Effective October 31, 2014, provincial rules in Ontario, Québec and Manitoba will require derivatives dealers and clearing agencies to report OTC derivatives transactions that involve "local counterparties" in the three provinces. This Osler Update outlines the steps to take to comply with trade reporting rules in the three provinces and provides an update on other recent derivatives regulatory developments in Canada.
Compliance with Reporting Requirements
Step 1: Confirm Whether the Rules Apply to Your Derivatives Trading Activity
Most OTC derivatives transactions involving a "local counterparty" in the three provinces must be reported.
- The scope of reportable transactions is described in OSC Rule 91-506 – Derivatives: Product Determination, with similar rules in Québec and Manitoba. Most OTC derivatives transactions, including interest rate swaps, equity swaps and options, credit swaps, foreign exchange forwards and most cash-settled commodity derivatives, will need be reported. Exchange-traded derivatives such as futures are not reportable.
- A "local counterparty" is defined in OSC Rule 91-507 – Trade Repositories and Derivatives Data Reporting, with similar rules in Québec and Manitoba, and includes: (a) a person or company (other than an individual) organized under the laws of, or having its head office or principal place of business in, the province; (b) parties required to register under provincial securities law as a derivatives dealer; and (c) an affiliate of (a) if responsible for substantially all of the liabilities of (a).
Step 2: Obtain a Legal Entity Identifier (LEI)
Any entity trading an OTC derivative that is subject to reporting in Ontario, Québec or Manitoba must obtain an LEI. Also, a swap execution facility (or similar) or entities that intermediate OTC derivative transactions that involve a local counterparty must obtain an LEI. The Ontario Securities Commission has published guidance on obtaining an LEI, available here.
Step 3: Confirm Status and Reporting Responsibility with Counterparties
Entities should be prepared to give representations to OTC derivatives counterparties concerning their status as: (a) a local counterparty and (b) a party assuming the reporting obligations in respect of OTC derivatives transactions. Canadian banks and non-Canadian financial institutions have requested that counterparties complete the ISDA Canadian Representation Letter for this purpose. Other entities, in particular entities that trade energy or other commodity derivatives, may choose to instead deliver the IECA Canadian Representation Letter to their counterparties.
Any entity trading an OTC derivative that is subject to reporting in Ontario, Québec or Manitoba should take care to confirm whether their counterparty is: (a) a dealer or (b) is prepared to report the transaction and accept the other obligations of a reporting counterparty as if it were a dealer. If neither party to the transaction is a dealer nor is prepared to report the transaction as if it were a dealer, then the reporting obligations in respect of the transaction do not take effect until June 30, 2015.
Step 4: Reporting Counterparties (Dealers and Clearing Agencies) Establish Connections to Approved Trade Repositories
Dealers, clearing agencies and any other party that is prepared to report an OTC derivatives transaction as if it were a dealer must establish connections to approved trade repositories in Ontario, Québec and/or Manitoba. ICE Trade Vault, LLC, Chicago Mercantile Exchange Inc. and DTCC Data Repository (U.S.) have been approved as trade repositories in Ontario and Québec. Manitoba approval is expected for the three trade repositories prior to October 31.
An important note on substituted compliance: non-Canadian derivatives dealers that trade reportable OTC derivatives with local counterparties in the three provinces must report the transactions to an approved Canadian trade repository. The substituted compliance provisions in the Canadian derivatives reporting rules do not exempt a non-Canadian dealer from reporting transactions involving a local counterparty on the basis that the non-Canadian dealer reports the transaction in the U.S. pursuant to CFTC reporting requirements.
Other Derivatives Regulatory Updates
- The Ontario Securities Commission has published a frequently asked questions guide on OTC derivatives trade reporting that provides a helpful, high-level overview of the trade reporting rules in Ontario.
- The Canadian Office of the Superintendant for Financial Institutions (OSFI) has published Draft Guideline B-7 Derivatives Sound Practices. The Draft Guideline sets out OSFI's expectations for federally-regulated financial institutions (FRFIs) with respect to derivatives activities, in particular the expectation that FRFIs will report OTC derivative transaction data to provincially approved derivatives trade repositories.
- The Alberta Securities Commission (ASC) has proposed the repeal and replacement of an existing blanket order that provides exemptive relief from dealer registration and prospectus delivery requirements when trading OTC derivatives with qualified parties in Alberta. Comments on the proposal are due October 17. The proposal indicates that Alberta will proclaim into force the Securities Amendment Act, 2014 on or about October 31, 2014, which will create a new framework in Alberta for the regulation of derivatives, including trade reporting.
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.