On April 18, 2013, the Canadian Securities Administrators (the "CSA") released Consultation Paper 91-407 – Derivatives: Registration (the "Consultation Paper") for comment. The Consultation Paper sets out the CSA's recommendations on registration and on-going compliance of derivatives market participants, and is the latest in a series of CSA consultation papers designed to set out a regulatory framework for the over-the-counter derivatives market in Canada.
The proposed registration regime includes three categories of registration: the derivatives dealer category for those carrying on the business of trading in derivatives, including intermediating trades, making markets in derivatives, receiving compensation for trading and soliciting derivatives trades; the derivatives adviser category for those carrying on the business of advising others in relation to derivatives; and the large derivative participant ("LDP") category for entities, other than derivatives dealers, that have a substantial derivatives exposure that could subject the Canadian or international financial system to significant systematic risk. The CSA indicates that the thresholds to determine whether an entity has sufficient derivatives exposure to warrant inclusion as an LDP will be determined in consultation with "other Canadian authorities" upon completion of sufficient analysis of trade repository data. Registration would be required for both frontline staff and managers/supervisors and include individuals involved in providing advice and trading services to clients as an intermediary.
The Consultation Paper includes proposed exemptions for certain market participants from the obligation to register. Clearing agencies that have been recognized (or exempted from recognition) would not be required to register where the obligation to register arises solely from carrying on the business of a clearing agency. A person trading with, on behalf of, or providing derivatives-related advice to, a person that is an affiliate would not be required to register. Additionally, governments would not be required to register, and dealers providing advice incidental to trading services would be exempt from the requirement to register as advisers.
A number of registration requirements are proposed that would apply to all registrants. These include: minimum proficiency requirements, financial and solvency requirements (including minimum capital, margin, insurance and reporting requirements), honest dealing obligations and obligations relating to the care of collateral posted by clients or counterparties. Derivatives dealers and advisers would also be required to fulfill certain gatekeeper functions and business conduct requirements including know your client/counterparty obligations, suitability obligations and conflict of interest management.
The CSA is also considering two regulatory alternatives specifically for situations where derivatives dealers trade as principal with non-qualified parties. "Qualified parties" are expected to include sophisticated market participants with the financial ability to absorb losses from derivatives transactions, conceptually similar to "permitted clients" and "accredited investors". Either the non-qualified party will be required to obtain independent advice before trading or the derivatives dealer will be required to instruct the non-qualified party that the derivatives dealer has a conflict of interest and advise the counterparty that it may obtain independent advice. Where a derivatives dealer trades as principal with a non-qualified party that is not independently represented, the derivatives dealer will be subject to additional reporting requirements including pre-trade reports, trade confirmations and account statements.
Market participants required to register as derivatives dealers, derivatives advisers or LDPs who are subject to equivalent regulation by an alternative Canadian regulator, as determined by the applicable securities regulator, would be exempt from redundant regulation. Foreign derivatives dealers, derivatives advisers and LDPs would be exempt from certain regulatory requirements where they can demonstrate that they are subject to substantially equivalent regulatory requirements in their home jurisdiction. However, they would still be required to register in the Canadian jurisdictions where they are carrying on derivatives-related business and would be subject to ongoing reporting requirements. More guidance would be useful on what the CSA considers a "substantially equivalent" regulatory regime for the purposes of these exemptions.
Also of note in the Consultation Paper is the CSA's recognition of Canada's role in the global derivatives market and its commitment to work with international regulators to develop rules for the Canadian market that ensure that Canadian derivatives market participants "have access to international markets and are regulated in accordance with international principles".
The Consultation Paper is open for comment until June 17, 2013. A copy of the Consultation Paper can be reviewed here.
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