As mandatory reporting of OTC derivative contracts to trade repositories (TRs) (one of the G20 commitments) takes effect globally, the Ontario Securities Commission (the "OSC"), the Quebec Autorité des marchés financiers (the "AMF") and the Manitoba Securities Commission (the "MSC") on November 14, 2013, simultaneously published the first province-specific set of harmonized derivatives rules (the "Rules") in Canada. In Ontario and Manitoba, they are titled as follows: OSC Rule 91-506 Derivatives: Product Determination and OSC Rule 91-507 Trade Repositories and Derivatives Data Reporting; and MSC Rule 91-506 Derivatives: Product Determination and MSC Rule 91-507 Trade Repositories and Derivatives Data Reporting respectively. In Quebec, the Rules are Regulation 91-506 respecting Derivatives Determination and Regulation 91-507 respecting Trade Repositories and Derivatives Data Reporting.1 The Rules take effect in Ontario, Quebec and Manitoba on December 31, 2013 under different circumstances that will be discussed later on in this detailed review (the "Review") of the Rules.

These Rules are the finalization of the draft rules proposed and updated by several Canadian provincial securities regulators under the umbrella of the Canadian Securities Administrators ("CSA") with respect to trade repositories and derivatives data reporting that form part of Canada's obligations because of the G20 commitments to establish a new regulatory regime relating to the trading of over-the-counter ("OTC") derivatives in Canada. The OSC, the AMF and the MSC listed the comments made earlier this year by Canadian derivatives market participants and other interested stakeholders during the consultation process in these final Rules and the CSA Derivatives Committee (the "Committee") took into account many of these comments and it voiced how it had addressed the comments as part of the Rules.

It remains to be seen whether these redrafted final Rules address all the concerns raised in the comments as a very important issue is still outstanding. This important issue is how market participants are supposed to ascertain whether or not they will be deemed to be a "derivatives dealer" and by default could be the "reporting counterparty" in a derivatives transaction. The definition of a derivatives dealer which in the OSC and MSC Rules is defined as "a person or company engaging in or holding himself, herself or itself out as engaging in the business of trading in derivatives in Ontario (Manitoba) as principal or agent", does not specify the so-called business triggers that are used in determining securities dealers in the sphere of securities regulation. The AMF Regulation 91-507 does not have this definition and the definition of a "derivatives dealer" in the CSA Consultation Paper-91-407 Derivatives: Registration is still a proposed definition and it will capture if not revised "persons carrying on the business of trading in derivatives or holding themselves out to be carrying on that business"... and "will be required to be registered as derivatives dealers in each Canadian province and territory where they conduct derivatives trading business". As will be discussed again later on in this Review, understanding the factors used by Canadian securities regulators vis-à-vis the determination of who will be deemed to be a dealer in securities regulation is paramount in understanding how the regulators would assess and determine who will be deemed to be a derivatives dealer.

I. Selected Highlights of the Rules that are common to Ontario, Quebec and Manitoba

Derivatives: Product Determination Rule 91-506 in Ontario and Regulation 91-506 Derivatives Determination 91-506 in Quebec (the "Scope Rule")

a. The Scope Rule defines the types of derivatives that will be subject to reporting requirements under the Trade Repositories (TR) and Derivatives Data Reporting (DR) Rule 91-507 in Ontario and Quebec and Regulation 91-507 respecting TRs and Derivatives DR (the "TR Rule").

b. The Scope Rule will initially only apply for the purposes of the TR Rule.

c. The Scope Rule defines certain contracts to be excluded derivatives and therefore the TR Rule will not apply to them: gaming and insurance contracts regulated by a domestic or an equivalent foreign regulatory regime; currency exchange contracts provided that the contract (i) settles within prescribed timelines, (ii) is intended by the counterparties to be settled by delivery of the currency referenced in the contract, and (iii) is not rolled-over; and commodity forward contracts provided that physical delivery of the commodity is intended and the contract does not permit cash settlement in the ordinary course; and

d. Contracts or instruments traded on certain prescribed exchanges. For this purpose the Committee decided that an exchange does not include a derivatives trading facility. (Emphasis added) The Committee based this decision to not exclude derivatives transactions traded on a derivatives trading facility because it states "has always intended that transactions executed on derivatives trading facilities would be required to be reported." The OSC and the MSC on their part stated in the changes to the Rules that they are "of the view that the clarification provided by Subsection 2(2) is necessary because until an oversight regime for derivative trading facilities is enacted, such facilities may be recognized or exempted as exchanges."

In this regard, it is pertinent to note the following issues: the Committee has not defined "derivatives trading facilities"; both the OSC and the AMF have granted temporary relief to certain swap execution facilities ("SEFs") regulated by the U.S. Commodity Futures Trading Commission (the "CFTC") from the requirement to be recognized as an exchange in Ontario and Quebec; and the Committee has not taken into consideration the CFTC's requirement of SEFs in Part 45.8 of its Regulations that requires SEFs to require each swap counterparty to provide sufficient information to enable the SEF to report all swap creation data.

TR Rule 91-507-Regulation of Trade Repositories

a. To obtain and maintain designation in Ontario and Manitoba or recognition in Quebec as a TR, a person or entity must apply to the applicable Commission or Authority for designation or recognition and must comply with the designated TR requirements set out in the TR Rule.

b. A designated or recognized TR will be required to provide the applicable regulator with access to all relevant derivatives data reported to it, provide counterparties to a transaction with access to derivatives data relevant to their transaction; and aggregate data on open positions, volume and prices related to transactions will be required to be reported publicly.

c. The Committee has added a 6-month extension to the requirement that a designated or recognized TR publicize anonymous transaction level data in Subsection 43(2).

TR Rule 91-507- Reporting Obligation and Requirements

a. All derivatives involving a local counterparty as defined are required to be reported to a designated TR or to the applicable commission or authority.

b. The Committee has revised the "local counterparty" definition from the definition in the initial draft rule to not include guaranteed affiliates of registered foreign derivatives dealers, taking into consideration market participants concerns about the old definition having extra-territorial implications.

c. The Committee has also revised the "reporting counterparty" definition to explain the reporting hierarchy in the TR Rule. Of note in this revision is how a local counterparty may determine when a foreign reporting counterparty as defined in Section 25(2) of the TR Rule has failed to report and as a result the TR Rule places the burden of reporting on the local counterparty. In a situation like this, the OSC, the AMF and the MSC expect "that a local counterparty will determine that the non-local reporting counterparty has discharged its reporting obligations by reviewing a confirmation of the transaction report. Where the local counterparty has not received confirmation that its transaction has been reported in accordance with the requirements of this TR Rule within two business days after the date on which the transaction occurred, it must act as reporting counterparty for the transaction. Where the local counterparty is a participant of the designated trade repository this confirmation would come from the designated trade repository in accordance with Subsection 23(1) of the TR Rule. Where the local counterparty is not a participant, it would be necessary for the local counterparty to ensure that it receives the confirmation from the reporting counterparty (or its delegate)".

d. Initial reporting is required to be completed on a real-time basis, but where this is not technologically possible, the reporting counterparty must report as soon as possible but no later than the end of the next business day.

e. Transactions that were entered into prior to the TR Rule coming into force ("Historical Contracts") will be required to reported provided they have not expired or been terminated within a prescribed period after the TR Rule comes into force.

f. The Committee has provided for a limited substituted compliance in Section 26(5) of the TR Rule for counterparties that live outside of the respective provinces of Ontario, Quebec and Manitoba, but are otherwise subject to the TR Rule to reduce overlapping international trade reporting requirements.

g. The Committee has removed the requirement that both parties report valuation data in Section 33 of the TR Rule.

Compliance and Effective Dates

There are three staggered compliance dates based on the parts of the TR Rule, when the derivative transaction was entered into and the types of entities involved as is explained in Section (d) of this part of the Review.

a. In Ontario, ministerial approvals are required for the Rules to come into force. The OSC stated that the Rules were delivered to the Ontario Minister of Finance on October 17, 2013. They also stated that the Minister may approve or reject the Rules or return them to the OSC for further consideration. If the Minister approves the Rules or does not take any further action by December 16, 2013, the Rules will come into force in Ontario on December 31, 2013.

b. In Quebec, the AMF stated that the Regulations have been made under the powers vested on the AMF under Section 175 of the Quebec Derivatives Act ("QDA") and will be submitted to their Minister of Finance and the Economy for approval with or without amendment. They also stated that the Regulations will come into force on the date of their publication in the Gazette officielle du Quebec or on a later date indicated in the Regulations.

c. In Manitoba, the MSC stated that it has recommended to the Government of Manitoba that it proclaim into force on December 31, 2013 amendments to the Manitoba Securities Act ("MSA") These amendments to the MSA they stated, will provide the necessary statutory jurisdiction for the MSC to enact the Rules effective December 31, 2013. They concluded that if the MSA amendments are not proclaimed, the Rules will not become effective in Manitoba.

d. In Ontario, Quebec and Manitoba, Parts 1 (Definitions and Interpretations), 2, (TR Designation and Ongoing Requirements) 4, (Data Dissemination and Access to Data) and 6 (Exemptions) come into force on December 31, 2013. Despite the above, Subsection 39(3) (Requirement for Public Dissemination) does not apply until December 31, 2014.

Parts 3 (Data Reporting) and 5 (Exclusions) come into force July 2, 2014. Despite this, Part 3 does not apply so as to require a reporting counterparty that is not a derivatives dealer to make any reports under that Part until September 30, 2014. In addition, despite the foregoing, Part 3 does not apply to a transaction entered into before July 2, 2014 that expires or terminates not later than December 31, 2014.

II. Securities Regulation Background of the Rules

For Canadian derivatives market participants and interested stakeholders to fully comprehend and assess the applicability of these Rules and upcoming harmonized derivatives rules in Canada, it is vital to first understand the underlying provincial regulation of securities in Canada. In the CSA Consultation Paper 91-301 – Model Provincial Rules – Derivatives Product Determination and Trade Repositories and Derivatives Data Reporting, that was the draft rule to these Rules published by the CSA on December 6, 2012, the Committee stated that the draft model rules had been drafted based on existing provisions of Ontario securities law. The regulation of securities forms the basis of these Rules and will also serve as the foundation of similar province-specific rules in Alberta, British Columbia, New Brunswick, Nova Scotia and Saskatchewan (the "Multilateral Jurisdictions") that still require the implementation of legislative amendments.

To give some background on how securities are regulated in Canada and how the Committee uses securities regulation as the template to draft harmonized derivatives rules, the ten (10) provinces and three (3) territories in Canada are all separately responsible for securities regulation in their respective provinces under the Canadian constitution. Each province has its own securities regulator, which administers the province's securities act and, correspondingly, promulgates its own set of rules and regulations. Accountability for securities regulation extends from the securities regulator to the Minister responsible for securities regulation and, ultimately, the legislature, in each province. Since December 2009, in order for Canada to meet its G20 Commitments, there has been an ongoing coordination of efforts by the Bank of Canada, the CSA, the Office of the Superintendent of Financial Institutions and the Canadian Department of Finance to implement the reform of Canada's OTC derivatives markets in line with the G20 Commitments. In order to assist Canada meet its G20 commitments, all the provinces and territories through an initial policy development rule-making process under the auspices of the CSA, are participating in creating and monitoring a new regulatory regime for OTC derivatives based on their existing securities regulation regime and in Quebec its existing securities and exchange-traded derivatives regulation regime.

As a result of provincial securities regulation in Canada forming the basis of the harmonized derivatives rules, it is important to understand the CSA regulation of securities when the Committee does not provide clarification on some issues for example how it assesses the business triggers in determining who is a dealer. In addition, basing the implementation of these Rules on the legislative amendments to the respective provincial securities legislation and the QDA in Quebec has resulted in some differences in the respective Rules despite the Committee's bid to draft harmonized Rules. As a result, it is important for market participants to at least understand how securities are regulated in the provinces where they might be deemed to be a local counterparty, a reporting counterparty or will need to be designated or recognized as a TR to determine the applicability of these Rules.

III. Differences in the Ontario Rules, Quebec Regulations and Manitoba Rules as a result of their respective securities and in Quebec (derivatives) regulation regimes

a. The OSC and the MSC state in their summary of the Scope Rule that the definition of "derivative' in Subsection 1(1) of its Securities Act ("OSA") and MSA, is intended to include the types of instruments traditionally referred to as derivatives (for example, swaps and forwards) as well as other novel instruments. It also stated that "the definition of "derivative" is broad enough to capture many contracts and instruments that are not traditionally considered to be derivatives. The OSA has this definition but the MSA does not contain a definition of a derivative and it begs the question if this definition is still to be added in an amendment of the MSA. In addition, the AMF stated that it does not propose to recommend that certain provisions of the Scope Rule be adopted in Quebec because these Sections2 are already covered by or excluded from the QDA or the Quebec Securities Act ("QSA") or Regulation 91-507. If a market participant wants to ascertain if the same derivatives are excluded in Quebec like in Ontario and Manitoba, it is important to look at the QDA and the QSA.

b. Unlike the OSC and the MSC, the AMF expands the definition of a "legal person" in Subparagraph 1(3) of Regulation 91-507 to "include another legal person if one is a subsidiary of the other or if both are subsidiaries of the same legal person, or if each of them is controlled by the same person. It also provides what the AMF would deem control by the same person in Subparagraph 1(4) and in Subparagraph 1(5); it considers how ait would deem a legal person to be a subsidiary of another legal person. These additions to the AMF's Regulation 91-507 is for clarification purposes to replicate how the AMF has treated the definition of a legal person in the QDA and QS.

c. In the respective Rules and Regulations, an entity seeking application for designation or recognition as a TR must make an application under the respective provisions of the OSA, QSA and MSA and file a completed Form 91-507F1.

d. Unlike the exemption provided in Section 42 of the OSC and MSC Rules 91-507 to the TR Rule in part, subject to such conditions or restrictions as may be imposed, that may be granted by a Director , the AMF Regulation 91-507 does not provide any such exemption.

e. The AMF expanded the Exclusions provided for in Part 5 of the TR Rule in its Regulation 91-507 to more than crown corporations and the TR Rule will also not apply to other institutions that include a Quebec university; a general and vocational college; and an intermunicipal management board.

IV. Applicability of the Rules

The new legal architecture for OTC derivatives in Ontario, Quebec and Manitoba not excluded by the Scope Rule and as a result would be subject to the TR Rule means such derivatives will be subject to the new reporting requirements from the moment of execution, whether that execution occurs on, or otherwise is subject to the rules of derivatives trading facility or through a private, bilateral negotiation between the two counterparties to the derivatives transaction (for example, a derivatives dealer and a local counterparty). Under these Rules, a derivative transaction execution would have occurred when a derivative transaction has been entered into, assigned, sold or otherwise acquired or disposed of or the novation of a derivative transaction has occurred.

Many Canadian derivatives market participants are already versed in the CFTC's swap reporting and recordkeeping requirements to implement major aspects of the U.S. Dodd-Frank Act as well as the Regulatory Technical Standards ("RTS") regarding the minimum details of the data to be reported to TRs implementing the European Market Infrastructure Regulation ("EMIR") and these questions and answers below are meant to show the applicability of these Rules in the same vein as the CFTC rules implementing the Dodd-Frank Act and RTS implementing the EMIR's reporting requirements. In addition, please find a comparison of data fields required in these Rules in comparison with the data fields required in the CFTCs Rules and the RTS- "Derivatives Data Reporting Fields Selected Jurisdictions-Comparison Chart".

Regulatory Reporting

a. Who is responsible for Reporting?
 The reporting counterparty as determined under Section 25 in the TR Rule is required to report. If the transaction involves a local counterparty and if the transaction is cleared through a recognized or exempt clearing agency, the recognized or exempt clearing agency is the reporting counterparty; if the transaction is not cleared through a recognized or exempt clearing agency and is between two derivatives dealers, each derivatives dealer is the reporting counterparty; if the transaction is not cleared through a recognized or exempt clearing agency and is between a derivatives dealer and a counterparty that is not a derivatives dealer, the derivatives dealer is the reporting counterparty, and in any other case, each local counterparty to the transaction.

In addition, a local counterparty to a transaction as defined in TR Rule must act as the reporting counterparty to the transaction if the reporting counterparty to the transaction as determined under paragraph (1)(c) of the TR Rule is not a local counterparty, and by the end of the second business day following the day on which derivatives data is required to be reported, the local counterparty has not received confirmation that the derivatives data for the transaction has been reported by the reporting counterparty.

A reporting counterparty in respect of a transaction is responsible for ensuring that all reporting obligations in respect of that transaction have been fulfilled and reporting counterparties may also delegate and contract third parties to facilitate reporting, but they remain fully responsible for their reporting obligations.

b. Where to Report?
 In accordance with Section 26 of the TR Rule, a reporting counterparty to a transaction involving a local counterparty must report, or cause to be reported, the data required to be reported to a designated or in the case of Quebec a recognized TR. If no designated or recognized TR accepts the data required to be reported the reporting counterparty must electronically report the data required to be reported to the OSC, AMF or MSC.

c. What information must be reported to a TR once a derivative transaction is cleared through a recognized or exempt clearing agency, executed on a derivatives trading facility or negotiated bilaterally?
 Pursuant to Section 27 of the TR Rule, a reporting counterparty must include the following in every report required: the legal entity identifier of each counterparty to the transaction as set out in Section 28 of the TR Rule; the unique transaction identifier for the transaction as set out in Section 29 of the TR Rule; and the unique product identifier for the transaction as set out in Section 30 of the TR Rule

i. Creation data: Section 31 of the TR Rule provides the requirement that a reporting counterparty report the creation data for a transaction that must be reported under the TR Rule to a designated or recognized TR and when and how creation data must be reported.

ii. Valuation data: Section 33 of the TR Rule provides the requirement that only a reporting counterparty must report valuation data for a transaction that must be reported under the TR Rule, based on industry accepted valuation standards to a designated or recognized TR and when and how valuation data must be reported.

iii. Life-cycle event data: Section 32 of the TR Rule provides the requirement that a reporting counterparty must report all life-cycle events data for a transaction that must be reported under the TR Rule to a designated or recognized TR and when and how life-cycle event data must be reported.

a. Who selects the TR?
 The TR is selected by the reporting party and under Subsection 26(9) of the TR Rule, where the transaction is cleared through a recognized or exempt clearing agency; the recognized or exempt clearing agency must report derivatives data to the designated or recognized TR specified by the local counterparty.

b. Who is liable if the derivatives data required to be reported is not reported or reported incorrectly?
Subsection 26(6) of the TR Rule puts the burden on the reporting party to ensure that all reported derivatives data is accurate and contains no misrepresentation. In addition, Subsection 26(7) provides that a"a reporting counterparty must report an error or omission in the derivatives data as soon as technologically practicable upon discovery of the error or omission, and in no event later than the end of the business day following the day of discovery of the error or omission". Subsection 26(8) puts the burden on a local counterparty that is not a reporting counterparty to notify the reporting counterparty of an error or omission with respect to derivatives data relating to a transaction to which it is a counterparty as soon as technologically practicable upon discovery of the error or omission, and in no event later than the end of the business day following the day of discovery of the error or omission.

c. May a derivative counterparty elect to report data voluntarily?
The TR Rule is silent on this.

d. Will the identity of the non-reporting counterparty be protected?
 Subsection 39(4) of the TR Rule provides that a designated trade repository must not disclose the identity of either counterparty to the transaction. The Committee states, this means that published data must be anonymized and the names or legal entity identifiers of counterparties must not be published. They however added the caveat that Subsection 39(4) is not intended to create a requirement for a designated or recognized TR to determine whether anonymized published data could reveal the identity of a counterparty based on the terms of the transaction.

Public Reporting

a. Is real-time reporting required for all derivatives?
 The Committee revised this requirement based on the comments by stakeholders and the revised Subsection 31(2) of the TR Rule reflects that the real-time reporting requirement applies to creation data only where technologically practicable.

b. What derivatives data must TRs disseminate publicly?
 Subsection 39(3) of the TR Rule places an obligation on designated or recognized TRs to make transaction level reports of the data indicated in the column entitled "Required for Public Dissemination" in Appendix A of the TR Rule for each transaction reported available to the public at no cost.

c. When must TRs make derivatives data public?
 Pursuant to Subsection 39(3) (a &b) the designated or recognized TRs must make the transaction level reports public not later than) the end of the day following the day on which it receives the data from the reporting counterparty to the transaction, if one of the counterparties to the transaction is a derivatives dealer, or the end of the second day following the day on which it receives the data from the reporting counterparty to the transaction in all other circumstances

Recordkeeping

a. What records must be kept?
 Subsection 36(1) of the TR Rule requires a reporting counterparty to keep transaction records

b. How long records must be kept?
 A reporting counterparty must keep the transaction records for the life of each transaction and for a further 7 years after the date on which the transaction expires or terminates.

c. In what form may records be kept?
 Pursuant to Subsection 36(2) a reporting counterparty must keep transaction records in a safe location and in a durable form.

d. How will the OSC. AMF and MSC examine records?
 The TR Rule is silent on this.

V. Notes

Though, we anticipate that the TR Rule will have a significant impact on the business procedures of Canadian derivative market participants and cross-border entities that trade with local counterparties, this Review is provided for your convenience and does not constitute legal advice. It is prepared for the general information of our clients and other interested market participants and stakeholders and it should not be acted upon in any situation without appropriate legal advice.

If you have any questions about what an entity that enters into OTC derivatives transactions in Ontario, Quebec and Manitoba needs to consider regarding whether the transaction is required to be reported, whether it is a reporting counterparty under the TR Rule, how it will address its or its counterparty's obligations under the TR Rule, and what systems and processes it should put in place to meet its obligations and, if applicable, to capture, process and verify all the required derivatives data, we invite you to contact us.

As the Multilateral Jurisdictions adopt their TR Rule through the proposed Multilateral Instrument, derivatives market participants in Canada will need to work through the interaction of the TR Rules in each Canadian provincial jurisdiction and consider whether reporting needs to be made to the designated or recognized TR or the applicable securities regulator in more than one jurisdiction.

For more information regarding the CSA's OTC derivatives regulation initiatives and the Canadian OTC Working Group and how it could impact your derivatives and commodity trading operations, please contact Piscilla Bunke.

Footnotes

1. The English translation of the Quebec Regulations starts from Page 85.

2. See Page 86 of the Quebec Regulations.

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