On May 12, 2016, helpful amendments to Ontario Securities Commission ("OSC") OTC derivatives trade reporting Rule 91-507 were published, along with similar amendments in Manitoba and Quebec. Generally speaking, these amendments:
- impose an obligation on all local counterparties to obtain, maintain and renew a legal entity identifier ("LEI");
- narrow the scope of transaction level data to be publicly disseminated, and postpone the initial publication date of such data from July 29, 2016 to January 16, 2017; and
- exempt an inter-affiliate transaction from trade reporting obligations, as long as both parties are end-users.
Obligation to obtain an LEI
The amendments impose a new requirement on all local counterparties to obtain, maintain and renew an LEI. LEIs are issued and maintained under a global system and are used for identifying counterparties to financial transactions, including OTC derivatives. This requirement does not apply to individuals nor to any other person not eligible to receive an LEI. This amendment addresses an anomaly in the existing rules which require a reporting party to report the LEI of its counterparty, but the reporting party has no ability to obtain this LEI on behalf of its counterparty. Now that there will be an obligation placed on all local counterparties to obtain an LEI, this should assist reporting parties in satisfying their obligation to report the LEI of counterparties.
More information on LEIs can be obtained here.
Changes to Public Dissemination of Transaction Level Data
The existing rules currently require that certain information, such as type of transaction, price, notional amount, effective date, termination date and payment dates, must be publicly disseminated for all in-scope transactions, other than inter-affiliate transactions. The amendments significantly reduce the scope of public disclosure by limiting this requirement to only the following types of transactions: interest rate swaps based on CDOR, USD LIBOR, EURIBOR and GBP LIBOR; credit derivatives on all indices, and equity derivatives on all indices. In addition, the amendments specify that any transaction requiring the exchange of more than one currency, or resulting from a bilateral or multilateral portfolio compression exercise, is excluded from the public dissemination requirements.
While the existing rules already provide that the identity of either counterparty must not be disclosed, it was felt that additional rules were required to further protect the anonymity of a counterparty when publicly disseminating transaction level data. If a counterparty were to be inadvertently identified, it could make hedging the risks of the transaction more difficult and expensive as market participants adjust pricing in anticipation of the counterparty's immediate hedging needs. As a result, in an effort to avoid inadvertent disclosure of a counterparty's identity, the amendments impose a rounding convention such that the exact notional amount of a transaction is not reported. In addition, a capping convention is also imposed which requires that only the capped amount is disclosed if the rounded notional amount of a transaction exceeds the capped amount for a specific asset class, taking into account the remaining term of the transaction.
By limiting the asset classes of transactions to be disclosed, along with the imposition of rounding and capping conventions, the amendments attempt to balance the benefits of post trade transparency with the potential harm that may be caused from inadvertently disclosing a counterparty's identity.
All transaction level data that is required to be publicly disseminated in accordance with the amendments must be disseminated 48 hours after the execution timestamp of the transaction.
Inter-affiliate Trade Reporting Exemption
Consistent with the previously published draft amendments, the final amendments include an exemption from the Ontario trade reporting obligations for inter-affiliate transactions between end-users (in other words, neither party to such transaction is a (i) derivatives dealer, (ii) recognized or exempt clearing agency, or an affiliate of a person or company referred to in (i) or (ii)). Unlike the previous draft, however, the final amendments extend this exemption to transactions entered into by a local counterparty and a foreign affiliate (previously, transactions with foreign affiliates were not exempt).
Under the Manitoba and Quebec rules, however, the previously published draft amendments setting out an exemption for inter-affiliate end-user transactions were removed. In their place, blanket exemption orders granting relief from reporting obligations for trades between inter-affiliate end users that are currently in place in those provinces will remain in effect until their respective securities commissions say otherwise.
The applicable regulators in all three provinces intend to further study the use of inter-affiliate derivatives as a strategy of corporate group risk distribution, and monitor international regulators' approaches to end-user inter-affiliate reporting. They may amend the trade reporting rules to require the reporting of these types of transactions if one of the affiliates is not a local counterparty and such transactions introduce risk to the markets in these provinces.
The amendments will come into force on July 29, 2016, coincident with the start date for trade reporting under Multilateral Instrument 96-101 in British Columbia, Alberta, Saskatchewan, New Brunswick, Newfoundland and Labrador, Nova Scotia, Prince Edward Island, Yukon, Northwest Territories and Nunavut. We are expecting similar amendments to MI 96-101 to be announced in due course.
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.