Canada: Conduct Controlled: CSA Proposes Derivatives Business Conduct Rules

Last Updated: April 26 2017
Article by Shahen A. Mirakian

Co-authored by Bettina Xue, Student-at-Law

On April 4, 2017, the Canadian Securities Administrators (the "CSA") published new draft rules governing the business conduct of derivatives firms.  The proposed new rules opened for a 150-day comment period, which is set to expire on September 1, 2017. The new rules are encompassed in:

  • Proposed National Instrument 93-101 Derivatives: Business Conduct (the "Instrument"); and
  • Proposed Companion Policy 93-101 Derivatives: Business Conduct ("the CP"), and together with the Instrument, "Proposed Instrument").[1]

There are three important aspects of the Proposed Instrument:

1. The Proposed Instrument only applies to "derivatives advisers" and "derivatives dealers";

2. the Proposed Instrument creates a two-tier system, where the obligations on derivatives advisers and dealers differ depending on whether their counterpart qualifies as an "eligible derivatives party" ("EDP"); and

3. the Proposed Instrument largely duplicates the business conduct requirements applicable to dealers and advisers registered under securities law but introduces a new supervisory obligation for senior managers which does not exist in securities law.

Who qualifies as a "derivatives adviser" or "derivatives dealer"

Only those parties who qualify as "derivatives advisers" or "derivatives dealers" are subject to the Proposed Instrument. The two terms are defined quite broadly and generally include any person or company engaged in, or holding themselves out as engaging in, the business of advising or trading in derivatives.[2] The Proposed Instrument is therefore applicable to Canadian banks and other federally-regulated financial institutions who are active in the derivatives markets, regardless of whether they are required to be registered under securities legislation.

The CP lists factors that may be considered to determine if a person or company is in the business of trading or business of advising others as to transacting in derivatives. This is not an exhaustive list.

The factors include:

  • Quoting prices or acting as a market maker – routinely quoting prices at which they would be willing to transact in derivatives or making a two-way market in derivatives.
  • Directly or indirectly carrying on the activity with repetition, regularity or continuity – frequent or regular trading or advising in any way that produces, or is intended to produce, profits. The activity does not have to be their sole or even primary endeavour.
  • Facilitating or intermediating transactions – if one provides services relating to the facilitation of trading in derivatives or acting as an intermediary (i.e. a broker).
  • Transacting with the intention of being compensated - if one receives, or expects to receive, any form of compensation for carrying on a derivatives transaction activity. However, a person or company would not be considered to be a derivatives dealer solely by reason that it realizes a profit from changes in the market price for the derivative.
  • Directly or indirectly soliciting in relation to derivatives transactions – contacting others to solicit derivatives transactions. Solicitation includes contacting someone by any means, including communication that offers transactions, participation in transactions or services relating to transactions, such as advertising. Solicitation involves an expectation of compensation generally (simply contacting others to obtain the best price for a hedge would not trigger the application of this factor).
  • Engaging in activities similar to a derivatives adviser or derivatives dealer – carrying out an activity related to a derivatives transaction that would reasonably appear, to a third party, to be similar to the activities discussed above.
  • Providing derivatives clearing services – providing services to allow third parties to clear derivatives through a clearing agency.

Generally, if the person or company regularly engages in the activities set out above in an organized manner, they would be considered a derivatives dealer or derivatives adviser. However, ad hoc or isolated instances of the activities above may not necessarily qualify. The factors listed above do not all carry the same weight and none of the factors will be determinative. Since the analysis of whether a person or company qualifies as a derivatives dealer or derivatives adviser is very fact-specific, it may be necessary to engage counsel to determine whether the Proposed Instrument applies to you or your business.

Who qualifies as an EDP

An EDP is an individual or organization who is considered to be sophisticated or has sufficient financial resources to purchase professional advice. Thus, they do not require the full set of protections that are afforded to retail investors.

The definition of an EDP within the Proposed Instrument includes specific types of organizations as well as tests applicable to a broad range of individuals or organizations. For example, the definition of an EDP includes Canadian financial institutions, pensions funds and different levels of government.

The general test for entities other than individuals can be summarized as:

  1. that an entity represents in writing that it has enough knowledge and experience to evaluate the information about the derivatives, the suitability of the derivatives and the characteristics of the derivatives to be transacted on its behalf; and
  2. that such entity has net assets of at least $25 million as shown on its most recently prepared financial statements.

For individuals, the general test can be summarized as:

  1. that he or she represents in writing that he or she has enough knowledge and experience to evaluate the information about the derivatives, the suitability of the derivatives and the characteristics of the derivatives to be transacted on his or her behalf; and
  2. that he or she beneficially owns financial assets[3] that have an aggregate realizable value before tax but net of any related liabilities of at least $5 million.

These general tests largely duplicate the tests in the definition of "permitted client" in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations ("NI 31-103"), with changes made to make them applicable to the derivatives marketplace.

Requirements under the Proposed Instrument and the two-tier system

The Proposed Instrument imposes obligations on derivatives advisers and dealers (collectively a "derivatives firm") when dealing with a derivatives party. A "derivatives party" includes a derivative firm's customers (i.e. clients of an adviser), counterparties and other persons or companies that the derivatives firm may deal with or advise (e.g. affiliates or other derivatives firms).

The obligations within the Proposed Instrument can be divided into two tiers. First, certain obligations apply in all cases, regardless of the identity of the derivatives party. Second, certain requirements do not apply or can be waived when the derivatives firm is dealing with an EDP. Many of the requirements contained in the Proposed Instrument are similar to existing requirements that apply to dealers and advisers under securities legislation.[4]

1. Requirements that apply to all cases regardless of EDP status

The following requirements cannot be waived and apply to all derivatives dealers or advisers that are governed by the Proposed Instrument:

  • Fair dealing – requirements to deal fairly, honestly and in good faith (s. 8);
  • Conflicts of interest – requirements to establish procedures to identify material conflicts of interest and respond to the conflicts (s. 9);
  • Know-your-derivatives-party – requirements to verify the identity of a derivatives party, including verifying whether the party is an EDP or an insider of a reporting issuer, and comply with anti-money-laundering and terrorist financing obligations (s. 10);
  • Segregating assets – requirements to segregate derivatives party assets from those assets of the derivatives firm, unless the derivatives firm is exempt[5] (s. 24, 25);
  • Confirmation of transaction – requirement on derivatives dealer to promptly deliver a written confirmation to the derivatives party of the transaction (s. 29(1));
  • Compliance – requirements to establish policies and procedures to assure that the firm, and individuals acting on the firm's behalf, comply with applicable laws, to manage risk and ensure that individuals have required training and expertise (s. 32);
  • Respond to material non-compliance – requirements on derivatives firm to respond to, and report, material non-compliance in a timely manner (s. 34);
  • Recordkeeping – requirements on creating and maintaining records (s. 36); and
  • Senior derivatives managers – requirements on senior derivatives managers to supervise the activities conducted in their business unit, promote compliance and respond to any non-compliance (s. 33).

The senior derivatives manager supervisory obligation is not currently found in any US or European regime (though a similar obligation exists under UK rules).  Senior derivatives managers are responsible for taking reactive and preventative steps to avoid material non-compliance with the Proposed Instrument with respect to all derivatives activities for which the senior manager is responsible.  The senior derivatives manager must report on these obligations on at least an annual basis to the board of the derivatives firm.

The definition of a "senior derivatives manager" is "the individual designated by the derivatives firm as responsible for directing the derivatives activities of that unit".  It remains to be seen how this definition will be applied in practice.  Derivatives firms will need to determine what is a derivatives unit and which individual is actually responsible for directing the responsibilities of that derivatives unit.

2. Requirements that do not apply to EDPs or can be waived by an individual EDP

The following requirements either do not apply if the derivatives firm is dealing with an EDP, or can be waived by an individual that qualifies as an EDP (if an individual does not waive, then these requirements would apply). In other words, unless the investor is an EDP, these additional obligations apply:

  • Derivatives-party-specific needs and objectives – requirements to obtain sufficient information regarding the derivative party such as the derivative party's financial circumstances and risk tolerance (s. 11);
  • Suitability – requirements to take reasonable steps to ensure that the transaction is suitable for the derivative party (s. 12);
  • Referral arrangements – conditions on referral arrangements and requirements to provide disclosure of fee referral arrangements to the derivatives party (s. 13, 14, 15);
  • Disclosure regarding the use of borrowed money or leverage – requirement to provide the derivatives party with a written statement on the use of borrowed money (s. 16);
  • Handling complaints – requirement to handle complaints in a fair and effective manner (s. 17);
  • Tied selling - prohibition on imposing undue pressure or coercion to obtain products or services as a condition of another product or service and requirement to disclose such prohibition in writing (s. 18);
  • Fair terms and pricing – requirements to maintain and apply written policies and procedures that are designed to obtain the most advantageous terms when acting as agent for the investor or derivative party (s. 19);
  • Disclosure to derivatives parties – requirements to disclose certain information (s. 20-23);
  • Holding and use of derivative party assets – requirements pertaining to holding derivative party assets in certain accounts and conditions on the use of derivative party assets (s. 26-27);
  • Investment of derivatives party assets – requirements that the investment must be permitted and conditions if the investment is pursuant to an agreement for resale or repurchase. A loss resulting from an investment or use of a derivative party's assets by a derivative firm must be borne by the derivatives firm (s. 28);
  • Transaction confirmations – requirement that a written confirmation of a transaction is to include certain content (s. 29(2));
  • Derivatives party statements – requirement to deliver a monthly statement with specific information to the derivatives party in certain circumstances (s. 30).


There are exemptions from the requirements in the Proposed Instrument for foreign derivatives dealers and foreign derivatives advisers which are registered in the jurisdictions which appear on Appendix A of the Instrument (which is currently blank) and do not solicit business from non-EDPs.  Foreign derivatives dealers and foreign derivatives advisers would have to submit to the jurisdiction of Canadian securities regulators in the same manner as parties relying on the international dealer or international adviser exemptions in NI 31-103.

There are also exemptions from the derivatives dealer business conduct requirements for Canadian banks and registered investment dealers who comply with corresponding obligations from their prudential regulators or their self-regulatory organization as the case may be.

There is an exemption from the derivatives adviser business conduct requirements for organizations which provide general advice that does not purport to be tailored to the needs of the recipient (so long as the organization discloses any interest it may have in the underlying interest of the derivatives on which general advice is being given).


The CSA anticipates that the Proposed Instrument will increase costs resulting from compliance with the Proposed Instrument. These costs will likely be borne by the derivative firms themselves, and in certain circumstances, be passed down to the investor. However, the CSA believes that the increased costs are proportionate to the anticipated benefits such as reducing loss suffered through inappropriate transactions and market misconduct.

The Proposed Instrument could make it more difficult for foreign derivative firms to enter, or remain in, the Canadian market. To off-set this potential impact, an exemption for foreign derivative firms is contemplated if the firm is already subject to, and in compliance with, the equivalent laws of an approved foreign jurisdiction.

The 150-day comment period is a longer time-frame than what is typically provided for comments. The CSA wants to give stakeholders an opportunity to comment on both the Proposed Instrument as well as a forthcoming set of registration rules to be published as National Instrument 93-102 Derivatives: Registration (the "Registration Instrument").  The Registration Instrument is expected to be published in the near future. Together, the Registration Instrument with the Proposed Instrument is intended to establish a harmonized derivatives registration and business conduct regime across Canada.

Next Steps and Comments

The CSA has invited interested parties to submit written comments on the Proposal Instrument by September 1, 2017, and has specifically requested comments on 11 questions published in the Notice and Request for Comment accompanying the Proposed Instrument. The comments will be taken into consideration when drafting the forthcoming National Instrument.

We invite market participants to discuss their questions and concerns with us and are available to assist those wishing to submit comments.

By: Shahen Mirakian, Partner and Bettina Xue, Student-at-Law

a cautionary note

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2017


[1] Ontario Securities Commission, CSA Notice and Request for Comment Proposed National Instrument 93-101 Derivatives: Business Conduct Proposed Companion Policy 93-101CP Derivatives: Business Conduct, online:

[2] The term "derivatives adviser" is defined very broadly. It includes:

(a) a person or company engaging in or holding himself, herself or itself out as engaging in the business of advising others as to transacting in derivatives, and

(b) any other person or company required to be registered as a derivatives adviser under the securities legislation of a jurisdiction in Canada.

"Derivatives dealer" means

(a) a person or company engaging in or holding himself, herself or itself out as engaging in the business of trading in derivatives as principal or agent, and

(b) any other person or company required to be registered as a derivatives dealer under the securities legislation of a jurisdiction in Canada.

[3] As defined in section 1.1 of National Instrument 45-106 Prospectus Exemptions.

[4] The Proposed Instrument largely duplicates the business conduct obligations of registered firms in NI 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations.

[5] The requirement to segregate the assets does not apply to firms that comply with or are exempt from sections 3 to 8 of National Instrument 94-102 Derivatives: Customer Clearing and Protection of Customer Collateral and Positions in respect of those derivatives party assets.

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2017

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.

Shahen A. Mirakian
Similar Articles
Relevancy Powered by MondaqAI
Norton Rose Fulbright Canada LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Norton Rose Fulbright Canada LLP
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