The Canadian Securities Administrators (CSA) have issued a number of consultation papers regarding the regulation of over-the-counter (OTC) derivatives. In November 2010, the CSA Derivatives Committee (Committee) issued a consultation paper, CSA Consultation Paper 91-401 on Over-the-Counter Derivatives Regulation in Canada, in respect of the G20 commitment to develop oversight of the OTC derivatives market. The consultation paper notes that the global financial crisis highlighted the considerable risks that OTC derivatives can pose to the financial system. Key recommendations in that consultation paper include:
- Mandatory electronic trading of OTC derivatives which are capable of being traded on an organized trading platform (e.g., products which are sufficiently standardized and liquid) and which pose a systemic risk to the market.
- Mandatory central clearing of OTC derivatives that are determined to be appropriate for clearing and capable of being cleared.
- Mandatory reporting of all trades in derivatives by Canadian counterparties.
- Providing end-user exemptions for certain defined categories of end-users where exemptions from the regulatory requirements would be appropriate.
Since November 2010 the Committee has issued a number of additional consultation papers. The following provides an overview of those consultation papers.
CSA Consultation Paper 91-402 Derivatives: Trade Repositories
This paper discusses the importance of reporting OTC derivatives data to trade repositories in terms of improving market transparency and thereby assist in providing effective oversight of the derivatives market. The Committee recommends granting provincial regulators the ability to make rules mandating that all transactions in OTC derivatives entered into by a Canadian counterparty be reported to an approved trade repository and makes a number of recommendations in respect of trade repository requirements.
Since the publication of the consultation paper, the CSA has issued another paper, CSA Consultation Paper 91-301 Model Provincial Rules – Derivatives: Product Determination and Trade Repositories and Derivatives Data Reporting, which provided model provincial rules on product determination, trade repositories and derivatives data reporting. That paper was followed up with Multilateral CSA Staff Notice 91-302 Updated Model Rules – Derivatives Product Determination and Trade Repositories and Derivatives Data Reporting, which provided updated model rules on derivatives product determination, trade repositories and derivatives data reporting.
Subsequently the Ontario Securities Commission (OSC) published its final rules. OSC Rule 91-506 Derivatives: Product Determination and OSC Rule 91-507 Trade Repositories and Derivatives Data Reporting (as amended, effective July 2, 2014, and proposed to be amended effective September 9, 2014). The OSC rules are discussed in our bulletins: The New Ontario Derivatives Reporting Requirements: Are You Ready?, Changes to New Ontario Derivatives Reporting Requirements and Further Changes to New Ontario Derivatives Reporting Requirements.
CSA Consultation Paper 91-403 Derivatives: Surveillance and Enforcement
This paper discusses the need for effective surveillance and monitoring of OTC derivatives transactions, harmonized market conduct rules and consistent enforcement in the OTC derivatives market so as to bring about greater transparency in the OTC derivatives markets, combat improper market conduct and help support Canada’s G20 commitments. The paper sets out the Committee’s recommendations regarding surveillance, monitoring and enforcement of market conduct in the OTC derivatives markets.
CSA Consultation Paper 91-404 Derivatives: Segregation and Portability in OTC Derivatives Clearing
This paper discusses the need for segregation of assets and the portability of those assets between clearing members of an OTC central counterparty. As initiatives promoting the clearing of OTC derivatives transactions will drive certain market participants to clear such transactions through intermediaries, the Committee notes its belief that effective segregation and portability measures will protect customer positions and collateral. The Committee’s recommendations for segregation and portability are set out in the paper as is the need for such requirements to be supported by federal and provincial law.
Since the publication of this paper the CSA has issued CSA Staff Notice 91-304 Model Provincial Rule – Derivatives: Customer Clearing and Protection of Customer Collateral and Position. The proposed rule sets out detailed rules on the clearing obligations of clearing agents, clearing members and clearing intermediaries, including requirements in respect of the treatment of customer collateral, such as segregation, use and portability of customer collateral, as well as detailed record keeping requirements.
CSA Consultation Paper 91-405 Derivatives: End-User Exemption
In this paper the Committee discusses the concept of providing exemptions from a number of regulatory requirements to certain types of market participants or end users. The paper discusses the criteria that should be used to determine end-user eligibility. The Committee notes that an “end user exemption” is expected to be available to market participants that are not in the business of derivatives trading but trade in OTC derivatives to mitigate commercial risks related to their business.
The end user exemption is discussed in further detail in our bulletin: Canadian Securities Administrators Consultation Paper 91-405 Derivatives: End-User Exemption. Since the publication of this paper the concept of an end user exemption has been included in the proposed model rule (CSA 91-303) on central counterparty clearing, discussed below.
CSA Consultation Paper 91-406 Derivatives: OTC Central Counterparty Clearing
In this paper the Committee notes that the adoption of requirements related to OTC central counterparty clearing is considered by the Committee to be a key element in addressing the reform of financial markets in Canada and that it will enhance the overall mitigation of risks. The Committee proposes that steps be taken to make central counterparty clearing of eligible OTC derivatives mandatory.
Since the publication of this paper, the CSA has published CSA Staff Notice 91-303 – Proposed Model Provincial Rule on Central Counterparty Clearing of Derivatives (CSA 91-303). CSA 91-303 would impose obligations on local counterparties to a transaction in a clearable derivative to submit the transaction to a clearing agency. As currently drafted the obligation to clear would not apply to certain end users. See: Canadian Securities Administrators Consultation Paper 91-405 Derivatives: End-User Exemption.
CSA Consultation Paper 91-407 Derivatives: Registration
This paper provides an overview of the Committee’s proposed registration regime applicable to derivatives market participants. It identifies the proposed categories of registration, registration requirements, including requirements applicable to proficiency, capital requirements and conduct. It also discusses the business trigger for registration as a derivatives dealer or adviser. The proposed registration regime is discussed in further detail in our bulletin: Canadian Securities Administrators CSA Consultation Paper 91-407 Derivatives: Registration.
The various consultation papers issued by the Committee identify a significant number of issues that need to be addressed in developing appropriate regulation of OTC derivatives. As noted above, model rules have been prepared in respect of mandatory trade reporting and clearing, with certain jurisdictions implementing trade reporting rules. Other jurisdictions are expected to follow with implementation of trade reporting rules once legislative authority has been implemented.