The Canadian Securities Administrators (CSA) have started granting their first exemption orders to permit international dealers to engage with Canadian clients in secondary market trading of bonds of Canadian issuers, under certain conditions, as contemplated in their September 1, 2016 guidance notice, CSA Staff Notice 31-346 – Guidance as to the Scope of the International Dealer Exemption in relation to Foreign-Currency Fixed Income Offerings by Canadian Issuers.
Ordinarily, international dealers are not allowed to trade with Canadian customers in equity or debt securities of Canadian issuers other than government issuers. There is a narrow exception for new debt issues only, that allows international dealers to trade with Canadian “permitted client” customers in new issues of debt securities by Canadian issuers, but only where those debt offerings are made primarily outside Canada. But due to the restriction on secondary market trading, those same international dealers were not allowed subsequently to make a market with those Canadian purchasers on those issues. This sometimes made those dealers reluctant to place bonds into Canada in the first place knowing they couldn’t make a market subsequently for their Canadian customers.
In their September guidance notice, the CSA staff said they “acknowledge that concerns over the current drafting may be affecting the willingness of international dealers to participate” and that they had been advised that these restrictions were perceived to be contributing to a decline in liquidity in the Canadian fixed income markets. The significant change announced in September’s guidance notice was that the CSA staff said they “do not believe there is a policy reason to limit the [international dealer] exemption … to trades that occur during the initial period of the securities’ distribution.” The CSA staff announced they were prepared to recommend exemptive relief.
The Ontario Securities Commission has now granted, on behalf of all the CSA provinces, the first few exemptions after that guidance, in favour of J.P. Morgan Securities LLC and Imperial Capital LLC. The new exemption decisions allow the exempted international dealers to engage in secondary market trading with permitted clients in Canada in debt securities of Canadian issuers, if either:
a. The debt securities are denominated in a currency other than Canadian dollars, or
b. The debt securities are denominated in Canadian dollars and were originally offered primarily outside Canada without a prospectus being filed in Canada
If the bonds to be traded are denominated in U.S. dollars, Euros or any other non-Canadian currency, it will not matter whether they were originally offered primarily outside Canada. On the other hand, if the debt securities are denominated in Canadian dollars, an international dealer would be required to confirm before trading that the original distribution of the securities had been offered primarily outside Canada and that no Canadian prospectus had been filed for the original distribution.
J.P. Morgan had previously been registered in Canada as an exempt market dealer (EMD), which allowed it then to trade securities of Canadian issuers without the domicile restrictions applicable to exempted international dealers. In 2015, however, the CSA removed the ability of registered EMDs to also rely upon the international dealer registration exemption, so most, if not all, of those U.S. broker-dealers gave up their EMD registration, which had the effect of reimposing upon them the trading restrictions on international dealers for securities of Canadian issuers. Imperial Capital had been registered until 2015 as a “restricted dealer” to the same effect as an EMD. However, J.P. Morgan’s and Imperial Capital’s prior registration does not appear to have been a policy condition for the new exemption, so it appears that other international dealers that were never registered as EMDs or restricted dealers are able to apply for a parallel exemption.
Only the specified exempted firm has the benefit of the exemptive relief. It cannot be relied upon by others automatically. The exemptive relief would have to be applied for on a per-firm basis, citing the recent decision as a precedent.
Rule amendments may be forthcoming eventually to bake similar relief automatically into the standard international dealer exemption rule conditions, but there are no plans currently announced by the CSA to that effect, so any such future rule changes are uncertain at this time.