Securities regulators in all the remaining provinces and territories of Canada have now published final rules in the form of Multilateral Instrument 91-101 Derivatives: Product Determination (MI 91-101) and Multilateral Instrument 96-101 Trade Repositories and Derivatives Data Reporting (MI 96-101) and related Companion Policies for their proposed derivatives trade reporting regime. As we wrote in January 2015, these regulators are proposing a regime that is harmonized with but separate from the regime that has been adopted in Ontario, Manitoba and Quebec.
MI 96-101 sets out the requirements trade repositories have to meet to be recognized as entities to which market participants can report their trades and outlines the reporting obligations of derivatives market participants in respect of transactions which are in scope for reporting under MI 91-101. While MI 96-101 is quite similar to the existing trade reporting rules in Ontario, Manitoba and Quebec, there are some noteworthy differences. It is also anticipated that further amendments will be made to MI 96-101 to align it with amendments currently proposed in Ontario, Manitoba and Quebec. These amendments are expected to come into effect at the same time as reporting under MI 96-101 comes into effect.
Implementation Dates. MI 96-101 is expected to come into force in the adopting jurisdictions on May 1, 2016, except for Parts 3 [Data Reporting] and 5 [Exemptions from Data Reporting] which do not come into effect until July 29. While reporting of new transactions begins July 29 in cases where the reporting counterparty is a reporting clearing agency or dealer, non-dealers do not have to begin to report until November 1. Implementation of reporting obligations is also delayed until January 1, 2017 in the case of certain transactions between affiliated entities (that are not reporting clearing agencies or dealers) and their transactions entered into before that date are not reportable. (There is, however, at this time, no other exemption for inter-affiliate transactions.)
Whether there will be recognized trade repositories in each of the jurisdictions by July 29 is uncertain, but some initiatives to streamline the recognition process are under discussion.
Pre-existing Transactions. There are obligations to report certain pre-existing transactions. Pre-existing transactions should be those entered into before July 29 in the case of clearing agencies and dealers and November 1 for non-dealers. MI 96-101 currently says “before May 1, 2016” but we understand this is an error that will be fixed in the follow-up amendments. The last date for reporting pre-existing transactions where the reporting clearing agency or dealer is the reporting counterparty is December 1 and in other cases February 1, 2017, but reporting is required only for transactions that were live on those dates. A more limited set of data is required to be reported for pre-existing transactions.
Local Counterparty. The touchstone for the reporting obligation is that a “local counterparty” is a party to the transaction. The definition of local counterparty is similar to that in the other jurisdictions (including the exclusion of individuals) with one exception. Included in the definition is “a derivatives dealer in the local jurisdiction”. Ontario, Manitoba and Quebec restrict this to “registered” derivatives dealers. However, section 42 provides that a counterparty is not required to report derivatives data if the sole reason it is reportable is that one or both of the counterparties are derivatives dealers in the local jurisdiction. Essentially this means that this particular category is not relevant to determining the application of the reporting obligation. However, it is relevant to any of the other parts of the instrument that apply to local counterparties. For example, the data required to be reported includes the jurisdictions in Canada in which the parties are “local counterparties”. Hopefully MI 96-101 (and the corresponding provisions in Ontario, Manitoba and Quebec) will be amended to exclude the reporting of jurisdictions in which a party is a local counterparty solely because it is a derivatives dealer in the jurisdiction. This is not information that market participants have built systems to solicit. Deeming dealers to be local counterparties seems an extremely awkward method of imposing obligations other than the reporting obligation on dealers. It would be preferable if it was dealt with more directly.
Separately, the Companion Policy to MI 96-101 helpfully provides more derivatives-specific guidance on the factors the regulators consider relevant in determining whether an entity is a “derivatives dealer” for purposes of MI 96-101.
Reporting Hierarchy. This following hierarchy determines the reporting counterparty under MI 96-101.
Click here to view the table.
Unlike the reporting hierarchies in Quebec and Manitoba, MI 96-101 does not include Canadian financial institutions as a separate category of reporting counterparty.
Substituted Compliance. The substituted compliance provisions are somewhat different from those in Ontario, Manitoba and Quebec, but are just as limited. The first situation where it is available is where the derivative data is reportable in a jurisdiction only because the counterparty is incorporated under the laws of the jurisdiction but that counterparty does not “conduct business in the local jurisdiction other than incidental to being organized under the laws of the local jurisdiction”. Since this is not information that is currently solicited from counterparties (and parties are not likely to build the systems to collect it), we expect that reporting counterparties will simply report rather than relying on substituted compliance.
To rely on substituted compliance (in either case) the derivative must be reported to a trade repository that is recognized in the local jurisdiction. However, the applicable rules can be one or more of the Manitoba, Ontario or Quebec trade reporting rules. The intention is to add EMIR and CFTC rules, but they are not currently covered. In addition, the reporting counterparty must instruct the trade repository to provide the local regulator with access to the data and otherwise use its best efforts to provide access to the data. So, for example, if the local counterparty was a corporation incorporated under Nova Scotia law, but which did not conduct business in Nova Scotia, and which had a head office in Ontario, the derivatives data would have to be reported in compliance with the trade reporting rules in one or more of Manitoba, Ontario or Quebec to a trade repository recognized in Nova Scotia, and the trade repository would have to be instructed to allow the Nova Scotia regulator to have access to the data. It hardly seems worth collecting the information on where the entity conducts business if the reporting counterparty has to tell the trade repository about the connection to Nova Scotia in any event.
The other situation where substituted compliance is allowed is where the derivative is required to be reported solely because the counterparty is a non-local guaranteed affiliate of a local entity. But again, the requirement to provide access to the data to the local regulator in any event renders the exception impracticable.
Comment deadline approaches on proposed amendments in Ontario, Manitoba and Quebec
Meanwhile, the comment period in respect of the most recent set of proposed amendments to the trade reporting rules in Ontario, Manitoba and Quebec will be closing on February 3, 2016.
As we discussed a few months ago, the most significant changes for market participants are the proposed amendments to relieve reporting for certain inter-affiliate transactions. These include a new exemption for end-user local counterparties that have completed trades with their end-user affiliates that are also local counterparties. An end-user is a party that is not a derivatives dealer or a recognized or exempt clearing agency or an affiliated entity of either of these entities (or, in Manitoba and Quebec, a Canadian financial institution or reporting clearing agency). The exemption applies for a counterparty that is a local counterparty in any jurisdiction of Canada. However, the exemption will be of limited use to groups where the treasury function is managed by a non-Canadian affiliate as it requires both parties to be local counterparties in a Canadian jurisdiction which has a trade reporting rule.
Amendments are also proposed to allow end-user local counterparties to benefit from substituted compliance in respect of derivatives transactions entered into with their foreign affiliates. Substituted compliance is available so long as the transaction must be reported pursuant to the law of a specified foreign jurisdiction (for example EMIR and CFTC reporting requirements). A key condition is that the reporting counterparty must instruct the trade repository to which the transaction is reported to provide the relevant regulatory authority with access to the derivatives data that it is required to report pursuant to the applicable Trade Reporting Rule. The scope of this exemption is also somewhat limited in that reporting must be made to a trade repository that is designated or recognized in the local jurisdiction. It will not apply, for example, if a foreign affiliate is reporting to an affiliate of a designated or recognized trade repository. We understand that the regulators are particularly interested in feedback on whether these exemptions for affiliated parties are sufficient to ease the burden on end user affiliates, and in particular on the cost impact any required reporting will have on end users that cannot rely on the exemptions. For other aspects of the proposed amendments see our original post from November 2015.