Cleared OTC Derivatives added in 91-503, replacing 91-502
On April 11, 2008, the Alberta Securities Commission (ASC) issued Blanket Order 91-503, "Over-The-Counter Derivatives Transactions and Commodity Contracts". BO 91-503 replaced the previous Blanket Order 91-502 with effect from March 31, 2008.
The ASC found that the use of clearing agencies has become increasingly more prevalent with respect to the clearing of OTC derivative transactions since BO 91-502 was issued in August 2000. The fact that BO 91-502 could not be relied upon to provide an exemption to the prospectus and registration requirements of Alberta's Securities Act for OTC derivative transactions cleared through the facilities of a clearing agency was therefore an increasing problem for the industry. ("Clearing agency" is defined in the Securities Act as an entity that acts as an intermediary in paying funds or delivering securities (or both), that provides centralized facilities through which trades in securities or exchange contracts are cleared, or that provides centralized facilities as a depository of securities).
The ASC's response, BO 91-503, extends the definition of "OTC derivative" (and therefore, the exemption to the prospectus and registration requirements of the Securities Act) to include an option, forward contract, contract for differences or other instrument of a type commonly considered to be a derivative, or any combination of any of them, if the agreement is cleared through an acceptable clearing corporation. "Acceptable clearing corporation" is in turn defined as a clearing agency that (i) operates a central system for the clearing of derivatives transactions; (ii) is subject to enabling legislation and oversight by a central or regional government authority in an "eligible country of operation" (i.e. a country that is a member of the Basle Accord and a country that has adopted the banking and supervisory rules set out in the Basle Accord) that provides for compliance and power of enforcement over its members or participants; and (iii) is named in a schedule from time to time published for the purpose of BO 91-503 with the approval of the ASC's Executive Director.
BO 91-503 provides for the same exemption from the prospectus and registration requirements of the Securities Act as did BO 91-502: OTC derivatives transactions and commodity contracts are not futures contracts, as defined in the Securities Act, provided the transactions are made between "Qualified Parties" who each act as principal or as an agent/trustee for accounts that are fully managed by it. The list of Qualified Parties in the Appendix to BO 91-503 is the same as that in BO 91-502, comprising mainly sophisticated, creditworthy entities.
In BO 91-503 (as was the case with BO 91-502), the definition of "OTC derivative" requires that such agreements not be part of a fungible class of agreements that are standardized as to their material economic terms. As such, OTC derivatives that are standardized and are to be cleared by an acceptable clearing corporation do not appear to be exempt from the prospectus and registration requirements of the Securities Act by virtue of BO 91-503. To this extent, further exemptive relief from the ASC may be necessary.
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.
