Canadian securities regulators announced today that trade reporting requirements for over-the-counter (OTC) derivatives transactions that involve “local counterparties” in the provinces of Ontario, Québec and Manitoba will now commence on October 31, 2014. This new date will apply to trades to be reported by derivatives dealers and clearing agencies; reporting for such trades had been scheduled to commence on July 2, 2014. Other trade reporting deadlines will also shift as a result of today’s announcement. Trades involving two end users (i.e., not involving a dealer or clearing agency) will now be subject to the reporting requirements commencing on June 30, 2015.
The remainder of this Osler Update outlines the current status of OTC derivatives regulatory reform in Canada, with an emphasis on the trade reporting rules.
Trade reporting rules in the provinces of Ontario, Québec and Manitoba (see, for example, OSC Rule 91-506 – Derivatives: Product Determination and OSC Rule 91-507 – Trade Repositories and Derivatives Data Reporting) will require most OTC derivatives transactions (including interest rate swaps, equity swaps, credit swaps, foreign exchange forwards and most cash-settled commodity derivatives) involving a “local counterparty” in the three provinces to be reported to a designated trade repository in the local province. As a result of today’s announcement, reporting obligations will commence on October 31, 2014 for transactions involving a derivatives dealer or that are cleared by a clearing agency. Reporting obligations for all other transactions (e.g., transactions between two end users) will commence on June 30, 2015.
In order to prepare for trade reporting, any entity trading an OTC derivative that is subject to reporting in Ontario, Québec or Manitoba must take steps to obtain a Legal Entity Identifier (an LEI). The Ontario Securities Commission has published guidance on obtaining an LEI, available here. Entities should also be prepared to complete a Canadian Representation Letter, which is a template letter prepared by ISDA that allows market participants to provide counterparties with information needed to assess how Canadian reporting requirements may apply to them. In addition, derivatives dealers, clearing agencies and end users subject to the reporting requirements should plan to establish connections to entities that will be regulated as trade repositories in Ontario, Québec and/or Manitoba. At present, ICE Trade Vault Canada, LLC and DTCC Data Repository (U.S.) LLC have applied to be regulated in the three provinces.
Canadian jurisdictions other than Ontario, Québec and Manitoba have not yet adopted trade reporting rules for OTC derivatives transactions. However, it is expected that other provinces and territories will soon announce the adoption of trade reporting rules that are substantially similar to the rules adopted in those three provinces.
Current Status of Other Proposed Derivatives Regulations
Central Counterparty Clearing
The CSA Derivatives Committee (Committee) recently published for comment CSA Staff Notice 91-303 Proposed Model Provincial Rule on Mandatory Central Counterparty Clearing of Derivatives (Model Clearing Rule) and CSA Staff Notice 91-304 Model Provincial Rule – Derivatives: Customer Clearing and Protection of Customer Collateral and Positions (Model Customer Collateral Rule). If adopted, the Model Clearing Rule would mandate that any “clearable derivative” transaction entered into by a local counterparty must be submitted to a central counterparty for clearing, subject to certain exceptions. In addition, the Model Customer Collateral Rule would prescribe detailed requirements for clearing agencies, clearing members and clearing intermediaries with regard to how they are permitted to deal with customer collateral. It is expected that draft provincial rules based on the Model Clearing rule and the Model Customer Collateral Rule will be published in late 2014, with final rules adopted in 2015 at the earliest.
Last year, the Committee published for comment CSA Consultation Paper 91-407 Derivatives: Registration (Registration Proposal), which outlines a proposed registration regime for derivatives market participants. Registration is contemplated at both the firm level and the individual level. At the firm level, three registration categories are envisioned: derivatives dealer, derivatives advisor and large derivatives participant. The Registration Proposal details the triggers for each registration category as well as exemptions from registration and certain ongoing requirements for registrants. These requirements relate to proficiency, gatekeeping, financial stability and solvency, compliance systems and internal business conduct, honest dealing and holding client/counterparty assets. The Committee received dozens of comment letters relating to the Registration Proposal. It is anticipated that the Committee will publish another consultation paper in 2014 to refine the recommendations made in the Registration Paper.
Certain Canadian securities regulators, including regulators in Ontario, Québec, Alberta and British Columbia, have issued interim exemption orders to a number of non-Canadian swap exchange facilities (SEFs), which exempt them from the obligation to be recognized as an exchange in the local Canadian jurisdiction. A list of SEFs that have obtained this exemptive relief in Ontario is available here. It is expected that the Committee will publish a consultation paper relating to SEFs and electronic trading of derivatives in Canada sometime in 2014.