On November 14, 2013, the Ontario Securities Commission (OSC) released its final rules regarding (i) how financial products will be categorized as derivatives, and (ii) data reporting requirements in relation to derivatives trades.
The OSC published OSC Rule 91-506 Derivatives: Product Determination (the PD Rule) and its companion policy 91-506CP, which will be effective starting December 31, 2013, and OSC Rule 91-507 Trade Repositories and Derivatives Data Reporting (the TR Rule) and its companion policy 91-507CP. Reporting obligations for derivative dealers will commence on July 2, 2014, and for all other parties on September 31, 2014.
OSC Rule 91-506 Derivatives: Product Determination
The Securities Act (Ontario) (the Act) defines a derivative as any 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). This broad definition technically captures many contracts and financial instruments that the OSC has no intention to regulate as derivatives. To rectify this, the PD Rule clarifies the meaning of a “derivative” by excluding the following from falling under the definition:
- derivatives trading on recognized or exempt exchanges regulated by a Canadian securities regulatory authority or a foreign securities regulator in a jurisdiction that is party to the International Organization of Securities Commissions’ Multilateral Memorandum of Understanding;
- regulated gaming contracts;
- regulated insurance contracts;
- currency exchange contracts for physical settlement within two days (i.e., foreign exchange services);
- physically settled commodity forward contracts that do not permit cash settlement in the ordinary course;
- evidence of deposits at banks, credit unions, or loan and trust companies;
- stock options of listed issuers used solely for compensation where the underlying interest is a share of the issuer or an affiliate; and
- any contract that fits the definition of both a security and derivative under the Act unless it fits these definitions solely because it is an “investment contract” or “option.”
Any contract or instrument excluded from the definition of “derivative” is not required to be reported under the TR Rule.
OSC Rule 91-507 Trade Repository and Derivatives Data Reporting
The TR Rule sets out (i) the requirements for acting as a trade repository under the Act, including the requirements for becoming a designated trade repository (TR) and their ongoing obligations, and (ii) reporting requirements that apply to counterparties of derivatives transactions. This summary will focus on the latter rules, which have a wider application.
Who is required to report
All derivatives transactions involving a local counterparty are required to be reported to a TR or to the OSC if no TR is available. A “local counterparty” means a counterparty that is organized under the laws of Ontario or has its head office or principal place of business in Ontario (or is the affiliate or guarantor of such entity) or who is registered as a derivatives dealer or in an alternative category under Ontario securities law. Where a trade is cleared by a recognized or exempt clearing agency, the recognized or exempt clearing agency is responsible for reporting. Where the trade is not cleared, the obligation to report falls on each derivatives dealer involved in the trade. If one of the counterparties of the uncleared trade is not a derivatives dealer, the obligation falls on the derivatives dealer, and if both counterparties of the uncleared trade are not derivatives dealers, the obligation falls on both of them unless they agree that one of them will report.
There are cases in which the obligation to report falls on the local counterparty to the transaction. Where a derivatives dealer is the reporting party but is not a local counterparty, if that dealer fails to report the transaction within two days of its occurrence, then the obligation to report falls on the local counterparty.
The reporting counterparty may delegate its reporting obligations.
What data must be reported
Transaction counterparties will each have a legal entity identifier under the Global Legal Entity Identifier System. The derivatives transaction report will include such legal entity identifiers together with a unique transaction identifier established by the TR and unique product identifier, which is a taxonomic product code also established by the TR. The reporting party must send a report to the designated TR (and to the same TR thereafter) detailing all the creation data that encompasses the counterparty identifiers, operational data including time stamps of clearing, and the principal economic terms of the transaction including pricing (Creation Data). The reporting party is also obliged to provide updates to the TR of any changes to the original Creation Data (Life Cycle Data) as well as the value of the transaction (Valuation Data).
The Creation Data for pre-existing transactions must also be reported to a TR if there are outstanding contractual obligations under such trade as of July 2, 2014. Although the reporting requirements for pre-existing contracts are somewhat less onerous because Life Cycle Data and Valuation Data are not required reported, the material details required are substantially similar.
When must the data be reported
Creation Data must be reported to the TR in real time and in any event no later than the end of the next business day following the trade date. Life Cycle Data must be reported by the end of the business day on which the change occurred. Valuation Data must be reported daily if the reporting party is a clearing agency or derivatives dealer and, in all other instances, no later than 30 days following the end of each calendar quarter. Pre-existing derivatives transactions must be reported to the TR no later than December 31, 2014.
Publicly available information
The TR must make aggregated data with respect to open positions, volume, number and prices publicly available. The public may also access individual transaction data through the TR including the principal economic terms and pricing but may not access the identities of the counterparties to the trades.