On December 6, 2012, the Canadian Securities Administrators OTC Derivatives Committee (the "CSA Committee") published CSA Staff Consultation Paper 91-301 Model Provincial Rules – Derivatives: Product Determination and Trade Repositories and Derivatives Data Reporting. The consultation paper delineates the scope of the contracts and instruments that must be reported to trade repositories (the "Scope Rule") and sets out requirements for the designation and operation of trade repositories and the mandatory reporting of derivatives trade data (the "TR Rule").

The TR Rule is based on the recommendations relating to derivatives trade repositories and reporting set out in CSA Consultation Paper 91-402 – Derivatives: Trade Repositories ("CSA Paper 91-402").1 The Scope Rule was initiated as a result of comments by interested parties indicating a need for a uniform definition of "derivative" for regulatory purposes. These are the first two model rules in a series that will implement Canada's G-20 commitments in respect of OTC derivatives regulation.

These new requirements have been published as model rules, rather than as National Instruments, since legal frameworks for derivatives regulation differ across Canadian jurisdictions. The model rules were drafted based on the Ontario Securities Act (the "OSA") and other jurisdictions will be required to make changes to fit their respective regimes.

The model rules have been published for comment, following which the CSA Committee will recommend appropriate revisions, Local regulators will publish their own versions for comment prior to implementation. The goal of the CSA Committee is that each jurisdiction implement the substance, if not the exact text, of the rules.

the scope rule

The OSA broadly defines a "derivative" as "an option, swap, futures contract, forward contract or other financial or commodity contract or instrument whose market price, value, delivery obligations, payment obligations or settlement obligations are derived from, referenced to or based on an underlying interest (including a value, price, rate, variable, index, event, probability or thing)."2 The definition excludes commodity futures contracts and options,3 contracts ordered by the Ontario Securities Commission (the "OSC") not to be derivatives, and contracts or instruments prescribed not to be derivatives by regulation.4 Other provinces are seeking to include definitions of "derivative" in their securities acts.5

Recognizing that it may not be appropriate for every instrument caught by the OSA definition to be governed by rules requiring counterparties to report derivative trades to trade repositories (e.g., because an instrument may be caught by both the rules governing "derivatives" and those governing "securities"), the CSA Committee has, through the Scope Rule, prescribed the following not to be derivatives for the purposes of the TR Rule:

  • contracts or instruments regulated by federal or provincial gaming control legislation;
  • insurance or annuity contracts issued by licensed insurers;
  • spot FX contracts, where physical delivery of the currency must be made or taken within two days, the contract or instrument cannot be rolled over, and cash settlement is not permitted;
  • contracts or instruments that are evidence of bank or credit union deposits; and
  • contracts or instruments for spot or deferred delivery of a "physical commodity", other than cash or currency, where physical delivery of the commodity must be made or taken and cash settlement is not permitted.6

The CSA Committee indicates that "financial commodities such as currencies, interest rates, securities and indexes" would not be considered physical commodities.

The CSA Committee further lists contracts or instruments that, since they are not "derivatives" under the OSA, would not be captured by the TR Rule. They include:

  • consumer contracts or instruments to purchase products or services at a fixed, capped or collared price;
  • guarantees and performance bonds;
  • contracts or instruments representing lending arrangements relating to building an inventory of assets in anticipation of securitizing such assets; and
  • commercial contracts or instruments containing mechanisms indexing purchase price or payment terms for inflation (e.g., by reference to an interest rate).

Under the Scope Rule, contracts or instruments that fit the OSA definition of "derivative", but are also "securities" under the OSA solely because they are "investment contracts" or "options", are prescribed not to be securities for the purposes of the Scope Rule, and are thus subject to the TR Rule.

All other contracts or instruments falling under both the OSA definitions of "derivative" and "security" are prescribed not to be derivatives, and thus not subject to the TR Rule. Structured notes, asset-backed securities, exchange-traded notes, capital trust units, exchangeable securities, income trust units, securities of investment funds and warrants are examples of such instruments. They would remain subject to prospectus and continuous disclosure rules and dealer and adviser registration requirements, as applicable.

The Scope Rule also excludes from the ambit of the TR Rule contracts or instruments used by issuers or their affiliates (i) solely to compensate employees or service providers; or (ii) as financing instruments, where the underlying interest is stock of the issuer or affiliate. Examples of compensatory interests covered by these exclusions include stock options, restricted share units, deferred share units and phantom stock units. A financing instrument must have been issued to raise capital in order for it to be excluded under this provision.

Although the Scope Rule would initially apply only to the TR Rule, the CSA Committee expects that with appropriate alterations, it will eventually apply to existing derivatives provisions and future rules.

the TR rule

The TR Rule sets out: (i) the general requirements that must be met by a trade repository to be "designated" by a local authority, as well as operational requirements for such repositories; and (ii) the requirement on counterparties to report derivatives transactions to designated trade repositories ("DTRs"). The CSA Committee has put forth the TR Rule in an effort to enhance transparency and promote the public interest in the derivatives market, and to provide data that will both permit regulators to accurately assess risk and guide them in formulating policies.

1.    trade repository designation and operational requirements

The OSA permits the OSC to designate a person or company who proposes to carry on business as a trade repository in Ontario.7 The TR Rule requires that prospective DTRs be designated by the regulator.

In order to become a DTR an applicant must provide information sufficient to demonstrate that: (i) designation would be in the public interest; (ii) it is, or will be, in compliance with securities law; and (iii) it has appropriate written rules, policies and procedures.

The CSA Committee anticipates that local regulators will consider numerous factors in considering whether an applicant has demonstrated that designation would be in the public interest, including: (i) whether the DTR has sufficient financial and operational resources; (ii) whether its rules and procedures foster fairness and efficiency in the capital markets and improve transparency in the derivative markets and; (iii) whether it has appropriate policies and systems in place to ensure derivatives data are kept secure and confidential.

Additional applicant requirements are derived from the propositions in the April 2012 Principles for financial market infrastructures report of the Bank for International Settlements and the International Organization of Securities Commissions (the "PFMI Report").8 DTRs may be expected to "observe or broadly observe" all relevant principles in the PFMI Report, even though the TR Rule does not expressly address some of them.

foreign trade repositories

Although the TR Rule requires all trade repositories to be designated in order for counterparties to use them, the CSA Committee recommends that regulators grant exemptions to foreign trade repositories if they are in compliance with "equivalent" regulatory and oversight regimes in their home jurisdictions.

2.    derivatives data reporting

The OSA provides the OSC with the ability to regulate "the listing or trading of publicly traded securities or the trading of derivatives, including rules…requiring the reporting of trades and quotations."9 In addition, an amendment to the OSA, passed by the legislature but not yet in force, will allow the OSC to prescribe "requirements relating to derivatives", including "record keeping, reporting and transparency requirements."10 The TR Rule requires that "derivatives data" for each transaction be reported to a DTR or, if there is no appropriate DTR, to the local securities regulator.

Transactions involving "entering into, assigning, selling or otherwise acquiring or disposing of a derivative" or the novation of a derivative must be reported. "Derivative" is defined in the Scope Rule. This is largely similar to the proposals in CSA Paper 91-402.

reporting counterparties

The TR Rule states that where one counterparty is a derivatives dealer and the other is not, the dealer bears the reporting obligation. In all other situations, both counterparties are responsible for ensuring that the necessary information has been reported to a DTR, unless the two agree in writing that only one of them will be the reporting counterparty. The CSA Committee recommends this in order to avoid "duplicative reporting".

Regardless, if the counterparty that is required or selected to report to a DTR is not a "local counterparty" (e.g., not a reporting issuer or registrant of the local jurisdiction, or did not negotiate or execute any part of the transaction in the local jurisdiction), and it fails to fulfill the reporting obligation, the local counterparty must report all relevant data. A reporting counterparty may delegate the reporting function, but it retains the ultimate responsibility for ensuring such reporting obligation is fulfilled.

data to be reported

The reporting counterparty is required to report "derivatives data" to a DTR. Derivatives data consist of creation, life-cycle and valuation data.

Creation data, which must be reported upon the execution of a trade, include, among other things, basic operational information (including whether the transaction was cleared and whether a broker was used), the material terms of the transaction and the identity of the counterparties.

Life-cycle data consist of changes to creation data and must be reported when such changes arise.

Valuation data consist of the current value of the trade as well as the date and type of valuation. For cleared transactions, valuation data must be reported at the end of every business day. For non-cleared transactions, valuation data must be reported at the end of every business day if the transaction involves a derivatives dealer, and not later than 30 days after a calendar quarter for reporting counterparties that are not derivatives dealers.

Local counterparties are also required to maintain records of derivatives data for the lifetime of the derivative and for seven years thereafter.

when to report

A reporting counterparty is required to make a report in real time, unless it is not "technologically practicable" to do so, in which case the report must be made as soon as technologically practicable and not later than the end of the business day after the event.

unique identifiers

The TR Rule requires that reporting counterparties include three "identifiers" with their reports. The "legal entity identifier" ("LEI") identifies the counterparties using the standards set out in the Global Legal Entity Identifier System (the "System").11 If the System is not available to a counterparty at the time it must make a report, the DTR must assign it a substitute LEI until the counterparty is assigned an LEI pursuant to the System.

Additionally, the "unique transaction identifier", delineates individual trades and is assigned by the DTR. Finally, the "unique product identifier", is assigned to each transaction based upon its "taxonomy" and need not be provided if international or industry standards for such identifiers are not available at the time the reporting obligation arises.

pre-existing derivatives

Data on derivatives contracts outstanding on the date the rule comes into force must be reported to a DTR not later than 365 days thereafter. However, pre-existing derivatives that expire or terminate within that period need not be reported.

access to data

The TR Rule requires DTRs to provide local regulators with "direct, continuous and timely electronic access" to data, as well as to fulfill ad hoc data requests. DTRs are also required to provide transaction counterparties with access to all relevant derivatives data.

The public's access to derivatives data is restricted under the TR Rule. DTRs must periodically provide aggregate transactional data to the public. They must also provide the principal economic terms of each reported transaction to the public no later than one day after receiving them if the reporting counterparty is a derivatives dealer or two days thereafter in all other cases. DTRs may not disclose the identities of counterparties to the public.

The time delays on public disclosure apply to all transactions, regardless of their size, and there would appear to be no explicit provision for publication delays specifically on particularly large "block trades", as proposed in CSA Paper 91-402.


While local regulators are given room for discretion in granting exemptions to the TR Rule, the rule specifically provides that a local counterparty need not report physical commodity transactions that would otherwise be subject to a reporting obligation if the party has less than $500,000 "notional value" under all outstanding derivatives contracts. If the other counterparty's total derivatives notional value is above the threshold, it must report the required data. This exemption applies to the requirement to report data to trade repositories but not to other aspects of the TR Rule, such as the requirement to maintain derivatives data.

effects of these proposals

The rules described above represent a serious and tangible step toward bringing derivatives markets into the daylight. The requirements set out in these rules are meant to implement regulatory oversight in the derivatives markets while not placing undue burden on market participants. Accordingly, the CSA Committee has signaled flexibility, particularly by encouraging local regulators to grant exemptions for foreign-based trade repositories facing an equivalent regime at home. Only time will tell whether the rules have brought regulators closer to their goal without frustrating the market in the process.

next steps

Interested parties may submit comments on the two model rules by February 4, 2013. Particular feedback is sought on the appropriateness of the exemption for physical commodity transactions with counterparties having less than $500,000 notional value of all outstanding derivatives. We are available to assist market participants who wish to submit comments to the CSA Committee about the model rules discussed in this bulletin, and invite market participants to discuss any comments and questions with us.