Earlier this month, the Canadian Securities Administrators (CSA) published proposed business conduct rules aimed to protect investors in over-the-counter (OTC) derivatives markets and create a uniform approach to derivatives business conduct regulation in Canada. National Instrument 93-101 Derivatives: Business Conduct (the Business Conduct Rule) outlines a fair dealing model that derivatives advisers and dealers are obligated to follow and which is meant to establish a robust investor protection regime that meets the International Organization of Securities Commissions’ (IOSCO) international standards.
The CSA is also expected to release derivatives registration rules in early summer for “derivatives dealers”, “derivatives advisers” and potentially other derivatives market participants. The derivatives business conduct and registration rules will generally apply to persons or entities that are in the business of trading or advising in OTC derivatives, subject to any exemptions that may be available in the circumstances. The comment period on both the derivatives business conduct rules and the registration rules will be open for 150 days until September 1, 2017.
Under the Business Conduct Rule, various minimum standards, such as fair dealing, conflicts of interest identification and management, know-your-client and suitability, record-keeping and disclosure requirements will apply to the conduct of derivatives dealers and derivatives advisers. The proposed Rule also notably includes the imposition of a senior derivatives manager role, whose responsibilities will include the requirement to certify that the firm’s derivatives business unit is in material compliance with the law. We recommend that you review the proposed Rule in order to consider how it might impact your business and the policies and procedures that you may have to develop to address these new business conduct requirements.
Additional disclosure requirements, restrictions and standards of care will also apply but only to activities involving less sophisticated derivatives parties that do not qualify as "eligible derivatives parties” (i.e., retail market participants). Criteria of sophistication and financial thresholds will be used to distinguish between “eligible derivatives parties” and the retail market. While the definition of “eligible derivatives parties” will be generally consistent with the definition of “permitted client” under National Instrument 31-103 with respect to trading and advising in relation to securities, there will be a few modifications to reflect the different nature of derivatives markets and participants.
The proposed Business Conduct Rule also contains a range of exemptions from its application, including for IIROC-member investment dealers, Canadian financial institutions that meet equivalent regulatory requirements and for certain derivatives end-users (e.g., entities that trade derivatives for their own account for commercial purposes providing they comply with certain conditions). Exemptions will also be provided to foreign derivatives dealers and advisers subject to and in compliance with specified laws of certain foreign jurisdictions. This exemption will be further detailed in appendices to be circulated by the CSA at a later date.