On June 19, 2014, amendments to the Bank Act received royal assent, allowing the Governor in Council to make regulations regarding a bank’s activities relating to derivatives. The Department of Finance (Canada) (“Finance”) commented that such regulations will facilitate the integration and consolidation of over-the-counter derivatives (“OTC”) regulations with the cooperative capital markets regulatory system. It is also expected that foreign regulator assessment of the Canadian regulatory financial system will be made easier because Finance will be able to ensure that Canadian OTC regulations are equivalent to those abroad. Recall that central clearing of OTC transactions was a key G-20 commitment to reinforce financial stability and was first brought forward in Canada’s 2012 Economic Action Plan.
The Canadian Securities Administrators (“CSA”) have recently issued derivatives regulations for comment that relate to reporting of OTC transactions in trade repositories and the central clearing of OTC transactions. Under the proposed regulations, the obligation to report OTC transactions will lie with the reporting counterparty, which includes persons in the business of trading derivatives such as certain financial institutions.
In the case of the central clearing obligation, all counterparties must submit their derivatives transactions to be cleared by a clearing agency unless they benefit from an exemption such as the “end user” exemption. This exemption applies when a counterparty enters into the transaction to hedge or mitigate commercial risk related to the operation of its business. Financial entities however, including banks, insurance companies and pension funds, are specifically not eligible for the “end user” exemption regardless of the purpose of the derivative transaction.
Currently, Québec is the only province that has already adopted derivatives legislation that concerns, among other things, registration of dealers in derivatives, qualification of derivatives contracts and trade reporting. The regulation regarding the reporting of OTC transactions in Québec is planned to gradually enter into effect starting on October 31, 2014 following the same timeline as that proposed by the CSA.
What will remain to be seen is the level of cooperation and harmonization between the CSA and Finance in the interest of efficiency given that rules for transaction reporting and central clearing are well under way.
Other amendments to the Bank Act concern activities in relation to benchmarks. As defined in the amendments, a benchmark means a price, estimate, rate, index or value that is determined by reference to an assessment of one or more underlying interests. Specifically, a benchmark is used for purposes of determining such things as interest payable, the value of financial instruments and financial performance. As such, any proposed regulations in this area can impact banks as banks rely on benchmarks in their day to day activities.