On May 12, 2016, the securities regulators in Ontario, Quebec and Manitoba announced their respective approaches with respect to the need to report derivative transactions entered between affiliates ("Inter-Affiliate Trades:).
While the approaches in these three provinces are each slightly different, the end result provides an exemption from the trade reporting requirements currently in place in those jurisdictions if the Inter-Affiliate Trade is among "end users". In order be an "end-user" and take advantage of these exemptions, effectively none of the parties can be:
- a derivatives dealer;
- a clearing agency; or
- an affiliate of a derivatives dealer or clearing agency.
As a bit of history, none of the trade reporting regimes of Ontario, Quebec and Manitoba originally included an exemption for Inter-Affiliate Trade Reporting (other than the reporting of Inter-Affiliate Trades was originally scheduled to be implemented approximately six months after other non-Inter- Affiliate Trade reporting).
Just prior to the implementation of Inter-Affiliate Trade reporting requirements in 2015:
- the Ontario Securities Commission ("OSC") issued OSC Staff Notice 91-703, in which the OSC stated it would not enforce Inter-Affiliate Trade reporting requirements as long as the counterparties were end-users (the "OSC No Action Notice"); and
- the securities regulators in Quebec and Manitoba issued temporary orders that provided trade reporting exemptions for certain Inter-Affiliate Trades amongst end-users (the "Temporary Orders").
Further, in November of 2015, all three of these securities regulators published for comment proposed amendments to their respective trade reporting regimes (the "November 2015 Proposals"). While not precisely the same, the gist of the November 2015 Proposals was that:
- with respect to Canadian affiliates (really, Canadian local counterparties), there would be no reporting of Inter-Affiliate Trades if both parties were end-users; and
- with respect to affiliates that are organized outside of Canada or have a principle place of business outside of Canada, as long as the counterparties and their affiliates were end-users, there would be no need to report Inter-Affiliate Trades if the transaction was reported to a designated trade repository pursuant to:
- the laws of another province of Canada; or
- the laws of certain specified foreign jurisdictions.
In January of 2016, the remaining provinces and territories of Canada (the "Remaining Jurisdictions") published their own "finalized" trade reporting rules (with first reporting scheduled to occur on July 29, 2016). However, in February of 2016, the Remaining Jurisdictions proposed amendments to the finalized rules that would provide an exemption for reporting of certain inter-affiliate trades which are very similar to the November 2015 Proposals (including the distinction between Canadian and non-Canadian affiliates).
However, with yesterday's announcement, the securities regulators in Ontario, Quebec and Manitoba have, at least for now, abandoned the approach where there is a distinction between Canadian and non-Canadian affiliates.
We state that this approach may be temporary as all three regulators have clarified that they are further studying this issue and monitoring international regulators' approaches with respect to end-user Inter-Affiliate Trade reporting. Further, all three have indicated that they intend to amend their rules at some point to require reporting of Inter-Affiliate Trades with non-Canadian entities that introduce risk to their respective markets.
In the interim, the regulators in Quebec and Manitoba are keeping the Temporary Orders in place.
The OSC, on the other hand, took a different approach. The OSC has amended its trade reporting rules to provide the end-user exemption effective as of July 29, 2016 and it has repealed the OSC No Action Notice (effective as of May 12, 2016). While the OSC No Action Notice has technically been repealed and the amendments providing the end-user exemption for the reporting of Inter-Affiliate Trades does not come into force until July 29, 2016, we have received comfort from the OSC that it does not intend to require the reporting of Inter-Affiliate Trades amongst end-users from now until July 29, 2016.
With respect to the Remaining Jurisdictions, it is not clear whether or not they will proceed with their exemptions for the reporting of Inter-Affiliate Trades as proposed in February (with a distinction between Canadian and non-Canadian counterparties) or if they will adopt an approach similar to that adopted by Ontario, Quebec and Manitoba.
Hopefully, the Remaining Jurisdictions will clarify their approach well in advance of the scheduled first reporting date of July 29, 2016.