Members of the Canadian Securities Administrators (CSA) from the provinces and territories of Canada other than Ontario, Manitoba and Quebec recently published their product determination rule, Multilateral Instrument 91-101 Derivatives: Product Determination (MI 91-101), which specifies the types of over-the-counter derivatives that will be subject to the new derivatives data reporting rule applicable in their jurisdictions. We previously discussed the new derivatives data reporting rule, Multilateral Instrument 96-101 Trade Repositories and Derivatives Data Reporting (MI 96-101), in detail here.
In addition, these members of the CSA have stated that they expect MI 91-101 to specify the types of OTC derivatives that will be subject to future rules relating to OTC derivatives. MI 91-101 is expected to come into force on May 1, 2016 together with MI 96-101.
Only financial products which are “specified derivatives” are subject to MI 96-101. While this approach to classification is somewhat different from the approach taken in the existing product determination rules in Ontario, Manitoba and Quebec, it reflects the fact that some of the participating jurisdictions have a statutory definition of a “derivative” and others do not. The purpose is to be clear and uniform across the jurisdictions in terms of which kinds of financial products are derivatives and then to exclude certain types of those derivatives from the derivatives data reporting scheme, again in a uniform fashion.
1. Capturing “derivatives”
Under MI 91-101 the term “specified derivatives” includes all “derivatives” except those that are specifically excluded. The term “derivatives” is, in turn, defined by reference to the securities laws of a local jurisdiction.
In the local jurisdictions where the securities legislation defines a “derivative”, namely Alberta, New Brunswick, Nova Scotia and Saskatchewan, that definition is adopted for the purposes of MI 91-101.
In the other participating jurisdictions that either don’t have a definition of “derivative” or which treat derivatives as a sub-class of securities, namely British Columbia, Newfoundland and Labrador, Northwest Territories, Nunavut, Prince Edward Island and Yukon, the term “derivative” is defined broadly in MI 91-101 as follows:
A contract or instrument if each of the following apply:
(a) it is an option, swap, future, forward, or other financial or commodity contract or instrument whose market price, value, or delivery, payment or settlement obligations are derived from, referenced to or based on an underlying interest including a value, price, index, event, probability or thing;
(b) it is a “security”, as defined in securities legislation, solely by reason of it being one or more of the following:
i. a document evidencing an option, subscription or other interest in a security;
ii. a futures contract;
iii. an investment contract;
iv. an option.
2. Excluding certain financial products to arrive at “specified derivatives”
The broad definition of “specified derivative” is then subject to the exclusion of certain types of financial products. These exclusions are substantially the same as (or intended to achieve effectively the same result as) those under the existing product determination rules in Ontario, Manitoba and Quebec.
The following changes to the previous draft of MI 91-101, some of which reflect comments received, may be noted:
- MI 91-101 does not require that foreign gaming contracts not violate Canadian laws in order to be eligible for exclusion.
- In the case of short-term currency exchange contracts, instead of simply requiring that they cannot be “rolled over”, MI 91-101 provides explicitly that counterparties may not enter into an arrangement or practice that would permit, or has the effect of permitting, the extension of the settlement date of the contract, whether by simultaneously terminating the contract and entering into another contract on similar terms or otherwise.
- With respect to physically-settled commodity contracts, the Companion Policy to MI 91-101 provides helpful guidance that an option for the delivery of a commodity which, if exercised, results in an obligation to make or take delivery of the commodity referenced in the contract, may be consistent with the physical settlement intention requirement if it is clear that the parties intend to settle the contract by physical delivery of the commodity and not by cash or other means. This serves to clarify that commodity options (which, if not exercised, would result in no amount of a commodity being delivered), may nevertheless qualify for the exclusion and resolves uncertainty as to whether embedded volumetric optionality in a contract can include a nil volume.
- The Companion Policy helpfully clarifies that, in the context of commodities such as electricity or natural gas marketed or distributed through regulated pool arrangements, a contract for delivery of the commodity through the pool would constitute “physical delivery” for purposes of MI 91-101. This reflects the fact that regulated pooling arrangements of this kind already provide transparency to regulators and the public and therefore do not need to be reported as derivatives.
- With respect to exchange-traded derivatives, the Companion Policy notes that, in the view of the participating CSA members, a contract “traded on an exchange” includes a contract that is made pursuant to the rules of one of the exchanges prescribed in MI 91-101 and reported to the exchange after execution. If the contract is reported to such an exchange, it can be excluded from trade reporting under MI 91-101, whereas contracts made off exchange and then cleared through an exchange are not.
The exclusion provisions of MI 91-101 also address technical differences in the definitions of “securities” and “derivatives” in the securities laws of the participating jurisdictions to ensure that, notwithstanding the broad range of instruments captured by the definition of “specified derivatives”, instruments that are more appropriately regulated as securities are excluded, much as they are in Ontario, Manitoba and Quebec.