On June 6, 2013, the Ontario Securities Commission (the OSC) published for comment Proposed OSC Rules 91-506 – Derivatives: Product Determination and 91-507 – Trade Repositories and Derivatives Data Reporting (together, the Proposed Rules). Concurrently, certain other provinces released publications contemplating a substantially similar regime. The OSC is accepting comments on the Proposed Rules until September 6, 2013.
The Proposed Rules require that over-the-counter derivative transactions be reported to a designated trade repository and outline specific parameters for such reporting. This note briefly summarizes key aspects of the Proposed Rules.
What transactions must be reported?
Under the Proposed Rules, most over-the-counter derivatives transactions will be required to be reported. Examples of reportable derivatives include interest rate swaps, equity swaps, credit swaps and foreign exchange forwards and swaps. Contracts that will not be required to be reported include insurance and annuity contracts, compensation instruments (e.g., stock options), financing instruments (e.g., warrants), deliverable commodity transactions and spot foreign exchange transactions.
Reporting will be required even if the two parties to the over-the-counter derivatives transaction are affiliated entities. Reporting will also be required for transactions entered into prior to the Proposed Rules coming into force, but that do not expire or terminate within one year of the Proposed Rules coming into force.
Who is required to report?
The Proposed Rules will oblige a “local counterparty” to report its derivatives transactions to a designated trade repository. A “local counterparty” is:
- a counterparty organized under the laws of Ontario or with its head office or principal place of business in Ontario;
- a counterparty registered or subject to registration as a derivatives dealer in Ontario; or
- an affiliate of one of the foregoing counterparties that is responsible for the liabilities of that counterparty (e.g., under a guarantee).
If a “local counterparty” is a party to a transaction, the following hierarchy will be used to determine which counterparty must act as the “reporting counterparty”:
- Cleared transactions – the clearing agency is the reporting counterparty;
Uncleared transactions –
- if the transaction is between a dealer and a counterparty that is not a dealer, the dealer is the reporting counterparty;
- otherwise, the party agreed to by the parties is the reporting counterparty or, if the parties do not so agree, both parties are the reporting counterparties.
In transactions where the “reporting counterparty” is not a “local counterparty”, the “local counterparty” will have ultimate responsibility to ensure that the transaction is properly reported.
What data is required to be reported and when?
The Proposed Rules contemplate that derivatives transaction reporting will take place in “real time” (unless technologically impracticable, in which case reporting must take place by the end of the business day following the date of the reportable event), as follows:
- Creation data (i.e., operational data, principal economic terms, counterparty information and event data) – reported upon transaction execution by the reporting counterparty;
- Lifecycle data (i.e., changes to previously-reported creation data) – reported at the end of the applicable business day by the reporting counterparty; and
Valuation data (i.e., data reflecting the current value of the transaction) –
- cleared transactions - reported daily by the clearing agency and the local counterparty;
- uncleared transactions - reported daily by each local counterparty that is a dealer and within 30 days of the end of each calendar quarter by each local counterparty that is not a dealer.
Consequently, both dealers and end users may be required to report certain types of data to designated trade repositories. While any counterparty may “delegate” the reporting of data to a third party, the counterparty will remain ultimately responsible for ensuring the timely and accurate reporting of the data.
Who will have access to data?
Designated trade repositories will be required to disclose derivatives data to the OSC and each counterparty to the applicable transaction. The Proposed Rules also contemplate publicly available aggregate data on open positions, volume, number and prices and certain other information, as well as transaction level reports (which do not disclose the identities of the counterparties). No data regarding inter-affiliate transactions will be made publicly available.
When do the obligations come into force?
There is no certainty as to when the Proposed Rules and substantially similar rules in other jurisdictions of Canada will come into force. We expect that the earliest coming into force date would be in the first half of 2014, with reporting obligations for dealers commencing six months thereafter and for other reporting counterparties nine months thereafter. Data in respect of pre-existing transactions that do not expire or terminate within one year of the Proposed Rules coming into force will be required to be reported within one year of the Proposed Rules coming into force.
What exemptions are available?
The OSC contemplates that exemptive relief may be available for entities reporting derivatives data pursuant to the rules of an equivalent jurisdiction, provided that all of the information otherwise required to be reported under the Proposed Rules is included in such foreign reports. There are no assurances that the Proposed Rules will require reporting of the same or less data than what is currently required to be reported in the United States, and what is proposed to be required to be reported in Europe. Therefore, the extent to which such exemptive relief will be available if a reporting counterparty reports in these jurisdictions is unclear.