apply to prescribed classes of derivatives.
You might also be interested in ...
- APRA's welcome transitional relief to Basel III counterparty credit risk measures implementation
- Regulators support industry-led move to OTC central clearing for now, and broad mandatory reporting
- Derivatives Developments - A New World Order
- Government introduces derivatives reform Bill into Parliament
- One month left to shape APRA's implementation of Basel III OTC derivatives capital requirements
- FIA-ISDA Addendum for cleared derivatives transactions released
- ISDA publishes Tri-Party IA Notices
- ISDA Dodd-Frank Protocol opens for adherence
- ISDA Eurozone Contingency Planning - New Illegality/Force Majeure Protocol
- ASIC looks at relaxing financial requirements for issuers of electricity derivatives
- English court upholds ISDA's interpretation of ISDA Master Agreement
- Government consults on new OTC derivatives framework for Australia
- CAMAC releases report on derivatives regulation
- ISDA publishes draft Appendix to the 2011 ISDA Equity Derivatives Definitions
- Documentation developments: Section2(a)(iii) of the ISDA Master Agreement
- Where to now for OTC derivatives - lessons from ISDA's AGM
Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.