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Funds need to prepare for international regulatory regime
King & Wood Mallesons (KWM) has warned super fund trustees not to ignore overseas regulatory changes including Dodd-Frank, the US Foreign Account Tax Compliance Act (FATCA) and the Volcker Rule.
Last week the Australian Parliament passed the Corporations Legislation amendment (Derivative Transactions) Bill 2012, a step towards complying with G20 obligations to regulate the Australian Over-The-Counter (OTC) derivative markets and the US Dodd-Frank Act.
Australian funds would escape the need to register as 'swap dealers', KWM said, but would need to comply with the Dodd-Frank business conduct rules and central clearing of OTC derivatives as counter-parties to registered swap dealers (Australian banks).
The documentation requirements had been alleviated somewhat by a DF Protocol issued by the International Swaps and Derivatives Association (ISDA), KWM said.
KWM said there was no immediate requirement to comply with central clearing of OTC derivatives, but a range of Australian 'buy-side' entities had considered clearing, mainly through clearing participants.
Regulations may indirectly snare participants due to the interconnected nature of global derivatives markets, KWM said, and affect the Australian fund or fund manager's business.
The FATCA regime could prove another headache for funds that invest in the US, hold US assets or deal with US counter-parties, despite an intergovernmental agreement (IGA) that lessened some of the reporting and tax burdens of FATCA, the law firm said.
Trustees would need to undertake the prescribed FATCA due diligence procedures and report to the US Internal Revenue Service on its US account holders, unless the fund's prescribed provisions allowed it to fall under one of the exemptions, according to KWM.
Australian financial institutions may not have to deduct FATCA withholding for payments made to non-participating non-US financial institutions, but the information would need to be recorded for deductions further up the payment chain.
Changes to the Investment Advisers Act under the Dodd-Frank reforms requires Australian fund managers with US clients to register with the Securities and Exchange Commission (SEC) as an investment adviser, or rely on three very restrictive exemptions, KWM said.
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