Canada: Canadian Business Conduct Rules For Derivatives Dealers

On April 4, 2017, proposed business conduct rules for derivatives dealers and derivatives advisers were published by the Canadian Securities Administrators ("CSA"). These rules, set out in Proposed National Instrument 93-101 Derivatives: Business Conduct and its Companion Policy 93-101CP (collectively, the "Business Conduct Rules"), are meant to help protect investors, reduce risk, improve transparency and accountability and promote responsible business conduct in the over-the-counter ("OTC") derivatives markets. The Business Conduct Rules represent only part of the proposed Canadian derivatives registrant regime. The second part of this regime, a proposed registration rule for derivative market participants, is expected to be released by the CSA this summer. The CSA has established a lengthy comment period for the Business Conduct Rules, ending on September 1, 2017, so that the registration rule and the Business Conduct Rules can be considered together.

While we understand that the proposed registration rule will not be out for comment until early summer, the Companion Policy to the Business Conduct Rules dedicates a full page of commentary to the definition of "derivatives adviser" and "derivatives dealer". This commentary, combined with the proposed draft exemptions for entities regulated by the Office of the Superintendent of Financial Institutions ("OSFI") and the Investment Industry Regulatory Organization of Canada set forth in the Business Conduct Rules, clearly reflects the direction of the CSA as to the type of entities that may be required to be registered under the new regulatory regime.

The Business Conduct Rules include a comprehensive set of rules that deal with fair dealing, conflicts of interest, know your client obligations, suitability, pre-trade disclosure, reporting, compliance, senior management duties, recordkeeping and the treatment of derivative party assets. Many of these requirements are modeled on the conduct requirements that apply to registered dealers and advisers under National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations ("NI 31-103"). Like these existing requirements, the Business Conduct Rules take a two-tiered approach to investor protection, based on the level of sophistication or financial resources of the investor. The CSA included a very useful table in its publication of the application of the business conduct requirements and how they apply to different types of clients; we have reproduced the table at the end of this bulletin.

Scope of the Business Conduct Rules

Derivatives dealer and derivatives adviser are defined under the Business Conduct Rules using a business trigger concept. A derivatives dealer is a person or company engaging in or holding itself out as engaging in the trading in derivatives, whether as principal or agent. A derivatives adviser is a person or company engaging in or holding itself out as engaging in the business of advising others as to transacting in derivatives. Both definitions also include any other person or company that is required to be registered as a derivatives dealer or derivatives adviser. We expect that the proposed registration rule will shed more light on the application of this additional provision.

It is expected that the broad nature of these definitions will capture non-traditional securities registrants, such as non-federally regulated financial institutions, money services businesses and commodity risk managers.

The Business Conduct Rules creates a category of "eligible derivatives party" ("EDP"), which is based on the "permitted client" definition under securities legislation and is meant to include those parties that do not need the full set of protections under the Business Conduct Rules because of their levels of sophistication or financial resources. Similar to the "permitted client" definition, EDPs include regulated entities and sophisticated clients that have net assets of at least $25 million for corporates and $5 million for individuals. Notably absent from the definition of EDP is the general "commercial user" subset of clients that are currently contained in certain provincial blanket orders.

As discussed below, only a subset of the Business Conduct Rules apply to dealings with EDPs. Adding to the two-tiered approach, the CSA proposes an additional subset for individuals EDPs who may or may not waive certain protections. For this purpose, we have used the term EDP to include individuals who are EDPs and who have provided a written waiver of certain protections.

Business Conduct Rules that Apply to All Derivative Parties

The fair dealing, conflicts of interest and general know-your-derivatives-party ("KYDP") obligations are considered by the CSA to be fundamental. Accordingly, these obligations apply to all derivatives firms when dealing with or advising derivatives parties.

The fair dealing provisions, which are consistent with NI 31-103, are meant to be flexible and to take into account the relationship between the derivatives firm and the derivatives party. The KYDP obligations include verifying identity, verifying whether the derivatives party is an EDP, determining if the derivatives party is an insider, and compliance with anti-money laundering and terrorist financing obligations.

Business Conduct Rules that Do Not Apply to Eligible Derivatives Parties

Certain obligations, including the derivatives party-specific needs and objectives, suitability, disclosure regarding the use of borrowed money or leverage obligations, handling complaints, tied selling, and fair terms and pricing, do not apply if a derivatives firm is dealing with or advising an EDP. Tied selling, such as offering a loan on the condition that the derivatives party purchases another product or service, such as a swap to hedge the loan, from the derivatives firm or one of its affiliates is prohibited unless the derivatives party is an EDP. This tied-selling restriction is not intended to prohibit relationship pricing or other beneficial selling arrangements similar to relationship pricing. The Business Conduct Rules require derivatives firms to have policies and procedures in place that are designed to obtain the most advantageous terms reasonably available when acting as agent for a derivatives party, and to make a reasonable effort to provide a price that is fair and reasonable taking into account all relevant factors to a derivatives party when transacting as principal.

The Business Conduct Rules also impose disclosure obligations designed to keep the derivatives parties informed when the derivatives firm is not dealing with or advising an EDP. These disclosure obligations address the relationship between the parties, the products and services that the derivatives firm may provide, information required to be able to assess the material risks of transacting in the derivative, and the material characteristics of the derivative.

Treatment of Derivative Party Assets and Reporting

Additional requirements related to segregation of assets, the holding of derivatives party assets, and restrictions on the use and investment of those assets are also included. This includes a requirement that assets must be held in one or more accounts at a permitted depository that are clearly identified and separate from the property of all persons who are not a derivatives party of the derivatives firm. Certain of these requirements do not apply if a derivatives firm is dealing with or advising an EDP. In addition, the Business Conduct Rules include mandatory reporting requirements, including monthly statement obligations.

Compliance, Recordkeeping and Obligations on Senior Derivatives Managers

As expected, the Business Conduct Rules impose an obligation on derivatives firms to maintain appropriate policies and procedures.

What is unexpected, however, is that the Business Conduct Rules impose certain supervisory, management and reporting obligations on senior derivatives managers, who are those individuals responsible for the derivatives activities of a particular business unit. The intent is to make senior management responsible for the effective and efficient management of their business units.

Exemptions

Derivatives end-users, which are those entities that trade derivatives for their own account for commercial purposes, are exempt from the Business Conduct Rules provided that they do not undertake certain activities that would suggest that they are in the business of trading or advising in derivatives.

In addition, foreign derivatives dealers and advisers who are regulated under similar foreign laws may be exempt from some of the Business Conduct Rules.

Expected Impact

We expect that the Business Conduct Rules will have little real impact on the activities of Canadian banks and securities dealers, as these firms are already subject to substantially similar rules. However, given the express focus on derivatives and the individual liability that may be imposed on senior managers, it will likely lead to an extensive review of existing policies and procedures and client-facing documents to ensure compliance with these specific obligations.

Perhaps the larger impact of the Business Conduct Rules will be felt by those firms that are now caught in the derivatives regulatory web, but are not otherwise regulated by OSFI or as securities dealers or advisers with the provincial securities commissions.

To view the full article please click here.

About BLG

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.

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

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

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.