On June 19, 2014, amendments to the Bank Act received
royal assent, allowing the Governor in Council to make regulations
regarding a bank’s activities relating to derivatives. The
Department of Finance (Canada) (“Finance”) commented
that such regulations will facilitate the integration and
consolidation of over-the-counter derivatives (“OTC”)
regulations with the cooperative capital markets regulatory system.
It is also expected that foreign regulator assessment of the
Canadian regulatory financial system will be made easier because
Finance will be able to ensure that Canadian OTC regulations are
equivalent to those abroad. Recall that central clearing of OTC
transactions was a key G-20 commitment to reinforce financial
stability and was first brought forward in Canada’s 2012
Economic Action Plan.
The Canadian Securities Administrators (“CSA”) have
recently issued derivatives regulations for comment that relate to
reporting of OTC transactions in trade repositories and the central
clearing of OTC transactions. Under the proposed regulations, the
obligation to report OTC transactions will lie with the reporting
counterparty, which includes persons in the business of trading
derivatives such as certain financial institutions.
In the case of the central clearing obligation, all
counterparties must submit their derivatives transactions to be
cleared by a clearing agency unless they benefit from an exemption
such as the “end user” exemption. This exemption
applies when a counterparty enters into the transaction to hedge or
mitigate commercial risk related to the operation of its business.
Financial entities however, including banks, insurance companies
and pension funds, are specifically not eligible for the “end
user” exemption regardless of the purpose of the derivative
Currently, Québec is the only province that has already
adopted derivatives legislation that concerns, among other things,
registration of dealers in derivatives, qualification of
derivatives contracts and trade reporting. The regulation regarding
the reporting of OTC transactions in Québec is planned to
gradually enter into effect starting on October 31, 2014 following
the same timeline as that proposed by the CSA.
What will remain to be seen is the level of cooperation and
harmonization between the CSA and Finance in the interest of
efficiency given that rules for transaction reporting and central
clearing are well under way.
Other amendments to the Bank Act concern activities in
relation to benchmarks. As defined in the amendments, a benchmark
means a price, estimate, rate, index or value that is determined by
reference to an assessment of one or more underlying interests.
Specifically, a benchmark is used for purposes of determining such
things as interest payable, the value of financial instruments and
financial performance. As such, any proposed regulations in this
area can impact banks as banks rely on benchmarks in their day to
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