Trade reporting obligations take effect in Ontario, Quebec and Manitoba (Applicable Provinces) on June 30, 2015 and will require over-the-counter (OTC) derivatives transactions between "End-Users" to be reported if either or both of the parties is a "local counterparty" in any of the Applicable Provinces. The term "End-User" refers to counterparties to OTC derivatives transactions that are not "derivatives dealers" (generally defined as persons engaged in the business of dealing in derivatives as principal or agent in the relevant province), recognized clearing agencies or, in Manitoba and Quebec, Canadian financial institutions (collectively, Non-End-Users). Non-End-Users have been subject to these reporting obligations since October 31, 2014.
On June 1, 2015, regulators in each of the Applicable Provinces issued notices (Inter-Affiliate Reporting Variation Notices) that they are considering changing the terms of the reporting requirements applicable to transactions entered into between affiliated End-Users. Furthermore, as an interim measure pending finalization of these amendments, End-Users have in effect been exempted from the requirement to report inter-affiliate transactions provided that to qualify for this relief, Quebec and Manitoba local counterparties will need to satisfy certain conditions, including a requirement to set out certain risk management terms in the written transaction agreement.
This Bulletin discusses the application of the trade reporting rules to End-Users and the interim relief provided by the Inter-Affiliate Reporting Variation Notices.
BACKGROUND ON CANADIAN OTC DERIVATIVES TRADE REPORTING RULES
Each of the Applicable Provinces adopted substantially similar OTC derivatives trade reporting rules (TR Rules) in 2014. The TR Rules address some of Canada's G20 derivatives regulatory reform commitments and are intended to give regulators access to trade information required to monitor derivatives markets, including in connection with systemic risk. A substantially similar version of the TR Rules is also expected to be adopted as a multilateral instrument in Alberta, British Columbia, New Brunswick, Nova Scotia and Saskatchewan in 2016 (Multilateral Instrument TR Rules).
Related "product determination" rules, referred to as Scope Rules, set out the types of OTC derivatives transactions that are subject to reporting requirements (Reportable Transactions). The scope of Reportable Transactions is very broad and generally includes all OTC derivatives transactions subject to limited exceptions, such as for certain spot foreign exchange and commodity derivatives transactions that are intended to be physically settled. Certain classes of transactions, such as insurance contracts and compensation products linked to an issuer's share price, are also out-of-scope for reporting purposes.
The TR Rules provide that Reportable Transactions must be reported to a designated trade repository (Designated TR). There are currently three institutions that have been recognized as Designated TRs. Each of these Designated TRs is located in the United States and also operates as a "Swap Data Repository" under U.S. trade reporting rules. Compliance with Canadian trade reporting requirements is complicated by the operational and report formatting requirements imposed by the Designated TRs. Accordingly, the regulators are encouraging End-Users that may be subject to reporting obligations after June 30, 2015 to prepare to meet their trade reporting obligations by developing appropriate systems and procedures and establishing links to Designated TRs.
PROPOSED CHANGES TO INTER-AFFILIATE END-USER REPORTING OBLIGATIONS
The Inter-Affiliate Reporting Variation Notices issued on June 1, 2015 announced that the regulators in the Applicable Provinces are considering making amendments to the reporting requirements that will apply to transactions between affiliated End-Users, in particular by reducing the frequency and data requirements for such transactions. Changes may also be made that would permit inter-affiliate End-User transactions to be reported in accordance with the rules of recognized foreign jurisdictions (currently, United States Commodity Futures Trading Commission requirements and European Market Infrastructure Regulation requirements) if one of the counterparties to the transaction is not a Canadian counterparty and other requirements are satisfied.
It is unclear whether any outright exemptions from reporting obligations will apply for inter-affiliate End-User transactions with small aggregate notional amounts or if paper reporting directly to the applicable regulators may be permitted in lieu of electronic reporting through Designated TRs. Such amendments could potentially meet the TR Rules' policy objectives and also address the operational issues faced by End-Users that may otherwise be required to establish systems to report to a trade repository.
Given the harmonized rule-making process adopted by the Canadian Securities Administrators, it is expected that similar exemptions and rule variations would be included in the Multilateral Instrument TR Rules when issued.
TEMPORARY RELIEF FROM INTER-AFFILIATE END-USER REPORTING OBLIGATIONS
Each of the regulators has provided interim relief from reporting obligations for transactions between affiliated End-Users that will apply until the regulators give further notice or the proposed rule amendments ultimately take effect.
The Ontario Inter-Affiliate Reporting Variation Notice is in the form of an Ontario Securities Commission (OSC) Staff Notice that indicates that "OSC Staff will not enforce compliance by End-Users with inter-affiliate trade reporting requirements" until the inter-affiliate transaction reporting amendments come into force or until a further notice is issued. No specific guidance was provided to Ontario local counterparties in the OSC Staff Notice concerning how the term "affiliate" is to be interpreted for these purposes. The Ontario Securities Act definition of "affiliate" is substantially similar to the Ontario corporate law definition and provides that companies are affiliated if one of them is the direct or indirect subsidiary of the other or if both are direct or indirect subsidiaries of the same company or are controlled by the same person or company. The tests for determining if a company is a subsidiary turns on a control test, and control is determined based on certain factual determinations, such as whether a person beneficially holds more than 50 per cent of the voting securities that together carry more than 50 per cent of the votes for the election of directors of the relevant company.
The Manitoba Securities Commission and Quebec's regulator, the Autorité des marchés financiers, have issued formal blanket exemption orders that exempt End-Users from their obligations to report an inter-affiliate transaction if: (a) the transaction is governed by a written agreement setting out the terms of the transaction, including terms relating to centralized evaluation, measurement and risk controls designed to identify and manage risks and (b) the counterparties maintain records related to the transaction and provide the relevant regulator with access to such records upon request. To qualify for these blanket exemption orders, End-Users must have their financial statements prepared on a consolidated basis in accordance with generally accepted accounting principles (as referred to in the specified securities disclosure rules).
END-USER REPORTING RESPONSIBILITIES IF THE INTER-AFFILIATE EXEMPTION IS NOT APPLICABLE
All Reportable Transactions that involve one or more "local counterparties" within an Applicable Province must be reported to a Designated TR in accordance with the TR Rules of the Applicable Province. An End-User will be a local counterparty in an Applicable Province if the End-User is incorporated or organized in the province or has its headquarters or principal place of business in the province. In addition, an End-User is deemed to be a local counterparty in an Applicable Province if the End-User has an affiliate in such province that is generally responsible for all of the End-User's liabilities (e.g., a partnership will be an Ontario local counterparty if it has a general partner that is an Ontario local counterparty).
An End-User does not have any trade reporting obligations in respect of Reportable Transactions entered into with a derivatives dealer or another type of Non-End-User. Instead, the TR Rules designate the Non-End-User as the "reporting counterparty" for the transaction. However, an End-User that is transacting with a person it believes to be a derivatives dealer may, in appropriate cases, wish to have the derivatives dealer counterparty specifically acknowledge that it is in fact a derivatives dealer in the relevant province, thereby relieving the End-User of reporting obligations.
For a Reportable Transaction between two End-Users, each End-User will be designated as a "reporting counterparty" that has a primary obligation to report the transaction under the TR Rules of each province in which it is a local counterparty. For example, for a Reportable Transaction between two Ontario End-Users, both counterparties are designated to be Ontario reporting counterparties, and for a Reportable Transaction between an Ontario End-User and a Quebec End-User, each counterparty will be a reporting counterparty under the TR Rules of its Applicable Province. Reporting obligations may be delegated to the counterparty or to a third-party, though in certain cases the delegating party remains responsible for the timeliness and accuracy of reports made on its behalf.
The obligation for an End-User that is a reporting counterparty to report Reportable Transactions applies beginning on June 30, 2015 in respect of new transactions and for Reportable Transactions entered into prior to June 30, 2015 (legacy transactions) the transaction must be reported on or before December 31, 2015 if the transaction remains outstanding on such date.
TRANSACTION REPORTING AND RECORD RETENTION REQUIREMENTS FOR TRANSACTIONS BETWEEN END-USERS
The TR Rules set out the information that must be reported to a Designated TR at the time a Reportable Transactions is entered into and throughout the life of the transaction.
- Creation data, including the economic terms of the transaction and identification codes for the transaction type and for the parties to trade, must be reported "in real time" or as soon as technologically practicable following execution of the transaction, but no later than the end of the business day following the day the trade is entered into. The counterparty identifier for each party is required to be the unique legal entity identifier (LEI) that has been obtained from one of the relevant internationally recognized service providers.
- Life-cycle event data (i.e., changes to previously reported derivatives data) must be reported by the end of the business day on which the life-cycle event occurs or otherwise as soon as technologically practicable following execution of the transaction but no later than the end of the next business day after the event.
- Valuation data must also be submitted to the Designated TR on a quarterly basis within thirty days of the end of the calendar quarter.
The TR Rules also set out record retention requirements that apply until seven years following the termination of each Reportable Transaction.
In addition to providing relevant Canadian regulators with access to reported data, Designated TRs are required to make certain reports of aggregated trading data available to the public, and beginning on July 29, 2016 Designated TRs will also publicly issue transaction-level reports omitting counterparty identities for all individual reported transactions other than inter-affiliate transactions.
FURTHER INFORMATION AND REQUESTS FOR REPORTING RELIEF
We would be happy to discuss the TR Rules and assist End-Users with reporting issues that arise in connection with transactions with their affiliates or with third-parties. We also expect that some End-Users may wish to provide input to the regulators on the scope of the proposed inter-affiliate amendments or to apply for exemptive relief from reporting obligations.
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.