On February 16, 2016, the Canadian Securities Administrators (“CSA”) proposed amendments (the “Proposed Amendments”) to Multilateral Instrument 96-101 Trade Repositories and Derivatives Data Reporting (the “Multilateral TR Rule”), roughly three weeks after adopting the Multilateral TR Rule. The Proposed Amendments seek to further harmonize the Multilateral TR Rule in the Provinces and Territories of Alberta, Saskatchewan, New Brunswick, Newfoundland and Labrador, Nova Scotia, Prince Edward Island, Yukon, Northwest Territories and Nunavut (collectively, the “Multilateral Jurisdictions”) with the existing TR rules (collectively, the “Existing TR Rules”) in the Provinces of Manitoba, Ontario and Quebec (collectively, the “Existing Jurisdictions”). Please see our previous article for an overview of the Multilateral TR Rule.
The primary elements of the Proposed Amendments include the:
- expansion of substitute compliance for inter-affiliate transactions and foreign-reported transactions;
- introduction of requirements for public reporting of transaction-level information and changes to the commencement date of same;
- introduction of a permanent exclusion for inter-affiliate transactions;
- introduction of a transition period for loss of an exclusion; and
- introduction of a requirement to obtain a Legal Entity Identifier.
Our detailed analysis of the Proposed Amendments continues below.
Overview of the Proposed Amendments
Substitute Compliance for Inter-Affiliate Transactions and Foreign-Reported Transactions
The Proposed Amendments will broaden the substitute compliance provisions under the Multilateral TR Rule by providing relief for certain transactions between end-user affiliates and certain transactions that are reported in compliance with the trade reporting laws of specified foreign jurisdictions.
Under the Multilateral TR Rule, substitute compliance is currently available in two circumstances: (i) where a counterparty is a local counterparty in a jurisdiction because it is organized under the laws of that jurisdiction but does not otherwise conduct business in that jurisdiction (other than incidental activities); and (ii) where a counterparty is a local counterparty in a jurisdiction solely on the basis that is an affiliated entity of a person or company that is organized in that jurisdiction, and that affiliate is liable for substantially all of the counterparty’s liabilities; provided that, in each case, the transaction is reported to a trade repository in one of the Existing Jurisdictions.
The Proposed Amendments will expand the substitute compliance provisions in the Multilateral TR Rule by making substitute compliance available in a third circumstance, where the counterparties are end-users (i.e. not derivatives dealers or clearing agencies or affiliates of derivatives dealers or clearing agencies) and the counterparties are affiliates of one another. The CSA acknowledged that providing substitute compliance for end-user affiliates will alleviate the reporting burden on such parties, and noted that the information pertaining to transactions between affiliated entities was generally less valuable than information pertaining to transactions between non-affiliated entities, as discussed below.
Similarly, the Proposed Amendments will expand the substitute compliance provisions by allowing substitute compliance where, in each of the three circumstances described above, a transaction is reported pursuant to the trade reporting laws of certain specified foreign jurisdictions. The E.U. and the U.S. are the only foreign jurisdictions specified under the Proposed Amendments, but the CSA has indicated that it may expand this list over time, as it continues to review the trade reporting laws in other foreign jurisdictions. The CSA noted that providing relief where trades are reported in the E.U. and the U.S. will harmonize the operation of substitute compliance under the Multilateral TR Rule with substitute compliance under the Existing TR Rules.
Requirements for Public Dissemination of Transaction-Level Information
The Proposed Amendments seek to amend the Multilateral TR Rule by including specific provisions relating to the types of information that will be publicly disseminated as well as the types of transactions in respect of which this information will be disseminated.
The Proposed Amendments will require trade repositories to disclose a wide range of information in respect of publicly reportable transactions, including the following data fields: (i) the contract or instrument type (e.g., swap, swaption, forward, option, basis swap, index swap or basket swap); (ii) the asset class (e.g., interest rate, credit, commodity, foreign exchange or equity); (iii) the underlying benchmark (e.g., CAD-BA-CDOR or USD-LIBOR-BBCA); (iv) the prices for each leg of the transaction; (vi) the notional amounts for each leg of the transaction; (vi) the currencies for each leg of the transaction; and (vii) the maturity date of the transaction. The CSA indicated that public dissemination of these and other data fields will facilitate price discovery, and will allow market participants to value derivatives transactions more accurately and assess whether they are achieving quality execution.
At the outset, the Proposed Amendments will only require public reporting for transactions involving three asset classes: (i) interest rate; (ii) credit; and (iii) equity. Similarly, the Proposed Amendments will only require public reporting for transactions involving a few underlying benchmarks: (i) for interest rate transactions, public reporting will apply to CAD-BA-CDOR swaps, USD-LIBOR-BBCA swaps, EUR-EURIBOR-Reuters swaps and GBP-LIBOR-BBA swaps; (ii) for credit transactions, public reporting will apply to all index swaps; and (iii) for equity transactions, public reporting will apply to all index swaps. The CSA acknowledged the importance of limiting the application of public reporting to those assets classes and underlying benchmarks that exhibit sufficient liquidity in order to make it difficult to identify the counterparties to a transaction. If counterparties to a transaction are identifiable, hedging large transactions could become more expensive, as other market participants could anticipate counterparties’ hedging needs and adjust their pricing accordingly. The CSA has indicated that further asset classes and underlying benchmarks may become publicly reportable after additional study of trade repository data and public consultation.
The Proposed Amendments include several other measures designed to protect the identity of counterparties. A trade repository will be required to round the notional amount of transactions in accordance with certain rounding conventions. Where the notional amount for one leg of a swap is less than $1,000,000, for example, a trade repository will round the reported amount to the nearest $10,000. Moreover, if the rounded notional amount of a derivative exceeds a “capped” notional amount, a trade repository will only report the capped notional amount, and not the rounded notional amount. Interest rate swaps with a tenor of less than or equal to two years are capped at $250,000,000, for example, and interest rate swaps with a tenor of greater than 10 years are capped at $50,000,000. The CSA believes that these measures will help protect the identities of counterparties without compromising the value of the information published by a trade repository.
Commencement of Public Dissemination of Transaction-Level Information
In addition to setting out requirements for the public reporting of transaction-level information, the CSA proposed to amend the commencement date for public reporting. Under the Proposed Amendments, public reporting of transaction-level information will come into effect on July 29, 2016, roughly six months earlier than contemplated under the Multilateral TR Rule. The CSA indicated that the reason for this amendment was to harmonize the commencement date under the Multilateral TR Rule with the commencement date under the Existing TR Rules. The CSA believes that harmonizing the commencement date for public reporting will facilitate a single, Canada-wide report of transaction data, and may help mitigate risk that counterparties could be identified based on the information contained in different transaction reports.
Exclusion for Inter-Affiliate Transactions
As forecasted in guidance on the Multilateral TR Rule, the CSA introduced a permanent exclusion for transactions between end-user affiliates, as a complement to the provisions allowing substitute compliance for transactions between end-user affiliates. The proposed exclusion will apply to transactions involving two affiliated counterparties, where each counterparty is a local counterparty in any jurisdiction of Canada. A temporary exclusion is currently available under the Multilateral TR Rule, but only in respect of transactions entered into before January 1, 2017. Proposed amendments to the Existing TR Rules will likewise introduce a comparable exclusion in the Existing Jurisdictions. In discussing the rationale for this exclusion, the CSA noted that the primary source of risk to a corporate group arises from its market-facing transactions (i.e. transactions with counterparties that are not affiliates), and not from its non-market facing transactions. While requiring market participants to report transactions between end-user affiliates will provide the CSA with certain information regarding the distribution of risk between such affiliates, the CSA believes that the costs of requiring such reports outweigh the benefits of such information.
Transition Period for Loss of Exclusion
The Proposed Amendments also include a new transition period applicable to end-user counterparties that have previously qualified for an exclusion from the reporting obligations under the Multilateral TR Rule (and have not previously reported under the Multilateral TR Rule or the Existing TR Rules), but that have since ceased to be eligible for such exclusion. In these circumstances, the CSA proposed that the Multilateral TR Rule will not become effective until 180 days after the date on which the local counterparty ceased to qualify for the exclusion. The CSA suggested that this transition period will provide the reporting counterparty with sufficient time to organize its affairs and prepare to fulfill the reporting obligations under the Multilateral TR Rule. Note that there is no comparable transition period under the Existing TR Rules or the proposed amendments thereto, and thus counterparties in the Existing Jurisdictions may have to become compliant with reporting obligations sooner than 180 days after the loss of an exclusion.
Requirement for Legal Entity Identifier
Finally, the Proposed Amendments include a requirement that all local counterparties obtain a legal entity identifier (“LEI”), consistent with the proposed amendments to the Existing Rules. An LEI is a 20-character, alpha-numeric code that is used to uniquely identify a counterparty to a financial transaction. Under the Multilateral TR Rule, a reporting counterparty is obligated to report the LEI for each local counterparty, which may be difficult to comply with if a local counterparty has not yet obtained an LEI. The Proposed Amendments will help facilitate a reporting counterparty’s duty to report by placing a direct obligation on a local counterparty to obtain an LEI, regardless of whether the local counterparty is the reporting counterparty. The CSA noted that this requirement will support authorities and market participants in identifying and managing financial risks, and simplify reporting and accessing reported data across jurisdictions.
Comments on the Proposed Amendments
The CSA invited members of the public to provide comments on six specific questions set forth in the Proposed Amendments. The comment period is scheduled to end on April 17, 2016. Note that the British Columbia Securities Commission (“BCSC”) did not participate in the publication of the Proposed Amendments, although it was among the jurisdictions that adopted the Multilateral TR Rule a few weeks ago. The CSA indicated that the BCSC intends to separately publish for comment proposed amendments to the Multilateral TR Rule, which amendments are expected to be substantively identical to the Proposed Amendments.