Canada: Derivatives Product Determination And Trade Reporting Rules - Canadian Securities Regulators Issue Final Rules

On November 14, 2013, the Ontario Securities Commission (the "OSC") published final OSC Rule 91-506 Derivatives: Product Determination and OSC Rule 91-507 Trade Repositories and Derivatives Data Reporting, a copy of which is available [here]. Once approved by the Minister of Finance, the rules will come into force on December 31, 2013. Similar rules were also issued by the Autorité des marchés financiers and the Manitoba Securities Commission. These rules represent the first set of final rules issued by Canadian securities regulators addressing the regulation of over-the-counter derivatives in Canada. The discussion set out below focuses on the Ontario final rules.

BACKGROUND

In December 2012, the Canadian Securities Administrators Derivatives Committee (the "Committee") released Consultation Paper 91-301 that set out model provincial rules dealing with product determination and trade reporting (collectively, the "Model Rules"). The Model Rules built, in part, on the Committee's previously issued derivatives consultation papers. A copy of BLG's Derivatives Bulletin describing the key concepts in the Model Rules can be found [ here]. In June 2013, the OSC published its proposed rules, the Autorité des marchés financiers and the Manitoba Securities Commission published their proposed province-specific rules and the Alberta Securities Commission, the British Columbia Securities Commission, the New Brunswick Securities Commission, the Nova Scotia Securities Commission and the Financial and Consumer Affairs Authority of Saskatchewan published a multi-province consultation paper containing updated Model Rules. 27 comment letters were received on the proposed provincial rules. The final Ontario rules reflect the Committee's response to those comments and the harmonized charges made to the province-specific rules.

OSC RULE 91-506 DERIVATIVES: PRODUCT DETERMINATION (THE "SCOPE RULE")

The purpose of the Scope Rule is to define those instruments that are derivatives. Initially, the Scope Rule will only be relevant for purposes of OSC Rule 91-507. All other legislation, rules, notices or other policies applicable to derivatives will continue to apply. However, it is expected that the Scope Rule will apply to the rules that will address other aspects of OTC derivatives regulation. As these other regulations are published and finalized, consequential amendments may need to be made to the Scope Rule.

The Scope Rule determines which instruments are derivatives primarily by defining those that are excluded from being a derivative. Instruments that are not derivatives include:

  • those governed by gaming control legislation
  • insurance or annuity contracts
  • currency exchange contracts, provided that the contract physically settles (as opposed to cash settlement) within two business days (rolling spot, FX forwards and similar trades are expressly identified as derivatives)
  • commodity forward contracts where physical delivery is intended and the contract generally does not provide for cash settlement
  • bank and similar deposits and
  • those traded on certain stock exchanges (not including a derivatives trading facility).

For instruments that fall within the definition of both derivatives and securities, generally, those that meet the definition of securities only by reason of being an "investment contract" or an "option" are prescribed to be a derivative; otherwise, such instruments are prescribed not to be a derivative.

The Companion Policy to the Scope Rule further indicates that contracts entered into for consumer, business or non-profit purposes that do not involve investment, speculation or hedging, such as employment contracts, contracts for business purchase and sale transactions and commercial sale arrangements, are not derivatives.

While the Scope Rule is helpful in defining the universe of derivatives to be regulated by the proposed OTC derivatives regime, its limited initial application means that derivatives users must continue to consider the application of certain securities laws and instruments to their trades. The definition of derivative under the Scope Rule does, however, provide clarity to certain market participants, such as money services businesses and commodity risk management firms, that these businesses will be caught under the new OTC derivatives regime.

OSC RULE 91-507 TRADE REPOSITORIES AND DERIVATIVES DATA REPORTING (THE "TR RULE")

The TR Rule covers two subjects: the requirements in order to become and operate a designated trade repository in Ontario, which become effective on December 31, 2013, and the requirements to report OTC derivative trades, which generally become effective as of July 2, 2014 (although the requirement of a reporting counterparty that is not a derivative dealer to report data only become effective on September 30, 2014 and transactions entered into before July 2, 2014 that expire or terminate on or before December 31, 2014 are not required to be reported).

For entities that wish to establish and operate a trade repository in Ontario, the TR Rule establishes the application process and addresses requirements relating to the general operations of a repository, including: governance; the board of directors; management; the chief compliance officer; fees; providing access to services; the acceptance of data; general communications; due process; data records, security and confidentiality; risk management; and outsourcing.

The other part of the TR Rule addresses the reporting requirements with respect to OTC derivative trades. Subject to a very narrow exemption for commodity trades other than cash or currency where the local counterparty is not a derivatives dealer and has less than $500,000 in aggregate notional value under all outstanding transactions, detailed derivatives data for each OTC transaction must be reported to a designated trade repository. If there is no designated trade repository that accepts derivatives data in respect of a particular trade or asset class, then the data must be reported electronically to the OSC.

The TR Rule includes rules to determine who has the obligation to report. Generally, the reporting counterparty will be the clearing agency for trades that are cleared through a recognized or exempt clearing agency or the derivatives dealer. For transactions between two derivatives dealers or between two local counterparties neither of which is a derivatives dealers, both parties have an obligation to report the transaction, but they may delegate this obligation to avoid double reporting. The intention of the TR Rule is to facilitate data reporting by a single counterparty. Although the reporting counterparty is permitted to delegate this duty to the other party, it should have procedures or contractual arrangements in place to ensure that reporting occurs. We expect that the reporting obligation will generally fall to the financial institution that is a party to the OTC derivative.

The report with respect to the initial creation of the trade is required to be made in real time unless it is not technologically practicable to do so. Life-cycle event data with respect to an existing trade must be reported by the end of the business day on which the life-cycle event occurs. The timing for the reporting of valuation data depends upon the status of the reporting counterparty: derivatives dealers and clearing agencies are required to report daily and other reporting counterparties are required to report quarterly. The scope of the aggregate data that is required to be reported is quite detailed and will create an onerous reporting burden on financial institutions that write OTC derivatives trades.

The trade repository must make the trade data available to the OSC on a direct, continuous and timely basis. In addition, the counterparties to a transaction are to be provided with access to all derivatives data relevant to the particular trade and each counterparty is deemed to have provided the consent required to release the data on such basis. Derivatives data is also to be made available on a periodic basis to the public. The public will be able to access aggregate data on open positions, volume, and number and price, as well as breakdowns, where applicable, by currency of denomination, geographic location of the reference entity or asset, asset class, contract type, maturity, and whether the transaction is cleared. Under the TR Rule, transaction level data reporting will not apply until December 31, 2014. This 6-month extension was a response to comments 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. The Committee determined that a delayed effective date for this requirement would allow time to further consider the appropriateness of the timing of transaction level public disclosure.

We expect that the TR Rule will have a significant impact on the business processes of derivative market participants and firms that trade in currency exchange contracts that do not meet the criteria in the carve-out for such contracts. An entity that trades OTC derivatives in Ontario needs to consider whether the trade 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 in the applicable agreements, 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 data. As other provinces and territories in Canada adopt their TR Rule, market participants in Canada will need to work through the interaction of the TR Rules in each Canadian jurisdiction and consider whether reporting needs to be made to the trade repository or securities regulator in more than one jurisdiction.

About BLG

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
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
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