The Canadian Securities Administrators (CSA) have published
proposed amendments (Proposed Amendments) to the Provincial Trade
Reporting Rules (defined below). The Proposed Amendments are meant
to streamline Canada's over-the-counter (OTC) derivatives data
reporting regime and more closely harmonize Canadian standards with
those of the U.S. Commodity Futures Trading Commission (CFTC) and
the Committee on Payments and Market Infrastructures and
International Organization of Securities Commissions joint working
group for the harmonization of OTC derivatives data elements
(CPMI-IOSCO Working Group).
The Proposed Amendments would be implemented through revisions to
the OTC trade reporting rules applicable in each province and
territory (these include Manitoba Securities Commission Rule 91-507
Trade Repositories and Derivatives Data Reporting; Ontario
Securities Commission Rule 91-507 Trade Repositories and
Derivatives Data Reporting; Autorité des marchés
financiers Regulation 91-507 respecting Trade Repositories and
Derivatives Data Reporting; and Multilateral Instrument 96-101
Trade Repositories and Derivatives Data Reporting), as well as by
updating each related companion policy and publishing new technical
manuals for each jurisdiction (collectively, the Provincial Trade
Reporting Rules).
The CSA expects to finalize and implement the Proposed Amendments
in 2024, after the implementation of corresponding amendments to
the CFTC's rules, and to introduce transition guidance.
The comment period for the Proposed Amendments expires on October
7, 2022.
SUMMARY OF PROPOSED AMENDMENTS
Unique Transaction Identifier (UTI)
The Proposed Amendments set out a hierarchy to determine which counterparty to an OTC derivatives trade will be responsible for generating a related UTI. The hierarchy aligns with guidance published by the CPMI-IOSCO Working Group, and also generally mirrors the reporting counterparty hierarchy under the Provincial Trade Reporting Rules.
Unique Product Identifier (UPI)
The Proposed Amendments require a reporting counterparty to identify a subject transaction using a UPI assigned by the Derivatives Service Bureau.
Updates to Minimum Data Elements
The data fields required to be reported to Canadian designated trade repositories have been streamlined to align with global standards.
New Derivatives Data Technical Manuals
New OTC derivatives data technical manuals are being published to provide guidance on administrative matters, including to conform to international data standards. This aligns with the CFTC's approach and will permit flexibility to harmonize Canadian requirements with international developments. Drafts of the manuals are posted to the provincial securities regulators' websites.
New Requirements for Designated Trade Repositories
The Proposed Amendments update the governance, risk and operational requirements applicable to designated trade repositories, to better align with international standards. For example, new provisions would require designated trade repositories to (i) have mechanisms to review service levels, pricing structure, costs and operational reliability; and (ii) manage risks from link and tiered participation arrangements.
Confidentiality for Anonymously Executed Trades
The Proposed Amendments add provisions to align with the CFTC's rules requiring the identity of a counterparty to an anonymous transaction executed on a derivatives trading facility not to be disclosed to other users of the platform.
Data Validation
Designated trade repositories will be required to validate that the data received from a reporting counterparty satisfies the required data elements of the Provincial Trade Reporting Rules and the standardized formats and values set out in the technical manuals. Derivatives data that fails the validation procedures would be rejected by the designated trade repository, and the reporting counterparty will be deemed not to have fulfilled its reporting obligation. In addition, designated trade repositories will maintain records of failed validation tests.
Data Accuracy Verification
The Proposed Amendments would replace the requirement that designated trade repositories confirm data accuracy with reporting counterparties with two new requirements: (1) reporting counterparties must ensure that reported data is accurate and contains no misrepresentation and (2) reporting counterparties that are derivatives dealers and recognized or exempt clearing agencies will also be required to verify the accuracy of data every 30 days. Designated trade repositories will be required to provide counterparties with timely access to relevant derivatives data and establish, maintain and enforce written policies and procedures to enable compliance.
Clearing Agencies Must Report Terminations
The Proposed Amendments will require a recognized or exempt clearing agency to report the termination of an original transaction for a cleared transaction, consistent with CFTC requirements.
Collateral and Margin Data Reporting
The Proposed Amendments will require any reporting counterparty that is a derivatives dealer or a recognized or exempt clearing agency to report collateral and margin data each business day until the transaction is terminated or expires. The Proposed Amendments introduce new data elements relating to collateral and margin, which reflect standards published by the CPMI-IOSCO Working Group.
Derivatives Trading Facilities Required to Report
The Proposed Amendments would require any transaction involving a local counterparty that is executed anonymously on a derivatives trading facility and that is intended to be cleared through a clearing agency that is not a recognized or exempt clearing agency to be reported by the derivatives trading facility.
Transactions with Individuals Required to be Reported
Individuals are not currently "local counterparties"
under the Provincial Trade Reporting Rules. Transactions with
individuals are nevertheless required to be reported where the
other counterparty to the transaction is a local counterparty (for
example, an Alberta derivatives dealer transacting with an
individual). Where a transaction is between a Canadian individual
and a non-Canadian derivatives dealer, the transaction is not
currently required to be reported as it does not involve a local
counterparty.
The Proposed Amendments will add individuals that are resident in a
Canadian province or territory to the applicable definitions of
"local counterparty".
Consequently, for example, a transaction between an individual who
is a resident of Alberta and a non-Canadian derivatives dealer will
now be required to be reported by the non-Canadian derivatives
dealer. Individuals will not themselves be required to report or to
obtain a Legal Entity Identifier.
Crypto Clarification
The Proposed Amendments will include guidance that OTC derivatives linked to crypto assets generally are required to be reported under the Provincial Trade Reporting Rules.
Reporting Hierarchy
Under Ontario's trade reporting rule, the reporting
hierarchy states that, if both counterparties to a reportable
transaction are derivatives dealers that are party to the ISDA
Multilateral Agreement on Canadian trade reporting, the ISDA
methodology (prescribed by such agreement) will determine the
reporting counterparty that is obligated to report the trade.
Otherwise, both derivatives dealers are obligated to report, and
while they may delegate reporting, they each retain the regulatory
obligation to ensure the trade is appropriately reported.
In the other CSA jurisdictions, derivatives dealers transacting
with each other are permitted to agree through a written agreement
which of them is required to report under the applicable Provincial
Trade Reporting Rule. Under this "variable approach", the
determination as to which derivatives dealer is the reporting
counterparty may differ for each relationship, asset class or
transaction.
The Ontario Securities Commission (OSC) has, in its release
regarding the Proposed Amendments, indicated it will not adopt a
"variable approach", but rather will either (1) maintain
its current reporting hierarchy (subject to other aspects of the
Proposed Amendments that affect the current hierarchy), or (2)
adopt an alternative hierarchy that builds on the current hierarchy
(as it is proposed to be amended). The alternative hierarchy would
insert an additional step, just prior to the step where both
counterparties that are dealers are deemed to be subject to the
trade reporting obligation, stating that where there are two
derivatives dealers, one that is a "financial entity" and
one that is not a "financial entity," the financial
entity is the reporting counterparty for the transaction.
"Financial entities" will include Canadian banks, trust
companies, insurance companies, credit unions and regulated pension
funds, dealers and asset managers.
This "alternative hierarchy" is intended to recognize
that derivatives dealers that are "financial entities"
may generally be better positioned to report OTC derivatives
transactions than derivatives dealers that are not financial
entities. For example, a commodity dealer or money services
business transacting with a bank may currently delegate its
reporting obligation to the bank. Under the alternative hierarchy,
the bank would be the reporting counterparty in this situation,
which avoids the need for delegation.
The OSC and the CSA members in the other Canadian jurisdictions
have specifically requested comment on the OSC's proposed
"alternative hierarchy."
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