Closing the hidden ownership gap: Australia's proposed reforms to derivative disclosure and tracing

On 4 September 2025, the Treasury Laws Amendment (Strengthening Financial Systems and Other Measures) Bill 2025 was introduced in Federal Parliament, Schedule 1 of which is designed to enhance disclosure of interests in securities in listed entities, specifically by requiring the disclosure of interests arising under equity derivatives, both physically-settled and cash-settled. The Bill also extends disclosures required under tracing notices and enhances the Australian Securities and Investments Commission's (ASIC) enforcement powers. Importantly, the Government has responded to market feedback and confirmed that the reforms will not affect the existing operation of the 20% takeovers threshold^[1] nor the compulsory acquisition and statutory buy-out provisions that apply following a successful takeover bid.

It is well recognised that Australia’s substantial holding and tracing notice regimes have not historically captured certain derivative-based economic exposures in listed entities. This has raised concerns that market participants are able to accumulate substantial economic interests or acquire stakes that confer significant influence without sufficient disclosure to other investors and the market. The Bill’s proposed amendments seek to rectify these concerns by ensuring a broader range of arrangements relating to derivatives are disclosed in a timely and transparent way. This strengthening of the disclosure regime aligns with a wider global trend towards increased transparency in relation to derivatives.

We acknowledge the role that appropriate disclosure of derivative instruments plays in the efficient, competitive and informed conduct of the Australian financial markets. However, we also recognise the importance of preserving the effective use of derivative instruments as a means of enabling market participants and investors to manage risk, acquire economic interests in listed entities, and support acquisitions.

Timing and transitional provisions

Importantly, the legislation provides for a lengthy lead time before these changes take effect. The new regime will commence 12 months after Royal Assent (currently expected to be in the final quarter of calendar year 2026), allowing market participants and regulators ample time to prepare for compliance.

The Bill also contains extensive transitional provisions to facilitate a smooth implementation. In broad terms, anyone who holds a substantial holding (at least 5%) under the expanded definitions when the law commences is deemed to begin holding that interest on the commencement date, thus triggering an immediate disclosure obligation. This ensures that the market is promptly informed of all major positions as the new regime kicks in. Situations arising after commencement, including movements in existing holdings that require disclosure under the new regime, must be disclosed within the specified two-business-day period.

The proposed changes to derivatives disclosure

The Bill introduces four core reforms:

• Disclosure of deemed economic interests: Substantial holding notices will need to include certain deemed economic interests, namely specified equity derivative positions, along with the holder’s conventional relevant interests. This change closes deficiencies by capturing derivative-based stakes, whilst the 5% threshold for triggering a substantial holding notice, which would include deemed economic interests, remains unchanged.

• Extended tracing notice regime: The tracing notice provisions are broadened to improve transparency of ownership. Information requested by way of tracing notices will be aligned with substantial holding notice requirements, and a wider range of recipients can be compelled to respond (including persons reasonably suspected of holding interests or their associates). This ensures companies and regulators can obtain more complete beneficial ownership details.

• Coverage of foreign entities: Entities incorporated or formed outside Australia that are listed on an Australian exchange will now be subject to the same substantial holding and tracing notice rules as domestic companies.

• Supporting enforcement provisions: New measures will support and enforce the enhanced disclosure regime. Notably, ASIC is empowered with stronger tools; for example, it can issue its own tracing notices with broader scope and impose freezing orders on disclosable securities when disclosure obligations are breached. These provisions aim to incentivise compliance and prevent concealment of ownership by allowing ASIC to intervene if a person fails to meet the new reporting requirements.

The Bill also stipulates that a person who has a disclosable substantial holding at the time an entity is listed in Australia is required to disclose that holding at the time of listing, therefore resolving the existing uncertainty on that point.

Disclosure of deemed economic interests in substantial holding notices

The Bill will significantly expand Australia's substantial holding disclosure regime to cover derivative-based economic interests. Under current law, only certain physically-settled equity derivatives (to the extent the counterparty actually holds the underlying securities) give rise to a disclosable relevant interest, but only to the extent that the counterparty to the derivative has a "relevant interest" in those underlying securities. The Bill removes these limitations by requiring that any economic interest in underlying listed securities obtained as a consequence of entering into derivative contracts, regardless of cash or physical settlement, or whether the counterparty has a "relevant interest" in the underlying securities, must be disclosed once the aggregate 5% threshold is met.

In practice, this means that substantial holding notices will need to include information about a holder’s exposure through swaps, options, and other derivatives that reference the listed securities (not just actual shareholdings). These derivative positions are termed "deemed economic interests" and will count towards the holder’s voting power for disclosure purposes, making previously unseen stake building visible to the market and regulators.

The three derivative categories

To implement the above change, the Bill introduces three distinct categories of derivative exposure that must be separately disclosed in a substantial holding notice:

1. Relatable derivative-based holding percentage: This category covers derivative positions already caught under existing law. It refers to the portion of an equity derivative that is “relatable” to an actual holding of underlying securities by the derivative writer (generally the hedged position). In other words, if the counterparty to a derivative has purchased or holds underlying securities, for example to hedge their exposure, the derivative taker is deemed to have a relevant interest in that holding. This applies the current section 608(8) Corporations Act principles and ensures that any existing or hedge-backed part of a physically settleable derivative is disclosed as a relevant interest in the underlying securities. In practice, the relatable percentage depends on the writer’s actual holding at each point in time. However, such positions may not be publicly visible, so disclosure hinges on the derivative taker's knowledge of the writer's actual position, and so the derivative taker only needs to report the hedged portion on this basis if they are (or reasonably should be) aware of it. The disclosure which is required on this basis is the number of underlying securities the writer holds that the derivative taker is aware of.

2. Deemed physically-settleable derivative-based holding percentage: This represents any other physically-settleable equity derivative exposure that is not covered by the above category. It is essentially the potential or theoretical holding – that is, the number of securities a party to a physically settleable derivative in the bought position would receive if the derivative were settled physically, excluding any securities already counted in the category described above.

3. Deemed non-physically-settleable derivative-based holding percentage: This category captures cash-settled derivatives and other derivatives that cannot be physically settled. Since these derivatives do not confer any direct right to acquire securities, the proposed law provides a mechanism to determine the number of underlying securities to which the derivative relates for disclosure purposes. The exact number or calculation method for such cash-settled positions will be prescribed by ASIC by way of a legislative instrument and the number of securities in respect of which disclosure will be required will not necessarily be the number of securities to which a cash-settled derivative is stated to relate. This approach aligns with practices under some international regimes (for example, EU or OECD frameworks), but leaves open exactly how these exposures are measured, or when 1% disclosure thresholds are triggered, until ASIC finalises the methodologies which it will regard as being acceptable.

Note that a deemed economic interest can only arise in relation to issued securities in the capital of an entity, and has no application with respect to unissued securities.

These three components together make up the holder’s overall "deemed economic interest" or "derivative-based holding percentage". A substantial holding notice must itemise each derivative category (with the percentage and number of securities attributable to each), as well as report the aggregate holding percentage across all three categories of derivatives (known as their "derivative-based holding percentage"), together with their aggregate percentage across derivative-based and non-derivative-based holdings (known as their "holding percentage") and details of any offsetting short positions (as discussed below). The Bill contemplates that the current substantial holder forms will be replaced with new forms designed by ASIC.

Offsetting short positions

The Bill also requires disclosure of short positions that offset a long derivative interest. In this context, a short position means any arrangement where the person will benefit if the target company’s share price falls (for example, short sales or short equity derivative positions). Under the proposed law, if a person is a substantial holder (ie. holds at least 5% when counting physically-held securities and long derivative interests) and they also hold short positions in the same securities, they must disclose those shorts in their substantial holding notice. The policy intent is to ensure that a disclosed long position is not "overstated" nor "illusory" in circumstances where the holder has countervailing short exposures that reduce their net economic interest. Essentially, short positions will operate as a qualifier to a long position and do not on their own create a substantial holding, but they must be reported to give a complete picture of the holder’s true economic exposure.

The methodology for calculating a person's offsetting short position will also be specified in instruments to be issued by ASIC. At this time, the Explanatory Memorandum to the Bill does not provide any guidance on the approach to be adopted.

Movement thresholds and ongoing updates

Under the current law, once an initial substantial holding notice is required (for reaching the 5% disclosure threshold), a holder must lodge any subsequent movements in their interests of at least 1% (in either direction) or when they cease to be a substantial holder (ie. hold less than 5%). The Bill will impose additional disclosure triggers to capture shifts in derivative positions. In summary, a substantial holder will need to give a notice if any of the following occurs:

1. Overall holding changes by 1% or more: This is an extension of the existing rule – if a person's total voting power, including deemed economic interests in a company (ie. securities + deemed economic interests) increases or decreases by at least 1%, that change must be disclosed.

2. Aggregate derivative-based holding changes by 1% or more: Even if a person's overall holding remains the same, a change in their aggregate derivative-based holding (the sum of the three derivative categories described above) by 1% or more will require disclosure. For example, if a person held no actual shares but has a 6% economic exposure by way of derivatives, if that derivative-based exposure moves to 7% (for instance by entering into additional swaps), a notice must be filed. This rule recognises that material changes in economic exposure are market-relevant information on their own.

3. Any single derivative category changes by 1% or more: The law goes one step further to capture shifts in the composition of the derivative interest. If the holding percentage of any one of the three derivative categories described above increases or decreases by at least 1%, it requires a disclosure. This applies even if the other derivative categories move in the opposite direction such that the aggregate derivative-based holding percentage is unchanged. This would include scenarios such as converting a cash-settled swap into a physically-settled swap (moving a position from the non-physical category to the physical category) or unwinding one derivative while simultaneously increasing another.

At every point where disclosure is required, the holder must report each class of derivative-based holding percentage, even if the figure for one or more of them is 0%. These heightened ongoing disclosure triggers mean that market participants will likely file more frequent updates whenever there are changes to their derivative holdings. Even if their overall percentage remains constant, the act of converting derivatives could trip the 1% category-change threshold. Market participants will need to monitor not just their total position but the breakdown of that position. In terms of timing to notify, the Bill retains the existing two-business-day deadline for giving substantial holding notices, except in cases of a notice triggered by a takeover bid (in which case, the deadline remains at 9:30 am on the trading day after the bid period commences).

Market-making and client facilitators' relief

The reforms acknowledge that certain financial intermediaries hold derivative positions as part of their ordinary course of business. To avoid unduly burdening liquidity providers, the Bill empowers ASIC to grant targeted relief for market-makers and client facilitators in specific circumstances. In essence, ASIC may declare by legislative instrument that no deemed substantial holding arises from particular transactions undertaken by certain financial intermediaries. The Explanatory Memorandum indicates that:

• this will include Australian Authorised Deposit-taking Institutions, AFSL holders, clearing facilities, or equivalent foreign entities when those transactions are solely to facilitate client exposure, make a market, or hedge risks from such activities; and

• ASIC will consider factors such as the usefulness of disclosing those positions to the market, the frequency and size of the exposures, the likelihood of any influence on the company, and whether the institution has systems to segregate genuine client/market-making positions from proprietary trading before granting any relief.

The categories of financial intermediaries suggested in the Explanatory Memorandum to whom this exemption will apply are unlikely to be adequate.

Crucially, this will not operate as a blanket exemption for all bank or broker derivative positions. The relief is expected to be narrowly tailored. It would likely cover, for example, a broker who is temporarily long or short a stock through derivatives to facilitate a client order or to provide continuous liquidity (a bona fide market-making position), where disclosing that position might be confusing or not meaningful to investors. However, positions taken for proprietary trading, strategic holdings, warehousing inventory, or other investment purposes would still be subject to full disclosure. In other words, if an investment bank’s trading desk builds a 6% equity swap position as part of a client facilitation program, ASIC’s instrument might exempt it from disclosure in some cases – however, if that same bank’s hedge fund arm deliberately amasses a 6% derivative stake for its own advantage, it cannot hide behind the market-making carve-out. The Government’s intent is to strike a balance between improving transparency and not impeding market liquidity. Market participants should watch the development of this exemption.

Tracing notices

Scope of directions

The Bill significantly broadens the class of persons who can be the subject of a tracing notice. Under current law, only registered shareholders (members) of a listed entity or persons already identified in a prior tracing response can be served with such a notice. The amendments expand the potential recipients to include any person the issuer (ASIC or a company) reasonably suspects has a relevant interest in, or gave instructions about, securities. In practice, the changes under the Bill will mean that tracing notices could be directed to:

1. Members of the entity (existing requirement);

2. Previously named persons – those identified in earlier tracing notice responses (existing requirement);

3. Suspected interest holders – persons reasonably suspected of having a relevant interest in the shares or of having given instructions about buying, selling, or voting the shares (new requirement); and

4. Associates of suspects – if ASIC is issuing the notice, it can also target individuals it reasonably suspects are associates of the above categories (new requirement).

This expansion lowers the threshold for investigating complex ownership chains and derivative arrangements, allowing regulators to probe beyond the formal share register (eg. into offshore or indirect beneficiaries). However, the company’s own use of this power is somewhat narrower than ASIC’s. When a listed entity issues a tracing notice based on suspicion, it must base that suspicion at least partly on information already disclosed under the substantial holding or tracing notice regime. In other words, companies can act on red flags evident from prior disclosures, but cannot send out speculative tracing notices absent any disclosed clue.

Moreover, unlike ASIC, a company cannot directly target someone merely for being an associate of another person unless that individual is themselves reasonably suspected of a relevant interest.

The Bill also preserves the member-initiated tracing process. Shareholders can continue to request that ASIC issue a tracing notice on the company’s behalf, but ASIC is now expressly permitted to refuse such a request if it considers compliance would be unreasonable.

Once a notice is issued, the recipient faces a turnaround of two business days to respond, and failure to comply remains a strict-liability offence.

Content of responses

The reforms also widen what must be disclosed in response. The information required from a tracing notice recipient is now aligned with the substantial holding notice disclosure requirements. A person responding to a tracing notice must provide the same depth of detail as if they were filing a substantial holding notice. This should include full particulars of any relevant interest they hold in the company’s securities, together with any deemed economic interests – notably, capturing equity derivative positions as well.

A notice recipient must disclose the identity of any associates they have in relation to the holding, along with the nature of each such association and must also reveal if any other person is known to have a relevant interest in their securities (for instance, an ultimate beneficial owner or another party who shares in the power over the shares). In short, the tracing notice can compel disclosure of the entire chain of influence and ownership: who holds the interest, on whose behalf or instruction, under what arrangements, and with whom they are associated.

Note that the amended provisions continue the existing obligation to disclose the identity of persons who have provided relevant instructions in relation to the acquisition of relevant interests in securities or deemed economic interests.

Foreign incorporated entities

The Bill proposes that the concept of a Chapter 6C entity will include entities whose securities are listed in Australia where the entity is neither formed nor incorporated in Australia. This means that investors in such entities will be required to adhere to the substantial holding disclosure regime applicable to Australian incorporated listed entities, including disclosure of deemed economic interests under the proposed new regime. This will include holdings of CDIs in such entities. The extended tracing notice regime will also apply to these entities.

Freezing orders

What is their purpose and the activation threshold

The Bill introduces new provisions enabling ASIC to issue freezing orders in situations where potential failures to comply with the disclosure obligations under Parts 6C.1 and 6C.2 of the Corporations Act have occurred. The primary purpose of freezing orders is to facilitate ASIC’s investigations and uphold the integrity of disclosure rules. By freezing certain assets, ASIC can prevent an undisclosed beneficial owner from further concealing their interest, protect other market participants from the effects of non-disclosure, and incentivise timely compliance with substantial holding and tracing notice requirements.

However, the types of orders that may be made by ASIC are extremely broad and include orders:

• restraining a specified person from disposing of or acquiring any interest in specified disclosable securities;

• restraining the exercise of voting or other rights attached to specified disclosable securities;

• directing the relevant entity not to pay dividends;

• requiring the transfer or issue of securities; and

• requiring the disposal of specified derivatives.

ASIC can only make a freezing order under specific conditions. First, ASIC must form the opinion that a person has failed to comply with a Chapter 6C disclosure obligation, for example, not lodging a required substantial holding notice or not responding to a tracing notice. Second, ASIC must believe that issuing the order will achieve a statutory objective such as safeguarding the rights or interests of people who have been or are likely to be affected by the disclosure contravention, ensuring the non-compliant person does not gain an advantage from their failure and is encouraged to correct it, or protecting ASIC’s ability to investigate the breach and seek appropriate remedies from a court or the Takeovers Panel.

The scope of assets that can be frozen is broad and covers any “disclosable security” in a listed entity, including shares or interests in listed companies, managed investment schemes, or foreign funds.

Submissions that can be made to ASIC

Before a final freezing order is made (or an existing order is extended, suspended, or revoked), affected parties are given a chance to be heard as a matter of procedural fairness. ASIC is required to provide any interested person a reasonable opportunity to make submissions, either orally or in writing, on the question of whether the order should be made or changed and ASIC may, but is not obliged to, hold a hearing before making an order. This safeguard ensures that ASIC considers all relevant facts (including any extenuating circumstances put forward by those involved) and that those impacted have a voice in the process.