On April 4, 2017, the Canadian Securities Administrators (CSA) published a notice and request for comment on its proposed business conduct rule that sets out a regime for regulating the conduct of dealers and advisors in over-the-counter derivatives markets. The CSAs Proposed National Instrument 93-101 Derivatives: Business Conduct along with Proposed Companion Policy 93-101 Derivatives: Business Conduct (together the proposed rule) is aimed at protecting parties using over-the-counter derivatives products by requiring derivatives firms to meet certain minimum standards in relation to their business conduct towards their customers and counterparties. The types of measures proposed will be familiar to dealers and advisors in securities markets, albeit with modifications tailored to the nature of the OTC derivatives market. The introduction of this proposed rule is the first of the two highly anticipated regulatory developments in the OTC derivatives space, with the second being the derivatives dealer registration rule, which is expected to be published in the summer of this year. Comments on the proposed rule are being accepted until September 1, 2017.

A separate regime for market conduct and derivatives dealer registration

The CSAs decision to separate the market conduct rule (which will apply to a certain extent to federal financial institutions) from the derivative dealer registration rule may foreshadow that federal financial institutions will be exempt from the registration rule.

Two-tiered approach to regulating market conduct

The proposed rule sets out a two tiered approach to regulation. In the first instance, certain minimum standards (e.g. fair dealing, conflict of interest management, know-your-client and duties imposed on ‘senior derivatives managers’) will apply to the conduct of all “derivatives dealers” and “derivatives advisors” (how those terms are defined will be the subject of a later post – but note that the proposed rule will apply regardless of whether or not they are registered, required to be registered or exempted from the requirement to be registered). The additional disclosure requirements, restrictions and standards of care, among other things, will only apply to activities involving less sophisticated derivatives parties (i.e. the retail market).

The criteria used to distinguish between the retail market and the more sophisticated parties that use OTC derivatives products is based on indicia of sophistication and financial thresholds, with the lighter regulatory touch reserved for dealings with customers or counterparties that qualify as “eligible derivatives parties”. According to the CSAs notice, the proposed definition of “eligible derivatives parties” is generally consistent with definitions that many of you will already be familiar with, such as the definition of “accredited counterparty” in the Quebec Derivatives Act, as well as the definition of “qualified party” found in the blanket orders relating to OTC derivatives trades that are currently in place in certain provinces.

150-day comment period and proposed dealer registration rule

The 150 day comment period (until September 1, 2017) is designed to give market participants enough time to review the proposed rule alongside the proposed derivatives dealer registration rule, which is expected to be published in the summer of this year. We anticipate that once the CSA has time to consider the feedback it receives on the proposed rule that there will be a second iteration of the rule before it is published it its final form. We also understand that securities commissions will be holding roundtable discussions during the comment period to solicit feedback on the proposed rule.

Stay tuned - we expect to post more detailed analysis on this development in the upcoming weeks. In the meantime, we recommend that you review the CSAs notice to the proposed rule in order to help you start thinking about how it might impact your activities and internal policies.