Response to submissions on proposed ARS 722.0 ABS/RBA derivatives data collection

To: All authorised deposit-taking institutions and registered financial corporations

The Australian Prudential Regulatory Authority (APRA) has today released a response to submissions on a proposed Reporting Standard ARS 722.0 ABS/RBA Derivatives (ARS 722.0) within the Economic and Financial Statistics (EFS) data collection. ARS 722.0 will be used to collect quarterly data on the derivatives activity of authorised deposit-taking institutions (ADIs) and registered financial corporations (RFCs). APRA’s new approach to ARS 722.0 will provide greater certainty about reporting obligations and will reduce reporting burden for most financial sector entities.

Background

In January 2017, the Reserve Bank of Australia, the Australian Bureau of Statistics (ABS) (collectively, ‘the agencies’) and APRA commenced consultation on the EFS data collection.¹ The consultation package included 21 reporting standards, including ARS 722.0.

In their August 2017 response to submissions² , APRA and the agencies stated that they would consider derivatives reporting further and consult at a later date. 

In March 2019, APRA and the agencies released an updated version of ARS 722.0 and reporting guidance for consultation. The updates included the movement of the derivatives reporting section of ABS Survey of International Investment to ARS 722.0. APRA and the agencies also made various changes to the reporting form to reflect specific points of feedback on the reporting form and instructions.

ARS 722.0 is designed to meet the international and domestic reporting requirements as prescribed by the 2008 System of National Accounts (SNA08) and Balance of Payments Manual (BPM6). These statistical frameworks require reporting of derivatives as financial instruments in their own right, which does not align with Australian Accounting Standards Board (AASB) reporting.

Submissions received 

APRA received eight submissions from industry, six of which were from reporting entities. The main themes discussed in the submissions included the implementation date, reporting thresholds, clarification of data quality expectations, and reporting of intragroup and related party transactions. Two submissions queried the derivative instrument classification used in the reporting form. Two submissions also sought clarification on adjustments applied to derivatives and alignment with other EFS reporting forms.

A number of submissions also queried specific aspects of the reporting standard and guidance. Where appropriate, APRA and the agencies have made modifications to incorporate this feedback.

Further information on the key issues raised and APRA and the agencies’ response is provided below.

Implementation date

All eight submissions commented on the implementation date, requesting an extension from the proposed first reporting period of March 2020. Submissions noted the proximity to the EFS data collection implementation and requested additional time to incorporate the changes to ARS 722.0. Submissions also noted concerns with the lead time of the release of the form and reporting taxonomy.

APRA and the agencies have considered these submissions and in response the first reporting period for ARS 722.0 will be for the quarter ending 30 September 2020.

Reporting threshold

Three submissions commented on the reporting threshold, which was increased in the March 2019 consultation to $1.5 billion in gross derivatives positions as measured by the sum of items 10.3 and 18.8 on Reporting Form ARF 720.0A/B ABS/RBA Statement of Financial Position(Standard)/(Reduced) (ARF 720.0A/B). One submission was supportive of the increase, while two submissions proposed raising it further, citing concerns that entities with balances close to the reporting threshold would experience uncertain reporting requirements, given the volatile nature of derivatives.

In response to this feedback, the agencies have analysed the coverage and in response will determine the standard for particular financial sector entities (see Appendix A). This ensures that the financial sector entities which are required to report will provide sufficient coverage for National and International Accounts requirements while removing uncertain reporting requirements for other financial sector entities. In particular, this addresses the potential for entities with gross positions close to a threshold to have their reporting obligation change as their positions fluctuate, reducing the additional burden created by this uncertainty.

The agencies will periodically review the financial sector entities required to report on ARS 722.0 and will update this list to either exclude a financial sector entity who no longer has significant activity, or include those that have increased their presence in the market. These financial sector entities required to report data under ARS 722.0 can be either ADIs or RFCs.

Data quality expectations

Three submissions sought guidance on the agencies’ data quality expectations and how to meet best endeavours requirements. One submission suggested that the Reporting Practice Guide RPG 702.0 ABS/RBA Data Quality for the EFS Collection (RPG 702.0) framework could be used to align quality with the rest of the EFS data collection, and give greater clarity on the definition of reportable errors.

On the basis of this feedback, ARS 722.0 reporting will be on a best endeavours basis for the first two reporting periods ending 30 September 2020 and 30 December 2020. Then, from the reporting period ending 31 March 2021 ARS 722.0 will be included in the scope of RPG 702.0.

All data items on ARS 722.0 will be Standard priority, and as such each reporting entity should judge whether a misreported data item constitutes a reportable error.

Adjustments

Two submissions sought guidance on reporting of adjustments made to derivatives at either the counterparty or portfolio level. Submissions raised concerns that excluding adjustments would cause values to be misaligned with values reported in other EFS reporting forms.

The agencies acknowledge that ARS 722.0 does not align with Australian Accounting Standards, and is not expected to reconcile to other EFS forms.

All adjustments should be excluded from the values reported in Items 1-9. Excluding adjustments will ensure that values are reported consistently and are comparable between entities.

The agencies have added a new Item 10 to the reporting form to collect data on the value of adjustments. Entities are required to report data for Item 10 only when adjustments cannot be separated from the values reported in Items 1-9. Data are required at either the counterparty or portfolio level. Item 10 will enable the agencies to understand the size and nature of any adjustments applied.

Derivative instrument types

The copy of ARS 722.0 that was released for consultation in March 2019 contained the following classification for derivative instruments:

• Options;
• Forwards;
• Swaps; and
• Any other instrument types not reported above, excluding futures.

Two submissions noted that this classification may create ambiguity as some instruments may be reported under multiple categories. Instruments such as swaps, which combine forwards and other instruments, could be reported under swaps or separately as the component types.

APRA and the agencies acknowledge this ambiguity and have added additional reporting guidance, including providing further examples in Reporting Practice Guide RPG 701.0 ABS/RBA Reporting Concepts for the EFS Collection(RPG 701.0).

Intra-group and related party transactions

APRA received three submissions seeking guidance on the reporting of intra-group and related party transactions.

Trades between domestic book entities and related parties should be reported along with external counterparty trades on ARS 722.0. Derivatives with resident and non-resident related parties (e.g. an offshore branch) should be included, but trades within domestic book entity desks and same-sector resident related parties should be excluded. The guidance will be updated to clarify the treatment of related party transactions.

Updates to RPG 701.0 and ARS 722.0 reporting instructions

Submissions raised various requests for further guidance on specific aspects of derivatives reporting. These topics are discussed in the ARS 722.0 reporting guidance where appropriate.

Finalised reporting standard and guidance

The final revised reporting standard and guidance are available on the APRA website at https://www.apra.gov.au/modernised-economic-and-financial-statistics-efs.

Yours sincerely,

Alison Bliss
General Manager
Data Analytics & Insights
 

Appendix A: List of entities required to report ARS 722.0

• Australia and New Zealand Banking Group Limited
• BNP Paribas
• Citibank, N.A.
• Commonwealth Bank of Australia
• Deutsche Bank Aktiengessellschaft
• The Hongkong and Shanghai Banking Corporation Limited
• JP Morgan Chase Bank, National Association
• Macquarie Bank Limited
• MUFG Bank, Ltd.
• National Australia Bank Limited
• Sumitomo Mitsui Banking Corporation
• Westpac Banking Corporation
   

Footnotes:

¹Modernised economic and financial statistics (EFS)
²Response to submissions for EFS data collection consultation