On January 22, 2016, the members of the Canadian Securities Administrators (“CSA”) representing the Provinces and Territories of British Columbia, Alberta, Saskatchewan, New Brunswick, Newfoundland and Labrador, Nova Scotia, Prince Edward Island, Yukon, Northwest Territories and Nunavut (collectively, the “Multilateral Jurisdictions”) adopted Multilateral Instrument 96-101 Trade Repositories and Derivatives Data Reporting (the “TR Rule”) and Multilateral Instrument 91-101 Derivatives: Product Determination (the “Product Determination Rule” and together with the TR Rule, the “Multilateral Rules”). With the adoption of the Multilateral Rules in the Multilateral Jurisdictions, as well as the adoption of final rules (collectively, the “Existing Rules”) in the Provinces of Manitoba, Ontario and Quebec (collectively, the “Existing Jurisdictions”) on November 14, 2013, all of the Provinces and Territories of Canada now have rules providing for the collection and reporting of information on over-the-counter (“OTC”) derivatives transactions.
Overview of the Multilateral Rules – TR Rule
The TR Rule is intended to improve transparency in the OTC derivatives markets by requiring market participants to report certain information in respect of OTC derivatives transactions. The CSA believes that derivatives data is essential for the effective regulatory oversight of the OTC derivatives market, including the ability to identify and address systemic risk and market abuse.
Under the TR Rule, all OTC derivatives transactions involving a “local counterparty” must be reported to a designated “trade repository”, which is responsible for collecting information on OTC derivatives transactions and sharing this information with regulators and other market participants. A “local counterparty” is a counterparty that is either: (i) organized under the laws of the jurisdiction; (ii) has its head office or principal place of business in the jurisdiction; or (iii) is an affiliate of a counterparty referred to in (i) or (ii) and is liable for all or substantially all of the liabilities of the counterparty.
The TR Rule includes a hierarchy for determining which counterparty will be responsible for reporting a transaction to a trade repository: (i) if the derivatives transaction is cleared through a “reporting clearing agency”, the reporting clearing agency will be the sole reporting counterparty; (ii) otherwise, if the derivatives transaction is between a derivatives dealer and a counterparty that is not a derivatives dealer, the derivatives dealer will be the sole reporting counterparty; (iii) otherwise, if the counterparties have, at the time of the transaction, agreed in writing that one of them will be the reporting counterparty, the counterparty determined to be the reporting counterparty under the terms of the agreement will be the sole reporting counterparty; and (iv) in any other case, both counterparties to the transaction will be the reporting counterparties. The inclusion of a reporting hierarchy is intended to ensure that reporting is carried out by the counterparty who will be most capable of, and least burdened by, the requirement to report.
The TR Rule requires that a reporting counterparty report information to a trade repository on a real-time basis, or where this is not technologically feasible, as soon as possible but not later than the end of the next business day following the day that the transaction was entered into. Three main types of information must be reported to a trade repository: (i) creation data, which includes specific terms relating to the derivative; (ii) life-cycle event data, which includes any changes to derivatives data previously reported; and (iii) valuation data, which includes the current value of the derivative. The TR Rule contemplates that trade repositories will ultimately share certain transaction-level information with the public. On February 16, 2016 the CSA proposed amendments to the Multilateral Rules (the “Proposed Amendments”) which set out further requirements for public dissemination of transaction-level information. The Proposed Amendments, which will be examined in a separate article, include specific provisions relating to the types of OTC derivatives that will be subject to public dissemination of transaction-level information, as well as the data that will be publicly disseminated.
Overview of the Multilateral Rules – Product Determination Rule
The Product Determination Rule works in harmony with the TR Rule and is intended to define the types of OTC derivatives that will be subject to reporting requirements under the TR Rule. The CSA indicated that the scope of the Product Determination Rule may be widened over time, with the Product Determination Rule being used to define the types of OTC derivatives subject to other requirements relating to OTC derivatives that may be published by the CSA.
Under the Product Determination Rule, “derivative” is defined broadly as being a contract or instrument that 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. This broad definition may include a number of instruments that would not traditionally be considered a “derivative” by market participants.
Notwithstanding the broad definition of “derivative”, market participants are generally only subject to reporting requirements in respect of a "specified derivative”, which is a narrower subset of contracts or instruments. Under the Product Determination Rule, the following instruments wouldnot be considered a “specified derivative” and accordingly, would not be subject to reporting requirements under the TR Rule: (i) exchange-traded futures and options; (ii) spot FX transactions that are intended to be physically settled within two business days; (iii) commodity derivatives transactions that are intended to be physically settled; (iv) compensation products linked to the share price of an issuer or its affiliate; (v) deposit instruments issued by a bank, credit union or trust company; and (vi) gaming or insurance contracts regulated under Canadian or foreign regimes.
Changes to the Draft Multilateral Rules
The CSA published a draft of the Multilateral Rules on June 6, 2013 and received eighteen comment letters thereon. After reviewing and considering these comment letters, the CSA introduced relatively few changes to the draft Multilateral Rules, which changes generally fell into one of two categories: (i) changes to address drafting or technical errors in the draft Multilateral Rules; and (ii) changes to better harmonize the draft Multilateral Rules with the Existing Rules.
With respect to the TR Rule, the CSA harmonized the definition of “local counterparty” to the corresponding definitions in the Existing Rules, by capturing a derivatives dealer as a local counterparty. As a consequence of this change, a corresponding exclusion was added to the TR Rule, excluding derivatives transactions between a non-resident derivatives dealer and another non-resident counterparty from any reporting requirements.
With respect to the Product Determination Rule, the CSA deleted certain provisions relating to investment contracts and options, noting that these provisions were unnecessary because of the operation of orders by securities regulatory authorities and other securities legislation in the Multilateral Jurisdictions.
Comparison to the Existing Rules
The Multilateral Rules are generally consistent with the Existing Rules that are currently in effect in the Existing Jurisdictions; however, there are a few important differences that market participants should be aware of.
Most significantly, market participants should note that the definition of “local counterparty” under the Multilateral Rules differs from the definitions of “local counterparty” under the Existing Rules with respect to derivatives dealers. Under the Existing Rules, all transactions by registered derivatives dealers are required to be reported to a recognized trade repository, including transactions by registered derivatives dealers that are foreign dealers, but subject to any applicable substitute compliance provisions. Under the Multilateral Rules, by contrast, transactions by foreign dealers do not need to be reported to a recognized trade repository, notwithstanding that such dealers are included in the definition of “local counterparty”, as there is an exemption available to such dealers.
The hierarchy for determining the “reporting counterparty” under the Multilateral Rules is also different from the hierarchy under the Existing Rules. For example, the hierarchy under the Multilateral Rules does not provide that “Canadian financial institutions” constitute a separate category of reporting counterparty, distinct from the Existing Rules in Quebec and Manitoba, but consistent with the Existing Rules in Ontario. In addition, the hierarchy under the Multilateral Rules provides, at the bottom of the hierarchy, that “each counterparty” to the transaction will be the reporting counterparty, whereas the hierarchy under the Existing Rules provides that “eachlocal counterparty” will be the reporting counterparty. Finally, the Existing Rules exempt local counterparty end-users from reporting commodity-based transactions (other than cash or currency) if the aggregate notional value of all outstanding transactions for the local counterparty does not exceed $500,000 without netting. Under the Multilateral Rules, the comparable exclusion is for a local counterparty that has not, in the preceding twelve months, had an aggregate month-end gross notional amount under commodity-based derivatives exceeding $250,000,000 (not including affiliated transactions).These discrepancies may mean that, as between particular counterparties conducting a particular trade, the counterparty responsible for reporting that trade in one jurisdiction may not be the same as the counterparty responsible for reporting that trade in another jurisdiction.
Another difference is that the substitute compliance provisions under the Multilateral Rules are generally more limited than the substitute compliance provisions under the Existing Rules. The Multilateral Rules only provide substitute compliance with respect to (i) transactions that involve a local counterparty that is organized under the laws of the jurisdiction but that does not otherwise conduct business in the jurisdiction (other than incidental activities) or (ii) transactions that involve a local counterparty that is a local counterparty solely because it is a guaranteed affiliate, and in either case, the transaction has been reported to a trade repository that is recognized in the local jurisdiction (i.e. a trade repository in the Existing Jurisdictions). Unlike the Existing Rules, the Multilateral Rules do not currently permit substitute compliance where a transaction has been reported to a trade repository in a foreign jurisdiction that has reporting requirements similar to those under the Multilateral Rules. As part of the Proposed Amendments, however, the CSA indicated that it intends to expand the substitute compliance provisions to also provide relief for (a) transactions between Canadian end-user affiliates and (b) transactions that have been reported in compliance with the equivalent trade reporting laws of certain specified foreign jurisdictions, which would initially be limited to the E.U. and the U.S.
The Multilateral Rules are scheduled to come into force on May 1, 2016, and thus market participants who carry out OTC derivatives transactions in the Multilateral Jurisdictions will need to begin organizing their affairs to ensure compliance with the Multilateral Rules. Although the Multilateral Rules come into force in May, the obligations thereunder will be phased in at later dates according to the following schedule:
- July 29, 2016: Commencement of mandatory reporting of new derivatives transactions by reporting counterparties that are either derivatives dealers or reporting clearing agencies;
- November 1, 2016: Commencement of mandatory reporting of new derivatives transactions by reporting counterparties that are not derivatives dealers or reporting clearing agencies (i.e. end-users);
- December 1, 2016: Deadline for reporting outstanding pre-existing derivatives transactions where the reporting counterparty is a derivatives dealer or reporting clearing agency;
- January 1, 2017: Commencement of public reporting of transaction-level information; and
- February 1, 2017: Deadline for reporting outstanding pre-existing derivatives transactions where the reporting counterparty is an end-user.
Note that under the Proposed Amendments, the CSA proposed to commence public reporting of transaction-level information approximately five months earlier, on July 29, 2016, in order to harmonize the start date with the start date under the Existing Rules.