On June 29, 2015, the OSC announced its intention to review compliance with over-the-counter (OTC) derivative trade reporting requirements as set out in OSC Rule 91-507 Trade Repositories and Derivatives Data Reporting (the TR Rule) in fiscal 2015/2016. (The TR Rule requires that all OTC derivatives transactions involving a local counterparty be reported to a designated trade repository in Ontario. For more information on the TR Rule please see our nutshell.)
OSC Staff Notice 91-704 Compliance Review Plan for OSC Rule 91-507 Trade Repositories and Derivatives Data Reporting (the Notice) indicates that the purpose of these planned compliance reviews is to reinforce the importance of derivatives data reporting, assess levels of compliance and identify obstacles to compliance, and help derivatives dealers to better understand their reporting obligations and the OSC’s expectations.
A joint team from the OSC’s Derivatives Branch and Compliance and Registrant Regulation Branch (OSC Staff) will carry out these compliance reviews. If selected, OSC Staff will notify the derivatives dealer in advance, request books and records, including policies and procedures relating to derivatives trade reporting obligations, and interview senior management and key employees in connection with the trade reporting obligations. OSC Staff may also attend the dealer’s premises to review internal processes and compare trade records with reported data.
The Notice provides that the initial reviews will focus on “derivatives dealers” that are “most active” in the market and their compliance with requirements in Part 3 Data Reporting of the TR Rule. It is important to note that the term “derivatives dealer” is defined broadly in the TR Rule to mean:
‘a person or company engaging in or holding himself, herself or itself out as engaging in the business of trading in derivatives in Ontario as principal or agent’.
Reporting obligations under the TR Rule have been in effect for certain market participants, including derivatives dealers and clearing agencies, since October 31, 2014. As of June 30, 2015, data reporting obligations became effective for a “reporting counterparty” that is not a derivatives dealer or a recognized or exempt clearing agency to make reports under certain circumstances. While the Notice states that the “initial reviews” will focus on derivatives dealers, OSC Staff may cast a wide net. Therefore, it would be prudent for all market participants with reporting obligations under the TR Rule to prepare for an OSC compliance review.
As part of these compliance reviews, the Notice indicates that OSC Staff will review the market participant’s systems and documentation related to derivatives data reporting obligations to verify that:
- derivatives transactions are correctly identified, and reported accurately, completely and within prescribed timelines;
- reporting counterparties are determined in accordance with the TR Rule requirements;
- life cycle and valuation data is reported and updated in accordance with required timeframes; and
- a Legal Identity Identifier for each transaction counterparty is reported in accordance with regulatory expectations.