Canada: Update-Canadian Derivatives Regulation: The New Looming Reality Of Compliance And Costs For Energy Companies

Last Updated: April 26 2016
Article by Priscilla P. Bunke

 On February 22, 2016, this blog piece that I wrote – " Canadian Derivatives Regulation: The New Looming Reality of Compliance and Costs for Energy Companies" for the Dentons Global Energy Blog was published on various publications such as Lexology and Mondaq. Since this publication, the Office of the Superintendent of Financial Institutions Canada ("OSFI") on February 29, 2016, issued the final version of its Guideline E-22 Margin Requirements for Non-Centrally Cleared Derivatives, which requires the exchange of margin to secure performance on non-centrally cleared derivatives transactions between covered entities. The final version of Guideline E-22 addressed some of the concerns I raised in the original article such as the fact that certain Canadian energy market participants could be deemed Covered Entities because of the breadth of the instruments covered by the Guideline. In the final version of Guideline E-22, OSFI has clarified that non-financial entities are not included in the definition of a Covered Entity as after careful consideration; it believes that it would be appropriate to exclude non-financial entities from the definition of Covered Entities.

I also raised the concern expressed by energy market participants regarding the breadth of the instruments covered by OSFI in the draft version of Guideline E-22. In the final version, OSFI has stated that despite its broad definition of a "derivative", "physically settled commodity transactions are not included in the definition of a derivative and therefore not subject to the margin requirements of this Guideline".

As a result, this is the update of the original article here below:

The Canadian energy companies, including energy producers, energy infrastructure companies, energy trading and marketing organizations, natural gas distribution companies, power transmission and generation companies, electric utilities and global companies who enter into over-the-counter ("OTC") derivatives transactions with Canadian energy companies are now going to have to comply with new regulatory obligations involving the oversight and regulation of OTC derivatives as the reform of Canadian derivatives regulation picks up steam in the Canadian western provinces. The recent publication on January 22, 2016 of the Canadian Securities Administrators ("CSA") Multilateral Instruments 91-101 Derivatives: Product Determination and 96-101 Derivatives: Trade Repositories and Derivatives Data Reporting ("Reporting Rule"), respectively introduce the first compliance obligations vis-à-vis reporting of OTC derivatives transactions for the energy industry.


Energy derivatives market participants in Canada and foreign market participants who enter into OTC derivatives transactions with Canadian energy companies are witnessing a multitude of rulemakings by the Canadian prudential and securities regulators as required by Canada's G20 commitments. These actions include the publication by ("OSFI") on February 29, 2016 of its final version of Guideline E-22, which requires the exchange of margin to secure performance on non-centrally cleared derivatives transactions between covered entities. OSFI hopes these margin requirements will mitigate systemic risk in the financial sector as well as promote central clearing of derivatives where practicable. OSFI addressed the letter announcing the final version of the Guideline to Banks; Foreign Bank Branches; Bank Holding Companies; Trust and Loan Companies; Co-operative Credit Associations; Co-operative Retail Associations; Life Insurance Companies; and Property and Casualty Insurance Companies. The Guideline would not apply to non-federally-regulated financial institutions even if they meet the definition of a "Covered Entity" which includes "a non-financial entity belonging to a consolidated group whose aggregate month end average notional amount of non-centrally cleared derivatives for March, April, and May of any year following the implementation date exceeds $50 billion".

On January 21, 2016, members of the CSA published for comment Proposed National Instrument 94-102 Derivatives: Customer Clearing and Protection of Customer Positions and Collateral and its companion policy for a 90-day comment period. The proposed instrument sets out requirements for the treatment of customer collateral, record-keeping and disclosure for clearing intermediaries and regulated clearing agencies providing clearing services for OTC derivatives. The purpose of the proposed instrument is to ensure that the clearing of customer OTC derivatives transactions will be carried out in a manner that protects customers' collateral and positions and to improve clearing agencies' resilience to default by a clearing intermediary.

Given the existing exemptions in Alberta and British Columbia ASC Blanket Order 91-506 and BCSC Blanket Order 91-501 Over-the Counter Derivatives, respectively, that currently precludes energy commodities futures trading from regulation, many parties must fear that impending rules would be so broad in scope that previously unregulated OTC derivatives transactions routinely used by energy companies would become subject to the jurisdiction of a provincial securities or federal prudential regulators and their new regulatory requirements that could include registration requirements. Many market participants believe the energy industry functioned well with the OTC derivatives exemption from regulation for energy futures markets in Canada. They believe the routine use of OTC derivatives to hedge market volatility due to many variable factors would be severely disrupted if regulated.

Energy companies use OTC derivatives with financial institutions and other commodity market customers to exchange floating price streams with fixed price streams. For example, an electric utility's annual revenue is based in part by the spot prices paid by an Independent System Operator that operates anywhere in Canada for the power generated. Without the derivative instrument, that annual revenue could vary widely based on demand. With an OTC derivative instrument, however, the utility enters into an agreement whereby the variable price paid for the power generated (revenue) is transferred to another counterparty in exchange for a fixed revenue stream for the year, or vice versa depending on the specific circumstances. OTC derivatives such as swaps work when counterparties have opposing views of the risks involved, and therefore agree to trade revenue streams.

Energy companies are very troubled that the final CSA Registration Rule could categorize these companies that execute daily OTC derivatives transactions as "derivatives dealers," subjecting them to mandatory capital, margin, and clearing requirements, as has been noted by various energy companies in comments submitted to different CSA members. One lingering concern is that the current exclusion of derivatives that are physically settled as seen in the final version of OSFI E-22 Guideline would not be transposed into every other Rule issued or enacted in the future.

The end result of the current Reporting Rule may not be a sea change for Canada energy companies, hedging transactions. However, as many rules remain in development such as the Registration; Clearing; Margin; and Capital Rules, the extent of the reform of OTC derivatives regulation in Canada on the energy industry remains to be seen. This causes a level of uncertainty as Canadian energy companies and other participants have to move forward with regulatory compliance assessments and initiatives.

As a result, many Canadian energy companies must take a cautious approach and carefully monitor the new rules as they are developed, to determine whether any impact on their companies OTC derivative transactions exist.

About Dentons

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries.

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. Specific Questions relating to this article should be addressed directly to the author.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
23 Oct 2018, Other, Toronto, Canada

Dentons and SheEO are coming together for an evening of #radicalgenerosity on October 23, 2017. Meet Vicki Saunders, Founder of SheEO, and learn about how SheEO is changing the landscape for female entrepreneurs.

23 Oct 2018, Seminar, Montreal, Canada

Dentons is pleased to invite you to join us for a breakfast seminar as part of the Les Matinées Dentons series on issues relevant to you and your business.

24 Oct 2018, Other, Toronto, Canada

If you build it, claims may come. Join the Dentons Construction group for breakfast and an informative discussion on current topics in construction law.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
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 (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

To Use 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.


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.


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