Derivatives disclosure D-Day – getting ahead of the new regime
Ahead of the Deal - Australian M&A Briefing
Key insights
- Upcoming disclosure overhaul: From 4 December 2026, a new statutory regime will require granular disclosure of both physical and cash-settled derivative positions once they exceed the 5% substantial holder threshold.
- Strategic and operational burdens: Bidders considering using equity derivatives to accumulate an economic interest in a target will need to grapple with five interlocking metrics for disclosure, including "relatable", "physically settleable", and "non-physically settleable" categories. Banks writing derivatives face significant operational burdens around aggregate position reporting and challenges balancing the new requirements against client confidentiality obligations.
- Derivatives – still a useful tool, but a rethink for disclosure: Although equity derivatives will continue to be a legitimate and potent M&A tool, bidders, advisers and banks should begin the process of stress-testing their structures against the new framework and pre-agreeing disclosure playbooks ahead of the regime taking effect.
Equity derivatives have long been part of the Australian M&A toolkit. They allow bidders to:
- obtain exposure over target securities, at undisturbed prices without immediately appearing on the target’s register;
- bridge regulatory waiting periods (for example, while FIRB/Treasurer no-objection is pending) by providing economic exposure where physical acquisition is constrained; and
- create a potential financial incentive for the swap writer to hedge the exposure, which can effectively take the target shares "out of play".
The Treasury Laws Amendment (Strengthening Financial Systems and Other Measures) Bill 2025 forces market participants to revisit the structure and disclosure framework applicable to strategic equity derivative transactions entered into by bidders.
The amendments, to take effect on 4 December 2026 (i.e. 12 months after Royal Assent), replace the current patchwork of Takeovers Panel guidance and market practice with a statutory regime that mandates disclosure of both physical and cash-settled (and, confusingly, "settleable") positions.
Frequent users of equity derivatives will need to plan immediately for the new disclosure architecture.
The current position versus the new law
Under the current regime, only "relevant interests" count towards substantial holding disclosure. Disclosures of cash-settled derivatives, where they form part of an overall long position of 5% or more, are made in compliance with Takeovers Panel Guidance Note 20.
The new regime retains the existing concept of “relevant interest” so the approach to the 20% threshold in section 606 of the Corporations Act 2001 (Cth) (Corporations Act) will be unaffected (unlike the earlier version of the proposed reforms) by a cash-settled equity derivative.
However, the substantial holding notice regime in Chapter 6C of the Corporations Act is significantly expanded to include several new concepts – including a “deemed economic interest” for substantial holding disclosure as well as "relatable" and "settleable" physical interests. As a result, cash or physical long derivative positions over the 5% substantial holder threshold must be disclosed in granular levels of detail, including any "offsetting short" positions, and ongoing 1% movements (including shifts within derivative categories) will trigger further disclosure obligations.
Furthermore, ASIC will have at its disposal an expanded penalties and freezing orders regime, to force regulatory outcomes where breaches appear to be serious.
Considerations for bidders and advisers
The changes should not significantly impact bidders who are considering a sub-5% stakebuilding strategy which is by far the most common in the market. However, if an equity derivative is to be used as a temporary stake prior to obtaining regulatory approval (such as the Treasurer's no-objection notification under the Foreign Acquisitions and Takeovers Act 1975 (Cth)), the complicated and granular disclosure regime will need to be taken into account. In particular:
- Five interlocking metrics: Disclosers of substantial holdings inclusive of derivatives will need to calculate and disclose the "relatable", and deemed "physically settleable", and "non-physically settleable" aspects of the derivative in the substantial holder notice. They will also need to disclose the aggregate derivative-based holding percentage, the overall holding percentage, and any offsetting short position percentage – and any 1% movements in these figures.
- ASIC calculation instruments for short positions: Particularly for offsetting shorts, disclosers will need to take into account the prescribed disclosure and calculation methodology to be confirmed by ASIC (which has not yet occurred).
Challenges for the writers
The new regime creates significant burdens on the operational teams of banks who write equity derivatives. The writers will need to consider:
- Aggregate disclosure burden and confidentiality: What are ASIC's expectations for banks in updating their internal systems to comply with this new regime? Do banks need new procedures adapted to respond to ASIC's or the target's requests for details of deemed economic interests, offsetting shorts, relevant agreements and, critically, information about “other persons” with deemed economic interests (i.e. client long positions)? Will there be an opportunity to challenge the “reasonable suspicion” (in relation to a particular stake and another person's potential interest in that stake, including by way of a derivative interest) which underpins such requests? How this will interact with client confidentiality obligations appears to be a work in progress.
- Potential ASIC exemptions/reliefs for market-making/client service flows: What exemptions will be available for routine writers of derivatives for financial transactions? The Explanatory Memorandum to the amendments anticipates ASIC may, by instrument, exempt certain transactions involving (for instance) market-making and hedging activities. The terms and conditions of any exemptions will need to be examined carefully.
Final observations and future developments
The new disclosure framework will not reduce the utility of equity derivatives and the products will remain a legitimate and potent tool in Australian public M&A.
That said, from 4 December 2026, the disclosure burdens for long positions exceeding the 5% threshold may cause some stakeholders to rethink their approach.
ASIC is expected to soon publish a consultation paper regarding derivative disclosure, including its proposed new forms of substantial holding notices, which will need to be revised to reflect the amendments to Chapter 6C. This should provide market participants, and their advisers, the opportunity to engage with ASIC on the practicalities and application of the new disclosure regime, including how ASIC may exercise its exemption powers.
In the meantime, our recommendation is to collaborate now with writers and advisers to stress-test structures against the new categories, lock down data and document workflows (including attachments such as long form confirmations), and pre-agree disclosure playbooks.
