By Brian Koscak and Michael Brown – Effective as of October 31, 2014, securities legislation in each of Ontario, Québec and Manitoba came into force that requires "local counterparties" which engage in derivative transactions to report certain derivatives transaction data to a designated trade repository. OSC Rule 91-507 Trade Repositories and Derivatives Data Reporting and the corresponding rules in Québec and Manitoba (collectively, the TR Rules) have broad application and any issuer or entity that engages in derivatives transactions, for hedging or speculative purposes, should be aware of its implications and reporting obligations.
Why report derivative transactions?
The TR Rules were developed to improve transparency in the
derivatives markets by requiring market participants to report
transaction data to designated trade repositories. Such data is
considered essential for regulatory oversight of the derivatives
market, and will allow regulators to address a variety of risks,
including monitoring of systemic risk and the risk of market abuse.
Derivatives data reported to designated trade repositories will
also assist policy-making by providing regulators with information
on the nature and characteristics of the Canadian derivatives
What is a derivative transaction?
Generally speaking, a derivative is an option, swap, futures contract, forward contract or other financial or commodity contract or instrument whose market price, value, delivery obligations, payment obligations or settlement obligations are derived from, referenced to or based on an underlying interest (including a value, price, rate, variable, index, event, probability or thing). A derivative can be a security, but does not have to be. In addition, for the purpose of the TR Rules, some contracts and instruments are specifically excluded from the definition of "derivative", such as contracts regulated by gaming control legislation, certain insurance contracts, and certain short term currency transactions (e.g., airport currency exchange transactions).
However, it is important to understand that many common derivatives transactions are now subject to reporting under the TR Rules. For example, a standard FX or interest swap transaction between a company and a bank would likely be a derivatives transaction and subject to reporting under the TR Rules.
What derivative transactions get reported?
While certain elements of the TR Rules came into force on December 31, 2013, Part 3 (Data Reporting) has only now come into force. Part 3 requires derivative transactions involving a "local counterparty" to be reported to a designated trade repository. Currently, each of Chicago Mercantile Exchange Inc., DTCC Data Reporting Repository (U.S.) LLC and ICE Trade Vault, LLC have been designated by the Ontario Securities Commission as designated trade repositories.
A local counterparty is a counterparty to a transaction if, at the time of the transaction, one or more of the following apply:
(a) the counterparty is a person or company, other than an individual, organized under the laws of Ontario, Québec or Manitoba, or that has its head office or principal place of business in Ontario, Québec or Manitoba;
(b) the counterparty is registered under the securities law of Ontario, Québec or Manitoba as a "derivatives dealer" or in an alternative category as a consequence of trading in derivatives; or
(c) the counterparty is an affiliate of a person or company described in paragraph (a), and such person or company is responsible for the liabilities of that affiliated party.
Commencing October 31, 2014, a derivatives dealer that is a counterparty to a transaction that involves a local counterparty must report, or cause to be reported, the data required by Part 3, which includes creation data, life-cycle event data and valuation data. A derivatives dealer is a person or company engaging in or holding itself out as engaging in the business of trading in derivatives in Ontario, Québec or Manitoba as principal or agent. Part 3 does not require a reporting counterparty that is not a derivatives dealer or a recognized or exempt clearing agency to make any reports under until June 30, 2015.
Part 3 of the TR Rules also require disclosure of pre-existing transactions:
- Transactions involving a derivatives dealer that were entered into before October 31, 2014 and with respect to which there were outstanding contractual obligations as of October 31, 2014 must be reported on or before April 30, 2015.
- Transactions that did not involve a derivatives dealer that were entered into before June 30, 2015 and in respect of which there were contractual obligations outstanding as of June 30, 2015 must be reported on or before December 31, 2015.
Are you ready for reporting?
Regardless of whether the obligation to report falls upon you or your counterparty, every report filed under Part 3 of the TR Rules requires each counterparty to be identified by a legal entity identifier (LEI). An LEI is a unique identification code assigned to a counterparty in accordance with the standards set by the Global Legal Entity Indentified System.
LEIs can only be obtained from a Local Operating Unit (LOU) endorsed by the Global LEI System's Regulatory Oversight Committee. Each LOU has its own process for issuing LEIs but generally, an applicant must supply the LOU with the official name of the entity, the jurisdiction of legal formation, the address of the headquarters, the name of the business registry and the entity's identification at that business registry where it was created, if applicable.
An LEI should be obtained prior to entering into a derivative transaction that must be reported. In Canada, applications for an LEI may be made here.
- Dates to Remember -
Commencing October 31 2014, all derivative transactions involving a local counterparty and a derivatives dealer must be reported to a designated trade repository.
- By April 30, 2015, all derivative transactions involving a local counterparty and derivatives dealer that were entered into prior to October 31, 2014, but which still had outstanding contractual obligations as of October 31, 2014, will have to be reported.
- Commencing June 30, 2015, all derivative transactions involving a local counterparty (whether or not one is a derivatives dealer) must be reported to a designated trade repository.
- By December 31, 2015, all derivative transactions involving a local counterparty that were entered into prior to June 30, 2015, but which still have outstanding contractual obligations as of June 30, 2015, will have to be reported by December 31, 2015.
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.