Canada: Conduct And Consequence: Canadian Regulators Publish Consultation Paper On OTC Derivatives Market Conduct Rules, Surveillance And Enforcement

Last Updated: December 6 2011
Article by Shahen A. Mirakian, Maria Sagan and Jocelyn Reikie Student At Law

On November 25, 2011, the Canadian Securities Administrators Derivatives Committee (the "CSA Committee") published CSA Consultation Paper 91-403 – Derivatives: Surveillance and Enforcement ("CSA Paper 91-403")1 setting out proposals for market conduct, surveillance and enforcement in respect of OTC derivatives.

This paper is the second in a series of eight CSA Committee consultation papers that build on the high level proposals for regulation of over-the-counter ("OTC") derivatives outlined in the CSA Committee's Consultation Paper 91-401 – Over-the-Counter Derivatives Regulation in Canada released on November 2, 2010 ("CSA Paper 91-401").2 Of particular importance in CSA Paper 91-403 is the introduction of market conduct rules for OTC derivatives. The CSA Committee states that harmonized market conduct rules, effective surveillance and monitoring, and consistent enforcement will create greater transparency in the OTC derivatives market, decrease improper market conduct and help support Canada's G-20 commitments to improve OTC derivatives markets by mitigating systemic risk through regulatory oversight.

CSA Paper 91-403 is divided into three parts, (i) market conduct rules; (ii) surveillance and monitoring; and (iii) enforcement.

harmonized market conduct rules

While Canada generally has a harmonized approach to regulation of market conduct in traditional securities markets, this consistency does not extend to OTC derivatives markets. The CSA Committee recommends that provincial market regulators be granted the authority to legislate on the following market conduct issues in the context of OTC derivatives markets:

  • Market manipulation and fraud
  • Misrepresentations and misleading or untrue statements
  • Prohibited representations
  • Abusive trading practices (e.g. front running)
  • Record keeping and audit trail requirements
  • Insider trading
  • Evasion or avoidance
  • Abuse of exemptions
  • Position limits
  • Business conduct standards for registrants

The CSA Committee's recommendation in respect of the majority of these market conduct issues is to implement rules in the OTC derivatives context comparable to existing rules in the securities marketplace. The CSA Committee proposes that the existing prohibitions against market manipulation, fraud, misrepresentation, making certain representations about securities, and abusive trading practices in capital markets be extended to OTC derivatives markets. For example, the CSA Committee recommends extending the prohibition in securities law against giving undertakings, written or oral, as to the future value or price of a security to the OTC derivatives context. As well, the CSA Committee recommends prohibiting persons who have an intention of effecting a trade in an OTC derivative from making representations that they or anyone else will refund any amount paid, unless the OTC derivative's terms provide for a refund or a right to a refund.3

A number of the CSA Committee's recommendations mirror the regulatory approach taken in the United States pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act.4 In particular, the CSA Committee's recommendations to extend rules existing in the securities marketplace with respect to market manipulation and fraud, record keeping and audit trail requirements to OTC derivatives markets are reflected in this U.S. legislation.

The CSA Committee also proposes the use of markers for transactions involving insiders and important shareholders in OTC derivatives markets, similar to those used in the traditional securities context, to assist with surveillance.

Although the CSA consultation paper dealing with exemptions has not yet been released, the CSA Committee has suggested that rules to prevent abuse of these exemptions, as well as a system for monitoring and penalizing general evasion and avoidance of OTC derivatives regulations, should be implemented by provincial market regulators. The CSA Committee seeks to address abuse of exemptions from new mandatory requirements – such as clearing, margin or collateral requirements – for certain transactions and certain categories of end-users that trade in OTC derivatives. It seeks to prevent abuses such as the misrepresentation of one's status as qualifying for the end-user exemption.

The CSA Committee mentions that both Europe and the United States have proposed new requirements for position limits with the objective of managing risk and reducing excessive speculation in derivatives markets. Unlike Europe or the United States, the CSA Committee is not, at this time, proposing implementation of position limits without further research. This research should address how position limits could be implemented without interfering with legitimate trading activity.

surveillance and monitoring

Currently, provincial market regulators have a limited ability to monitor the activities of OTC derivatives markets. The CSA Committee recommends the development of a comprehensive, coordinated approach to surveillance and monitoring of OTC derivatives markets, that includes cross-product and cross-market analysis, in order to facilitate detection of improper market conduct, systemic risks, and problematic positions.

The CSA Committee proposes that provincial market regulators, in coordination with other Canadian financial market regulators, monitor participant positions through data collection relating to positions held by registrants and other key participants.

It also recommends that provincial market regulators have the authority to access, receive, and analyze data about OTC derivatives and market participants. Collaboration with domestic and international regulators and regulated entities, such as self-regulatory organizations, is also recommended. Provincial market regulators may also need to work with provincial governments to implement carve-outs from the provincial access to information legislation to preserve the confidentiality of data. Further study and research is recommended regarding operational issues, such as which entity will be responsible for surveillance, including whether a centralized system should be developed, or whether each province should perform its own surveillance.

enforcement

The CSA Committee recommends that existing compliance, investigation, and enforcement powers in securities legislation be extended to cover trading in OTC derivatives. In particular, it proposes that provincial market regulators be granted the authority to conduct compliance reviews, compel disclosure of information, prescribe regulatory, quasi-criminal and civil liability offences, issue penalties, and issue a variety of orders. It states that the development of a whistleblower framework may be addressed in the future.

next steps

Canadian market participants have until January 25, 2012, to provide comments on CSA Paper 91-403. The CSA Committee hopes that CSA Paper 91-403 will generate commentary and debate in the area, assisting members of the CSA Committee in formulating new policies and rules regarding OTC derivatives regulation. Once comments are received and reviewed, the CSA Committee will finalize the rule-making guidelines and the provinces will begin the rule-making process.

effect of these proposals

With the exception of position limits, the CSA Committee's proposals regarding market conduct rules are reflective of the traditional mandate of securities regulators to protect investors and preserve capital market integrity, rather than the G-20's focus on mitigating systemic risks associated with OTC derivatives. This may be problematic because it treats OTC derivatives as investment products, like traditional securities, rather than as risk management tools.

Therefore, market participants should pay careful attention to the proposed market conduct rules and work with the CSA Committee to formulate rules that work in the OTC derivatives context.

As Canada moves toward uniform regulation of OTC derivatives, we will continue to monitor the CSA Committee's proposals for OTC derivatives regulation, and will publish bulletins on each of the CSA Committee's future consultation papers as they are released.

Footnotes

1. "CSA Consultation Paper 91-403 - Derivatives: Surveillance and Enforcement" (25 November 2011).

2. For a review of CSA Paper 91-401, see McMillan LLP Derivatives Law Bulletin "Change Is Near but Unclear: Canadian Regulators Publish Initial Proposals on OTC Derivatives" (November, 2010); for a review of CSA Consultation Paper 91-402 – Derivatives: Trade Repositories ("CSA Paper 91-402"), please see McMillan LLP Derivatives Law Bulletin " Reporting for Duty: Canadian Regulators Publish Framework for OTC Derivatives Trade Reporting and Repositories" (June, 2011).

3. It should be noted that both of these proposals regarding prohibited representations have already been adopted in Ontario as part of the December 2010 amendments to the Securities Act relating to OTC derivatives.

4. Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub.L. No. III-203, 124 Stat 1376 (2010).

The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.

© Copyright 2011 McMillan LLP

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
Shahen A. Mirakian
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