On January 29, the Canadian Securities Administrators (CSA) published for comment CSA Consultation Paper 92-401 Derivatives Trading Facilities. The Consultation Paper prepared by the Canadian Securities Administrators Derivatives Committee (CSA Committee) proposes a framework for regulating facilities that brings together multiple buyers and multiple sellers of over-the-counter (OTC) derivatives. The Consultation Paper also proposes that OTC derivatives that meet certain criteria may be required to trade exclusively on such regulated facilities.
The Canadian OTC derivatives market comprises a relatively small share of the global market and a substantial portion of transactions entered into by Canadian market participants involves foreign counterparties. The CSA Committee is of the view that it is therefore important that rules developed for the Canadian market are aligned with international practice to ensure that Canadian market participants have access to the international market and are regulated in accordance with international principles to the extent appropriate.
Concept of “derivatives trading facility”
The CSA Committee proposes to define a “derivatives trading facility” (DTF) to mean a person that constitutes, maintains, or provides a facility or market that brings together buyers and sellers of OTC derivatives, brings together the orders of multiple buyers and multiple sellers, and uses methods under which the orders interact with each other and the buyers and sellers agree to the terms of trades.
The proposed definition of a DTF is intentionally broad and would capture various multilateral execution processes and venues. However, the proposed definition is not intended to capture bilateral or one-to-many facilities such as single-dealer platforms, nor is it intended to capture facilities or processes where there is no actual trade execution or arranging taking place, such as bulletin boards used solely for advertising buying and selling interests.
Any DTF, regardless of whether it offers trading in OTC derivatives that are mandated to be traded on a DTF, would require an authorization from the securities regulatory authority in each jurisdiction in which it operates, or an exemption from such requirement.
DTFs generally would be regulated similarly to an exchange. For example, all DTFs would be required to have rules governing the conduct of participants, designed to ensure compliance with applicable legislation, prevent fraud and manipulative acts and practices, and promote just and equitable principles of trade.
DTFs generally would also be required directly or indirectly through an authorized third-party regulation services provider to monitor compliance by participants with those rules and to appropriately discipline participants in the event of non-compliance.
A DTF operator that exercises discretion in the execution of transactions would be subject to additional requirements similar to those applicable to dealers.
An authorized DTF would be permitted to provide facilities for trading in both OTC derivatives that are mandated to be traded on a DTF and those OTC derivatives not mandated to be traded on a DTF. For clarity, market participants would not be required to trade non-mandated OTC derivatives through a DTF.
Class of OTC derivatives to be traded exclusively on a DTF
In determining whether to require a class of OTC derivatives to be traded exclusively on a DTF, the CSA Committee recommends that the CSA members consider factors including whether the class of OTC derivatives is: subject to a clearing mandate, sufficiently liquid and standardized, subject to a similar trading mandate in other jurisdictions, or already trading through the facilities of a DTF or foreign trading platform.
The CSA Committee recommends that a foreign-based DTF, such as a “swap execution facility” (SEF) or “organized trading facility” (OTF), that provides Canadian participants with direct access to their trading platforms be subject to the requirements of the proposed DTF regulatory regime. A foreign DTF would be required to be authorized, or exempted from authorization, in each local jurisdiction of Canada in which it provides a local participant with direct access.
However, the CSA Committee recommends that CSA members consider exemptions for foreign-based DTFs, on a case-by-case basis, from some or all of the requirements of the DTF regime if the foreign-based DTF is able to demonstrate that the regulation and oversight in its home jurisdiction is comparable to that which would apply under the proposed DTF regulatory regime. In such cases the CSA Committee recommends that CSA members consider relying on the day-to-day oversight by the home regulator of the foreign-based DTF, generally limiting direct oversight to matters of particular local importance. The foreign-based DTF would still be subject to reporting obligations to Canadian securities regulators with respect to services provided to local participants.
CSA Consultation Paper 92-401 Derivatives Trading Facilities can be found here.
The CSA Committee invites participants to provide input on the issues outlined in the Consultation Paper. Thirty-one specific questions have been raised by the CSA Committee. The comment period is open until March 30, 2015.