Financial Sector (Collection of Data) (reporting standard) determination No. 41 of 2018
EXPLANATORY STATEMENT
Prepared by the Australian Prudential Regulation Authority (APRA)
Financial Sector (Collection of Data) Act 2001(the Act)
Under paragraph 13(1)(a) of the Act, APRA may, by writing, determine reporting standards with which financial sector entities must comply. Such standards relate to reporting financial or accounting data and other information regarding the business or activities of the entities. Subsection 15(1) of the Act provides that APRA may declare a day on and after which the reporting standards are to apply.
On 23 August 2018, APRA made Financial Sector (Collection of Data) (reporting standard) determination No. 41 of 2018 (the instrument) which revokes Reporting Standard ARS 221.0 Large Exposures made under Financial Sector (Collection of Data) (reporting standard) determination No. 31 of 2014 and determines a new Reporting Standard ARS 221.0 Large Exposures (ARS 221.0).
The instrument commences on 1 January 2019.
- Background
APRA’s mandate is to ensure the safety and soundness of prudentially regulated financial institutions so that they can meet their financial promises to depositors, policyholders and fund members within a stable, efficient and competitive financial system. A key component of this is requiring ADIs to have prudent systems for identifying, measuring, evaluating, monitoring, reporting and controlling or mitigating material risks that may affect their ability to meet obligations to depositors.
A risk concentration occurs when an ADI has a concentration of exposures to counterparties, industries, countries or particular asset classes. A large exposure is a type of risk concentration and is defined in Prudential Standard APS 221 Large Exposures (APS 221) as an ADI’s exposure to an individual counterparty or a group of connected counterparties that is greater than, or equal to, 10 per cent of the ADI’s Tier 1 Capital. Large exposures have the potential to cause significant losses to an ADI as a result of a sudden default of a counterparty or a group of connected counterparties which an ADI has exposure to.
ARS 221.0 collects information from ADIs on their 10 largest exposures to counterparties and groups of related counterparties. The new ARS 221.0 revises the scope of information to be reported to APRA and requires ADIs to report based on new requirements and definitions in line with changes to APS 221. The new ARS 221.0 is largely based on the Basel Committee on Banking Supervision’s Standards: Supervisory framework for measuring and controlling large exposures (Basel large exposures framework) that was finalised in April 2014.[1] Prior to this update, ARS 221.0 was last materially updated in 2003.
2. Purpose of the instrument
The purpose of this instrument is to revoke ARS 221.0 and replace it with a new version of ARS 221.0. The changes largely reflect the reporting requirements of the Basel large exposures framework. Material amendments to ARS 221.0 include requiring ADIs to report:
- their 20 largest exposures to counterparties or groups of connected counterparties, up from the top 10 largest exposures;
- each counterparty in each group of connected counterparties, that an ADI has an exposure to, that has been reported to APRA;
- exposures to counterparties and groups of connected counterparties on the basis of excluding the effect of credit risk mitigation techniques on the measurement of exposures;
- certain exposures that have been excluded from the application of prudential limits on exposures under APS 221; and
- the legal entity identifier (LEI) of each counterparty, or principle counterparty of each group of connected counterparties, if the counterparty has a LEI.
ARS 221.0 incorporates by reference certain provisions of Acts, Prudential Standards, Australian Accounting Standards issued by the Australian Accounting Standards Board, and Australian Auditing Standards issued by the Auditing and Assurance Standards Board. All of these references are references to the instruments as they exist from time to time. These instruments are available on the Federal Register of Legislation at www.legislation.gov.au.
ARS 221.0 requires financial sector entities to report a counterparty country using the English name of the relevant country as assigned by the ISO 3166 Maintenance Agency to define country codes under International Standard ISO 3166 developed by the International Organization for Standardization (ISO). The ISO has stated that the Maintenance Agency assigns country names to member states of the United Nations and some dependencies of those member states based on information from United Nations sources.[2] A list of the country names and associated country codes is available online for free at http://www.iso.org/iso/country_codes. In addition, financial sector entities are to report the ISO 17442 Legal Entity Identifier (LEI) code for a counterparty.
The LEI codes are issued by Local Operating Units (LOU) in accordance with International Standard ISO 17442. Each LEI comprises a 4-digit code for the issuing LOU, a 14-digit code for the specific legal entity, and a 2-digit verification code. LEIs can be searched online for free at https://www.gleif.org/en/lei/search.
Financial sector entities are expected to report the country names and LEIs as matters of fact, analogous to a requirement to include Australian or foreign addresses and telephone numbers. Information about how the country names and LEI codes can be accessed for free is included in ARS 221.0 to assist financial sector entities understand and comply with the requirements. The ISO standards, LEI database, country names or LEI codes are not intended to be incorporated into ARS 221.0.
3. Consultation
In April 2017, APRA commenced a formal consultation on specific proposals in the draft revised ARS 221.0 along with the release of its discussion paper Revisions to Large Exposures and a draft revised APS 221.[3] APRA received 13 submissions in response to its consultation from ADIs and industry bodies, and held further discussions with numerous ADIs and industry bodies.
Submissions in relation to the draft revised ARS 221.0 noted that there would be some challenges to meeting the proposed reporting requirements. In particular, a number of respondents noted that there would be material efficiency challenges for foreign ADIs to report using the requirements of the draft revised APS 221. Modifications to the requirements were proposed by industry to maintain the need for efficiency whilst balancing concerns regarding financial safety and financial system stability.
In December 2017, APRA released its response to submissions paper clarifying and outlining changes to its proposals in a number of areas following consideration of the issues raised in submissions.[4] The new version of ARS 221.0 incorporates changes made following consideration of issues raised and allows foreign ADIs to report using the requirements and definitions of its home jurisdiction.
4. Regulation Impact Statement
APRA undertook an independent review of revisions to the large exposures framework and have followed a process and analysis equivalent to a Regulatory Impact Statement (RIS). Regulatory costs associated with the revisions to the securitisation framework have been agreed with the Office of Best Practice Regulation.
The document evidencing the independent review has been lodged as supporting material.
5. Statement of compatibility prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
A Statement of compatibility prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 is provided at Attachment A to this Explanatory Statement.
ATTACHMENT A
Statement of Compatibility with Human Rights
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
Financial Sector (Collection of Data) (reporting standard) determination No. 41 of 2018
The legislative instrument is compatible with the human rights and freedoms recognised or declared in the international instrument listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (HRPS Act).
Overview of the Legislative Instrument
The purpose of the instrument is to revoke Reporting Standard ARS 221.0 Large Exposures determined by APRA in 2014 and replace it with a new Reporting Standard ARS 221.0 Large Exposures.
ARS 221.0 sets out requirements for authorised deposit-taking institutions (ADIs) to report their large exposures. ADIs are body corporates that have been granted the authority, under the Banking Act 1959, to carry on banking business in Australia.
The new ARS 221.0 introduces expanded requirements for reporting exposures to counterparties and groups of connected counterparties. Broadly, the changes are intended to enhance financial system stability and the financial safety of ADIs to ensure they can meet their financial promises to depositors.
Human rights implications
APRA has assessed the instrument and is of the view that it does not engage any of the applicable rights or freedoms recognised or declared in the international instruments listed in section 3 of the HRPS Act. Accordingly, in APRA’s assessment, the instrument is compatible with human rights.
Conclusion
The instrument is compatible with human rights as it does not raise any human rights issues.
[1] The Basel large exposures framework can be found at: https://www.bis.org/press/p140415.htm.
[2] https://www.iso.org/iso-3166-country-codes.html.
[3] The discussion paper is available at: https://www.apra.gov.au/revisions-large-exposures
[4] The response to submissions paper is available at: https://www.apra.gov.au/revisions-large-exposures