Financial Sector (Collection of Data) (reporting standard) determination No. 12 of 2007 MRS 160.0 Derivative Activity (Cth)
Financial Sector (Collection of Data) (reporting standard) determination No. 12 of 2007
Reporting standard MRS 160.0 Derivative Activity
Financial Sector (Collection of Data) Act 2001
I, Charles Watts Littrell, a delegate of APRA, under paragraph 13(1)(a) of the Financial Sector (Collection of Data) Act 2001 and subsection 33(3) of the Acts Interpretation Act 1901:
REVOKE the Reporting Standard MRS 160.0: Derivative Activity; and
DETERMINE the Reporting Standard MRS 160.0 Derivative Activity in the form set out in the Schedule, which applies to the financial sector entities referred to in paragraph 1 of the reporting standard.
Under section 15 of the Act, I DECLARE that the reporting standard shall begin to apply to those financial sector entities on the later of 30 June 2007 and the date of registration on the Federal Register of Legislative Instruments.
Dated 29 June 2007
[Signed]
Charles Littrell
Executive General Manager
Policy, Research and Statistics
Interpretation
In this Determination
APRA means the Australian Prudential Regulation Authority.
Schedule
Reporting Standard MRS 160.0 Derivative Activity comprises 18 pages commencing on the following page.
Reporting Standard MRS 160.0
Derivative Activity
| Objective of this reporting standard This reporting standard is made under section 13 of the Financial Sector (Collection of Data) Act 2001. It requires medical defence organisations (‘MDOs’, as defined in paragraph 17) to report to APRA on a half-yearly basis in relation to their Derivative Activity. This reporting standard outlines the overall requirements for the provision of this information to APRA. It should be read in conjunction with reporting form MRF 160.0 Derivative Activity and the instructions to that form (each of which is attached and forms part of this reporting standard). |
Application
1. This reporting standard applies to all MDOs.
Information required
2. An MDO must, after the end of each reporting period, and in accordance with the instructions, duly complete the form in respect of the reporting period, and provide the completed form (the ‘report’) to APRA by the due date.
Method of submission
3. Reports must be given to APRA either:
(a)in electronic form, using one of the electronic submission mechanisms provided by the ‘Direct to APRA’ (also known as ‘D2A’) application;
(b)in Microsoft Excel format on a 3.5 inch diskette, which must be posted to APRA’s head office at Level 26, 400 George Street, Sydney, NSW 2000; or
(c)manually completed on paper, which must be faxed or mailed to APRA’s head office.
Note: the Direct to APRA application software and forms may be obtained from APRA but will not be available immediately upon commencement of this standard. Therefore, initially, only methods of submission (b) and (c) will be available.
Reporting periods
4. Subject to paragraphs 5 and 6, the reporting periods are the half-yearly period ending on 30 June 2007 and each successive half-yearly period (ending on 31 December or 30 June) after that.
5. APRA may, by notice in writing, change the reporting periods for a particular MDO so that it is required to report in respect of half-yearly reporting periods based upon the MDO’s own year of income.
Note: this will be relevant where the MDO’s year of income does not end on 30 June or 31 December.
6. APRA may, by notice in writing change the reporting periods for a particular MDO to require it to provide the information:
(a)more frequently (APRA may require this when, having regard to the particular circumstances of the MDO, APRA considers it necessary or desirable for the MDO to report more frequently for the purposes of monitoring the financial position of the MDO); or
(b)less frequently (APRA may do so when, having regard to the particular circumstances of the MDO and the extent to which its financial position requires monitoring, it is unnecessary to require it to report on a half-yearly basis).
Due dates
7. Reports under this standard must be provided to APRA no later than:
(a)in the case of a report in respect of a half-yearly period ending on the last day of the MDO’s year of income – 4 months after that day; and
(b)in the case of all other reports – 20 business days after the end of the reporting period.
8. APRA may, in writing, grant an MDO an extension of the due date for submission of a report, in which case the new due date will be the date on the notice of extension.
Audit and auditor’s certificate
9. Reports under this standard must be the product of processes and controls that have been reviewed and tested by a registered company auditor. This will require the auditor to review and test the systems, processes, and controls supporting the reporting of the information to ensure that they produce accurate data and are otherwise reliable. This review and testing must be done on an annual basis or more frequently if necessary to enable the approved auditor to form an opinion as to the accuracy and reliability of the data.
10. In relation to each year of income of an MDO (including a year of income ending on 30 June 2007), the MDO must provide APRA with an annual certificate, signed by a registered company auditor, which must either:
(a)state that in the auditor’s opinion the information provided to APRA under this standard in respect of the year of income is accurate and reliable; or
(b)state that in the auditor’s opinion the information provided to APRA under this standard in respect of the year of income is not accurate or reliable and specify the ways in which the information is not accurate or reliable and the grounds upon which the auditor has come to this conclusion.
A certificate under this paragraph must be provided to APRA no later than four months after the last day of the year of income to which it relates. It may be combined with certificates under corresponding paragraphs of other reporting standards (made under section 13 of the Financial Sector (Collection of Data) Act 2001) applying to the MDO.
Authorisation
11. Reports under this standard must also be subject to processes and controls developed by the MDO for the internal review and authorisation of that information. It is the responsibility of the board and senior management of the MDO to ensure that an appropriate set of policies and procedures for the authorisation of data submitted to APRA is in place.
12. If an MDO submits a report under this standard using the ‘Direct to APRA’ software, it will be necessary for an officer of the MDO to digitally sign, authorise and encrypt the relevant data. For this purpose APRA’s certificate authority will issue ‘digital certificates’, for use with the software, to officers of the insurer who have authority from the insurer to transmit the data to APRA.
13. If a report under this standard is completed in Microsoft Excel format and provided on diskette, the diskette must be sent to APRA with a letter signed by either the Principal Executive Officer or Chief Financial Officer of the MDO.
14. If a report under this standard is completed and provided in paper form, it must be signed by either the Principal Executive Officer or Chief Financial Officer of the MDO.
Minor alterations to forms and instructions
15. APRA may make minor variations to:
(a)the form, and the instructions to the form, to correct technical, programming or logical errors, inconsistencies or anomalies; or
(b)the instructions, to clarify their application to the form
without changing any substantive requirement in the form or instructions.
16. If APRA makes such a variation it must notify affected MDOs in writing.
Interpretation
17. In this standard:
APRA means the Australian Prudential Regulation Authority established under the Australian Prudential Regulation Authority Act 1998.
business day means an ordinary business day, excluding weekends and public holidays.
Chief Financial Officer means the person having the function of chief financial officer of the MDO, by whatever name called, and whether or not he or she is a member of the governing board of the MDO, and if there is no such person means a person who performs similar functions to those commonly performed by a chief financial officer.
due date means the relevant date under paragraph 7 or 8.
form means the attached form.
instructions means the attached instructions.
MDO means a corporation to which section 5A of the Financial Sector (Collection of Data) Act 2001 applies (but, for the avoidance of doubt, does not include a general insurer within the meaning of the Insurance Act 1973).
Principal Executive Officer means the principal executive officer of the MDO for the time being, by whatever name called, and whether or not he or she is a member of the governing board of the MDO.
registered company auditor has the meaning in section 9 of the Corporations Act 2001.
Note: That section provides that registered company auditor:
(a) means a person registered as an auditor under Part 9.2 of the Corporations Act; and
(b) in relation to a body corporate that is not a company—includes a person qualified to act as the body's auditor under the law of the body's incorporation.
report has the meaning given in paragraph 2.
reporting period means the relevant period under paragraph 4, 5 or 6
year of income in relation to an MDO means the accounting period adopted by the MDO for the purposes of the Income Tax Assessment Act 1936 or for taxation purposes generally (whether or not that period is the same as the standard financial year beginning on 1 July and ending on 30 June).
Reporting Form MRF 160.0
Derivative Activity
Instruction Guide
Introduction
This form requires Medical Defence Organisations (MDOs) to report information about its derivative activities and exposures.
Audit Requirements
This form must be subject to audit review and testing on an annual basis or more frequently if necessary to enable the auditor to form an opinion on the accuracy and reliability of the data. The auditor must provide a certificate to the MDO specifying whether, in their opinion, the data provided by the MDO are reliable. The MDO must submit this certificate to APRA on an annual basis.
The scope and nature of audit testing required is outlined in the applicable Auditing and Assurance Guidance Statement issued by the Auditing and Assurance Standards Board
.Definitions
Definitions for data reporting items required by this form have been provided where possible in the instructions under the section headed ‘Specific Instructions’.
Unit of Measurement
This form is to be prepared in thousands of Australian dollars (AUD). Amounts denominated in a currency other than Australian currency are to be converted to AUD in accordance with AASB 121 The Effects of Changes in Foreign Exchange Rates (AASB 121).
Reporting Obligations
MDOs are required to report on a half-yearly basis (that is, six monthly intervals), based on their financial year.
For annual reporting, MDOs must lodge a form within four months of the end of their financial year. The information required on an annual basis must be reported as at the last day of the reporting period on a financial year-to-date basis of the MDO.
For half-yearly reporting (that is, the half-year that does not correspond with the MDO’s financial year end), MDOs must lodge a form within 20 business days of the end of that six month period
Definitions for specific items in the form
Derivative financial instruments
Derivatives expose MDOs to a full range of investment risks, even though in many cases there may be no, or only a small initial outlay. MDOs must set aside capital to cover the Investment Risk of these transactions particularly where derivatives are used for reasons other than to hedge an underlying physical position.
Derivatives are generally defined as those instruments/contracts, where the value is based on other products, either financial or real, and/or on prices associated with financial products.
Derivative contracts involve:
Future delivery, receipt or exchange of financial items such as cash or another derivative instrument, or
Future exchange of real assets for financial items where the contract may be tradeable and has a market value.
The contracts can either be binding on both parties (e.g. as with a currency swap) or subject to the exercise by one party of a right contained in the contract (as with options).
The counterparty in a derivative contract is the party assuming the credit risk. For exchange-traded contracts, credit risk is transferred or assumed by the exchange clearing house. For over the counter contracts (e.g. derivative contracts customised for the Insurer by a bank), the other party to the contract (seller or buyer) is the counterparty.
Derivative products/contracts are not limited to but include the following:
Options (including call and put options; exchange-traded and over-the-counter options; interest-rate, bullion, commodity and equity options; warrants);
Interest rate swaps;
Cross-currency interest-rate swaps;
Foreign exchange swaps;
Foreign exchange forwards;
Futures (i.e. bank bill, bond, equity); and
Forward rate agreements.
Any associated derivative balances relating to the MDOs investment securities/portfolio that is contracted by the related entity must also be recognised by the licensed insurer.
Exclude:
Derivative margin accounts, which hold deposits lodged with an exchange or clearing house as collateral to cover adverse movements in market prices. These balances are to be reported in the Investments form under the appropriate line item within “Call Deposits”.
Repurchase/Resale agreements despite their similarity to a FRAs and/or swaps.
Related parties
Where this term is used or referenced in these forms, related parties is to be interpreted consistently with its definition and meaning as contained in AASB 124 Related Party Disclosures (AASB 124).
Specific Instructions
This form is divided into 5 parts:
Part A: Interest rate contracts
Part B: Foreign exchange and gold contracts
Part C: Equity contracts
Part D: Precious metal contracts (excluding gold)
Part E: Other market-related contracts
Each part should be completed in accordance with the following instructions.
Aggregate value of all derivative financial instruments (other than exchange traded) with residual maturity of:
This section of the form requires all derivative contract positions of the MDO (except for derivatives traded on recognised futures and options exchanges which are subject to daily marked-to-market), to be classified into the following residual maturity bands:
Less than 1 year
1 year to less than 5 years
5 years or more
Residual maturity refers to the time remaining from the reporting date to the maturity date of the derivative financial contract.
Derivative exposures/positions applicable for each of these residual maturity bands is then required to be sub-classified into those exposures/positions that are either long or short positions. Within the long and short position sub-classification, derivative exposures are then required to be further sub-classified into the appropriate investment/counterparty grade of the derivative contract. The grades are detailed in Attachment 1.
Total 'Over-the-Counter' interest rate derivative contracts
These refer to derivative contracts that are not traded on a recognised exchange. Instead these contracts are transacted between individual counterparties (e.g. most commonly a bank). The details of a derivative contract can be negotiated between the contracting parties.
1.1 Forwards, swaps, other
1.2 Bought option positions
Report option positions where the MDO has purchased an option position (i.e. a call or put option) and has the right but not the obligation to exercise the option against the writer and request delivery or sale of the underlying security or cash settlement. (Note: do not include options in the form of credit derivatives, these are separately reported). Report bought option exposures into the following:
1.2.1 Call options
Right but not the obligation of the holder of the option to require the writer of the option to sell the underlying security/asset to the holder.
1.2.2 Put options
Right but not the obligation of the holder of the option to require the writer of the option to buy the underlying security/asset from the holder.
1.3 Written (sold) Option Positions
Report option positions where the MDO has written/sold option positions (i.e. call or put options), and as a result has the obligation to deliver or purchase the underlying product of the option or settle in cash, if exercised by the holder of the option position sold by the MDO. (Note: do not include options in the form of credit derivatives, these are separately reported). Report sold option exposures into the following.
1.3.1Call options
Obligation but not the right of the writer of the option to sell the underlying security/asset to the holder of the option.
1.3.2 Put options
Obligation but not the right of the writer of the option to buy the underlying security/asset from the holder.
Credit Derivatives
Report credit derivative option positions where the MDO is:
providing credit protection; or
purchasing credit protection.
Note: do not include options based on financial market products/indexes, these are separately reported).
Total exchange traded derivative financial instruments
These refer to derivative contracts that are transacted on a recognised futures or options exchange (e.g. in Australia the Sydney Futures Exchange) and are subject to daily mark-to-market and margin payment. These contracts are transacted in standardised parcels. The clearing house effectively becomes the counterparty to all derivative positions.
Record the aggregate principal and mark to market value for each contract type (i.e. Interest Rate Contracts, Equity Contracts).
Total derivative financial instrument exposure in relation to:
3.1 Investment portfolio (as disclosed in MRF 140 series forms)
Report the aggregate principal and mark to market value of derivative exposures that relate to the investment portfolio, either as hedging a component of the underlying investment portfolio (i.e. fixed interest or equities) or as an outright investment.
3.2 Other assets
Report the aggregate principal and mark to market value of derivative exposures that are in relation to assets other than those included in the investment portfolio of the MDO (see point above), i.e. used for the purpose of hedging asset returns/values.
3.3 Claims liabilities
Report the aggregate principal and mark to market of derivative exposures that relate to the MDO’s claims liabilities (e.g. hedging the currency movement on a claim liability denominated in a currency other than Australian currency).
3.4 Debt funding/borrowings
Report the aggregate principal and mark to market of derivatives that relate to specific debt/borrowings of the MDO (e.g. hedging the interest rate risk or currency risk associated with the borrowings).
3.5 Other
Report the aggregate principal and mark to market of derivatives that relate to other items not specifically listed above (i.e. hedging the currency risk associated with an anticipated purchase).
4. Total derivative financial instruments which are with the following related parties:
Disclose those derivatives that are with the following:
4.1Parent entity
Disclose holdings of derivatives that are purchased from or sold to the parent entity of the licensed insurer.
4.2[c1]Controlled entities
For Branches, this line item is to be interpreted as amounts in relation to “Other branches of the parent entity”, and for licensed MDOs as amounts in relation to “Controlled entities”.
Disclose holdings of derivatives that are purchased from or sold to controlled entities of
the MDO.
4.3 Associates/Joint ventures
Disclose holdings of derivative securities that are purchased from or sold to Associates or Joint Ventures of the MDO. Associates and Joint Ventures are defined in accordance with AASB 131 Interests in Joint Ventures (AASB 131) and AASB 128 Investments in Associates (AASB 128).
4.4Other related parties
Disclose holdings of derivative instruments that are purchased from or sold to any other related entity of the reporting Insurer not disclosed above.
ATTACHMENT 1: Counterparty Grades
| Grade | Standard & Poor’s | Moody’s | AM Best | Fitch |
| 1 | AAA | Aaa | A++ | AAA |
| 2 | AA+ | Aa1 | A+ | AA+ |
| 3 | A+ | A1 |
| A+ |
| 4 | BBB+ | Baa1 | B++ B+ | BBB+ |
| 5 | BB+ or below | Ba1 or below | B or below | BB+ or below |
Unrated assets or exposures should be classified as Grade 4.
An MDO must, in general, use the same rating agency for determining counterparty grades. An MDO may depart from this general rule where there are good reasons for doing so, such as under the following circumstances:
Where the rating agencies usually monitored by the MSO do not issue a solicited credit rating for a particular debt obligation and only one other rating agency issues a solicited credit rating for that debt obligation, the MDO may use that solicited credit rating.
[c1]Not the same as in MRF 160.0
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