Australia, one of the countries that is subject to the CRS, is a very well recognized center for the FX industry. Prior to July 1 this year, OTC derivatives brokers will need to determine whether they are caught by the CRS requirements. TRAction FinTech Director Sophie Gerber investigates
By Sophie Gerber, Director, TRAction FinTech
Regulatory reporting via electronic methodology is most certainly a very important facet for all entities within the electronic trading sector, both institutional and retail and across all major regions in which the financial sector is prominent.
A substantial emphasis is now on the forthcoming MiFID II directive, which determines the structure by which trading system topography is designed and implemented, how trades are reported to Competent Authorities (CAs) and among other things, the important distinction between different types of execution models across the entire sector.
MiFID II has, in the footsteps of the Dodd-Frank Act in North America, become a huge infrastructural milestone which all members of Europe’s electronic trading community will have to address, with the rise of companies that provide technological and consulting services to bring the companies into compliance with such a technologically dependent regulatory structure.
If this was not enough to contend with, the countries which are classified under the Organisation for Economic Co-operation and Development (OECD) global system of assessing the national commercial and social prowess of specific countries, has brought into effect the Common Reporting Standard (CRS), thus bringing tax declaration of an entity into the equation along with trade reporting transparency.
The CRS, which is formally referred to as the Standard for Automatic Exchange of Financial Account Information, is an information standard for the automatic exchange of information, developed in the context of the OECD.
Australia, one of the countries that is subject to the CRS, is a very well recognized center for the FX industry, and is home to several internationally respected large FX brokerages, prime of prime brokers and institutional funds.
The good news is that whilst the CRS applies to over fifty nations worldwide, OTC derivatives trading in Australia will likely be unscathed by this new regime.
On 12 July 2015, 53 jurisdictions signed an agreement to automatically exchange information based on Article 6 of the Convention on Mutual Administrative Assistance in Tax Matters. This agreement specifies the details of what information will be exchanged and when, as set out in the Standard.
All EU countries, China, India, Hong Kong, Russia and 109 countries altogether have agreed to become signatories. However, there are still many countries which will not participate in the automatic information exchange. Many of those that have not signed are small countries. In April 2016, shortly after the release of the Panama papers, Panama agreed to comply with the standard.
As part of the OECD mandate to achieve common global standards to combat offshore tax evasion, Australia is implementing the Common Reporting Standard (CRS) from 1 July 2017.
Prior to this date, OTC derivatives brokers will need to determine whether they are caught by the CRS requirements.
Will these requirements apply to you?
TRAction Fintech has analysed the CRS reporting requirements and engaged in consultation with industry experts to determine whether the CRS applies to OTC derivatives brokers. Our interpretation of the CRS reporting requirements are as follows:
1. Entities which issue derivatives should not be required to report under the CRS. TRAction Fintech understands that clients who issue derivatives by entering into contracts with their clients as principal are not caught by the CRS reporting requirements.
2. Entities which deal in direct equities should be required to report under the CRS. TRAction Fintech understands that when an entity deals in direct equities, the entity is conducting business on behalf of its client (i.e. Investment Entity Type A as described below).
If your company has received correspondence with regard to CRS reporting requirements, TRAction Fintech can assist you.
TRAction Fintech can:
1. Collate all necessary information to be reported for all client accounts opened after 30 June 2017.
2. Report annually to the ATO. TRAction Fintech can help ensure that you are meeting both your CRS and OTC derivative reporting requirements.
What is the CRS?
Entities to which the CRS applies are required to collect financial account information on clients which are (or are controlled by) foreign tax residents and to report this information annually to the Australian Tax Office (ATO).
The first reports are due to the ATO on 31 July 2018 for the period 1 July 2017 to 31 December 2017, and for full calendar years thereafter.
To identify tax residency, specified due diligence procedures (conducted by obtaining relevant information through your account opening forms) will need to be conducted, which include consideration of the residential address of the account holder. The information that needs to be reported includes identity details of the foreign tax resident, the account balance and other information specific to the nature of the reporting entity.
Which entities are subject to CRS adherence?
The following entities which are resident in Australia or have a branch in Australia are required to report pursuant to the CRS:
• a Custodial Institution – An entity that holds financial assets on account of others and at least 20% of gross income is attributed to holding these financial assets;
• a Depository Institution – An institution that accepts deposits and also engages in other financial transaction activity; this includes but is not limited to banks;
• an Investment Entity