Canada: CSA Publishes Model Rules On Trade Repositories, Derivatives Data Reporting And The Determination Of Derivatives

On December 6, 2012 the OTC Derivatives Committee of the Canadian Securities Administrators (the Committee) published for interim guidance and comment CSA Staff Consultation Paper 91-301. This is a noteworthy step in the efforts by provincial securities regulators to fulfill Canada's G-20 commitments to regulate OTC derivatives.

The paper sets out two model provincial rules and accompanying model explanatory guidance pertaining to, firstly, trade repositories and derivatives data reporting (the TR Rule) and, secondly, the determination of products which will be treated as derivatives for purposes of the TR Rule (the Scope Rule). The Committee sets out the implementation process, stating that once comments on the model rules have been considered, they may be modified and then each Canadian jurisdiction will need to publish for comment its own rules, explanatory guidance and appendices with appropriate local modifications. The Committee recognizes that this may result in some differences in the final rules from jurisdiction to jurisdiction, but their stated intention is that the substance of the rules be the same across all jurisdictions and that market participants in derivatives products receive the same treatment throughout Canada.

The TR Rule and Scope Rule are drafted on the basis of the Ontario Securities Act which contains framework provisions for the regulation of the derivatives market, including the activities of trade repositories. The implementation process is complicated by the fact that not all existing securities legislation currently provides an appropriate framework to implement such rules. In the case of Alberta and British Columbia, New Brunswick, Nova Scotia and Saskatchewan, existing securities legislation will need to be amended. In Manitoba and Ontario, only OTC derivatives will be subject to those province's rules, since exchange-traded contracts are currently subject to their respective Commodity Futures Acts. In Quebec, certain provisions of the Scope Rule would not be applicable as they are already covered by the Quebec Derivatives Act. In addition, since the rules will be implemented on a jurisdiction-by-jurisdiction basis, the timing of their coming into force in various jurisdictions may vary.

The TR Rule reflects proposals contained in CSA's Consultation Paper 91-402Derivatives: Trade Repositories which was released on June 23, 2011. The TR Rule covers two areas:  (1) the requirements trade repositories must meet to be designated or recognized by provincial regulators as acceptable entities to which market participants may report their trades, and (2) the reporting obligations of derivatives market participants themselves. The Committee envisages that exemptions from certain requirements may be available for foreign trade repositories that are subject to comparable regulatory regimes in other jurisdictions. In keeping with the objective of harmonizing such legislation with regimes elsewhere, the TR Rule broadly follows the approach taken by the CFTC in Part 49 of its regulations relating to swap data repositories and the international standards set out in Principles for financial market infrastructures published by CPSS and IOSCO.

The TR Rule sets out detailed requirements for an entity to qualify as a designated or recognized trade repository. These focus on, among other things, governance, risk management procedures and record-keeping. In the case of foreign trade repositories, the requirements include providing access to their books and records to Canadian regulators and submitting to the jurisdiction of the Canadian courts. The TR Rule stipulates who is required to report and sets out in its appendix detailed requirements regarding what information is to be reported.

The Scope Rule provides a gloss on the broad definition of "derivative" in the Ontario Securities Act and aims to narrow the range of products that are to be treated as derivatives subject to derivatives data reporting obligations under the TR Rule.  The Scope Rule will initially apply for purposes of the TR Rule but, in order to provide flexibility, it may be amended as necessary to apply to other model rules as they are promulgated. The Committee notes that the interpretative guidance provided in the Scope Rule is not intended to alter the guidance provided in existing instruments, for example OSC Staff Notice 91-702 relating to contracts for differences offered in the retail markets.

The Scope Rule sets out several sub-rules to determine whether a product is a "derivative" for purposes of the TR Rule. The first sub-rule lists a variety of derivatives (excluded derivatives) which are to be excluded from the definition of "derivative" appearing in applicable legislation, including transactions which are: 

  1. regulated by gaming control legislation;  
  2. insurance or annuity contract issued by licensed insurers in Canada;  
  3. spot market contracts or instruments for the purchase and sale of currencies or physical commodities which, subject to limited exceptions, involve physical settlement only; and  
  4. evidences of deposit issued by banks, cooperatives, credit unions, caisse populaires or loan and trust corporations.

The explanatory guidance also states that the Committee consider that there are other instruments, such as contracts or instruments which, while not expressly excluded, should not be considered "derivatives" if they are entered into for consumer, business or non-profit purposes that do not include investment, speculation or hedging.

The second sub-rule provides that all investment contracts and over-the-counter options (to the extent that they are not excluded derivatives referred to above) that are derivatives and that are otherwise securities solely by reason of falling under the relevant securities act definitions of "investment contract" or "option", are prescribed not to be securities. The explanatory guidance indicates that OTC foreign exchange contracts and contracts for differences would fall into this category. Physically-settled OTC options over securities would also be covered provided they are not compensation or financing options referred to below:

The third sub-rule provides that all contracts or instruments (other than any contract or instrument to which the first and second sub-rules above apply) that are securities and are otherwise derivatives are prescribed not to be derivatives for purposes of the TR Rule. This is intended to cover structured notes, ABS, exchange-traded notes and warrants which are to be treated as securities, even if they contain an embedded derivative.

Finally, all contracts or instruments that would otherwise be derivatives (other than any contract or instrument to which any of the above sub-rules apply) are prescribed not to be a derivative if such contract or instrument is used by an issuer or an affiliate of an issuer solely to compensate an employee or service provider or as a financing instrument, and its underlying interest is a share or stock of that issuer or its affiliate.

While those familiar with the nuances of the distribution of legislative powers in Canada will understand why this multi-step approach to implementing a pan-Canadian regulatory regime is being taken, it will no doubt strike observers from the derivatives world outside of Canada as surprisingly complicated and cumbersome. Moreover, the potential for variances between the applicable rules in jurisdictions within Canada, although a boon to lawyers practicing in this area, will likely result in some continued inefficiency in the market (although perhaps less than that caused by the existing patchwork regulatory regime).

The introduction to CP 91-301 indicates that the model rules approach will address existing regulation in other areas (such as the regulation of financial institutions). It remains to be seen how these provincial rules will be integrated into the existing federal regime governing the derivatives activities of Canadian banks, which represent the vast majority of the market.

CP 91-301 will be open for comment until February 4, 2013. The Committee notes that it is looking for specific feedback on section 40(2) of the TR Rule which exempts from reporting requirement transactions in relation to physical commodities if the local counterparty is not a dealer or adviser and has less than $500,000 aggregate notional value, without netting, of outstanding transactions at the time of the transaction, including the additional notional value related to the transaction in question.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Davies Ward Phillips & Vineberg
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Davies Ward Phillips & Vineberg
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions