On November 14, 2013, the Ontario Securities Commission (the "OSC") published revised versions of harmonized derivatives rules in respect of product determination, trade repositories and derivatives data reporting (the "Rules"). The revisions to the Rules address comments received by the OSC on draft versions of the Rules that were published earlier this year and are based on model provincial rules that were established by the Derivatives Committee of the Canadian Securities Administrators (the "CSA"). Assuming that the necessary Ministerial approval is obtained, the Rules will come into force on December 31, 2013, with certain reporting requirements phased in over the course of 2014.
Concurrently with the release of the Rules by the OSC, Quebec's Autorité des marchés financiers and the Manitoba Securities Commission also published final versions of similar rules that will apply in those provinces. It is expected that other jurisdictions will adopt similar province-specific rules, based on the CSA's model rules, in the future. The regulators' intention is that the rules will be substantially harmonized across all jurisdictions.
Below is a brief summary of the Rules published by the OSC.
Product Determination Rule
OSC Rule 91-506 Derivatives: Product Determination and its related companion policy (the "Scope Rule") provide guidance as to the types of derivatives that will be subject to reporting requirements under the TR Rule (see discussion below). The Scope Rule effectively narrows the range of products that might otherwise fall within the broad definition of "derivative" under Ontario securities legislation. The Scope Rule also resolves conflicts that may arise when a specific contract or instrument falls under the overlapping definitions of "derivative" and "security" under Ontario securities legislation.
The Scope Rule specifically excludes certain contracts or instruments from the definition of "derivative", including:
- gaming and insurance contracts where such contracts are 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;
- commodity forward contracts provided that physical delivery of the commodity is intended and the contract does not permit cash settlement in the ordinary course;
- evidence of deposits held by certain federally and provincially regulated entities;
- contracts or instruments traded on certain prescribed exchanges;
- contracts meeting the definition of both "security" and "derivative" in Ontario securities legislation provided that such contract is not a security solely by virtue of being an "investment contract" or "option"; and
- certain listed issuer compensation products where the underlying interest is a stock or share of the issuer.
Any contract or instrument that is excluded from the definition of "derivative" under the Scope Rule will not be required to be reported to a designated trade repository.
Trade Repositories and Derivatives Data Reporting Rule
OSC Rule 91-507 Trade Repositories and Derivatives Data Reporting and its related companion policy (the "TR Rule") generally address two areas: (i) requirements relating to the regulation of trade repositories and (ii) reporting requirements by counterparties to derivatives transactions.
Regulation of Trade Repositories
The TR Rule establishes detailed requirements for an entity to obtain and maintain a designation as a trade repository. In determining whether or not to designate a trade repository, the OSC will consider various factors, including whether it is in the public interest to do so, whether the applicant is in compliance with securities laws and whether the applicant has established policies that meet standards applicable to trade repositories.
Once designated, a trade repository will be subject to a variety of ongoing compliance requirements relating to, among other things, governance, recordkeeping, data security and confidentiality and risk management.
Pursuant to the TR Rule, all derivatives transactions involving a local counterparty are required to be reported to a designated trade repository or, if none have been designated for the type of transaction, to the OSC. The TR Rule outlines a hierarchy for determining which counterparty to a transaction is required to report:
- If the transaction is cleared through a recognized or exempt clearing agency, then the clearing agency will be responsible for reporting the transaction.
- If the trade involves one or more derivatives dealers (including foreign dealers that are registered in Ontario), then such derivatives dealers will be responsible for reporting the transaction.
- If a local counterparty end-user enters into a transaction with a foreign dealer that is not registered in Ontario, the initial reporting obligation will fall on the foreign dealer. However, if the local counterparty end-user has not received confirmation that the necessary reporting has been made within two business days, then the local counterparty end-user will become responsible for reporting the transaction.
- If the transaction is between two end-users, then each local counterparty to the transaction will have a reporting obligation.
It should be noted that in all of the cases described above the counterparties to a transaction are free to contract or institute systems and practices to delegate the reporting function to one of them or to a third party to avoid double reporting. However, each counterparty that has a reporting obligation (pursuant to the hierarchy set out in the TR Rule) will remain responsible for ensuring the timely and accurate reporting of a transaction.
Content and Timing of Reporting
The three main types of data that must be reported under the TR Rule are (i) creation data; (ii) life-cycle event data, which includes any changes to derivatives data previously reported; and (iii) valuation data, which includes the current value of the transaction.
The TR Rule requires that the initial reporting of creation data be completed on a real-time basis and the reporting of life-cycle event data be completed by the end of each business day (in each case provided that it is technologically possible to do so). Valuation data must be reported daily where the reporting counterparty is a derivatives dealer or a recognized or exempt clearing agency. In all other cases, valuation data must be reported quarterly.
Effective Dates for Reporting Obligations
Although the TR Rule is expected to come into force on December 31, 2013, certain of the reporting requirements will be phased in over the course of 2014. Specifically, the derivatives trade reporting requirements will come in to force on July 2, 2014 (except in cases where both counterparties are non-dealers, in which case no reporting will be required until September 30, 2014).
In addition, obligations under the TR Rule that will require the public dissemination of anonymous transaction-level data by designated trade repositories will not come into effect until December 31, 2014. This additional six-month extension was made in response to many comments received by the OSC on the draft Rules that the publication of transaction-level data, even with the reporting delays provided for in the TR Rule, could cause harm to the Canadian derivatives market and market participants due to the less liquid nature of the Canadian derivatives market relative to other major trading jurisdictions. It remains to be seen what, if any, changes will be made to the TR Rule to address these concerns.
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.