On June 29, 2015, the Ontario Securities Commission announced its intention to review compliance with derivative trade reporting requirements during fiscal 2015/16.
After many speaking engagements where we discussed the need for comprehensive, firm-specific derivatives policies and procedures, on June 29, 2015, the Ontario Securities Commission announced its intention to review compliance with derivative trade reporting requirements during fiscal 2015/16. OSC Staff Notice 91-704 – Compliance Review Plan for OSC Rule 91-507 Trade Repositories and Derivatives Data Reporting (the Notice) provides that the initial compliance reviews will focus on those "derivatives dealers" that are "most active" in the market and their compliance with the derivative data reporting requirements in Ontario Rule 91-507 (the Ontario Rule).
WARNING: On first blush, this review seems to be limited, since the notice makes reference to “derivatives dealers” and those that are “most active”. As you may be aware, there are no registered derivatives dealers in Ontario, as this registration category only exists in Québec under the Derivatives Act (Québec). We believe that the compliance review will be of firms that carry on the business of entering into, or trading in, over-the-counter derivatives, which includes firms that are typically out of scope of the Canadian securities regulators (financial institutions, money services businesses and those in the commodity risk sector).
In addition, “most active” may be contrued in two ways – the review may focus on large institutional derivatives market participants with high notional value transactions or the review may target participants that cater to retail and mid-market corporate clients that have a high volume of transactions.
As it is likely that the compliance net will be cast far and wide, all market participants should be prepared for this OSC review.
The compliance reviews will be carried out by a joint team from the OSC’s Derivatives and Compliance and Registrant Regulation Branches. To the extent appropriate, the compliance team will also co-ordinate with other regulators that have oversight over the applicable market participants. A derivatives dealer that receives notice of a compliance review will be required to provide OSC staff with its books and records, including policies and procedures, to the extent that they relate to the dealer’s trade reporting obligations. OSC staff may attend on a dealer’s premises to review internal processes and to compare internal trade records to the corresponding reported derivatives data. OSC staff will also interview senior management and key employees.
The main points that the OSC will seek to verify are that:
- reportable transactions (i.e., those that are determined to be derivatives under NI 91-506 Derivatives: Product Determination) have been reported
- reporting is completed within the required timelines
- the reporting counterparties are determined in accordance with the requirements set out in the Ontario Rule
- reported data is accurate and complete
- life cycle and valuation data is reported and updated within the required timeframes and
- a legal entity identifier for each transaction counterparty is reported in accordance with the OSC’s stated expectations.
Following the compliance review, each dealer will receive a written report setting out any issue identified during the review process. The OSC will also publish anonymized key findings and trends once a sufficient number of reviews have been completed.