Following up on our recent post, below is a more detailed review of the draft rules proposed by several Canadian securities commissions with respect to trade repositories and derivatives data reporting. Specifically, the Ontario Securities Commission, Quebec's Autorité des marchés financiers and the Manitoba Securities Commission published individual proposals, while those jurisdictions that require the implementation of legislative amendments before publishing province-specific rules, namely B.C., Alberta, Saskatchewan, Nova Scotia and New Brunswick, published an updated Model Rule.
Ultimately the proposals take into account many of the comments made earlier this year on the Canadian Securities Administrators’ Draft Model Rules, including those made by ISDA. The redrafted rules are much improved, but some issues remain.
While this post addresses Ontario specifically, the rules will be essentially the same in other jurisdictions in Canada.
Proposed OSC Rule 91-506 Derivatives: Product Determination has been tightened up in a number of significant ways and clarified by additional commentary in the Companion Policy (CP).
- The CP deals specifically with a number of questions raised by commenters with respect to the effect of netting provisions and standard close-out provisions and book-out practices on the ability to rely on the exclusion for cash settled currency spot contracts and commodity contracts, by clarifying that these terms and practices in and of themselves would not indicate an intention to cash settle.
- The settlement period for the currency contract exclusion is extended beyond two days if it is settling in conjunction with a related securities transaction that settles beyond two days.
- Insurance contracts and gaming contracts regulated in foreign jurisdictions (not just Canada as under the Draft Model Rule) have been added to the list of excluded transactions (subject to some conditions).
- The CP clarifies that intangible commodities, such as emissions allowances, are covered by the exclusion.
Meanwhile, proposed OSC Rule 91-507 Trade Repositories and Derivatives Data Reporting has also changed in some material ways, but not all recommendations were accepted.
- By narrowing the definition of “local counterparty”, it has a much narrower extra-territorial scope than the Draft Model Rule. It no longer includes any person simply on the basis of being a registrant or reporting issuer in Ontario, or negotiating or executing the transaction in Ontario, or being a subsidiary of a local counterparty. A local counterparty is an Ontario-based entity or a derivatives dealer doing business in Ontario. It also includes affiliates of either (but only if the local counterparty has guaranteed most of its liabilities).
- End-users are not exempt from reporting requirements, and if they are the local counterparty and their dealer counterparty is not, they remain on the hook for the disclosure.
- TRs will only have to confirm accuracy of data with their participants, not other counterparties.
- It limits the type of data to report for pre-existing trades to accommodate the fact that not all data field information would have been collected for those trades.
- Only “reporting counterparties” must retain transaction records, but the OSC confirmed that it is for the life of the transaction plus seven years, not five.
- It reduces the type of data for public dissemination in response to comments that there was insufficient protection of confidentiality.
- No amendment to deal specifically with block trades was made in response to comments that the rule did not allow sufficient time to hedge. The OSC will consider exemptions on a case-by-case basis.
- It now excludes inter-affiliate trades from public data dissemination requirements, but not disclosure requirements generally.
- Although a TR is not allowed to publicly disclose the identity of counterparties, it isn’t clear that it is permitted to withhold dissemination of trade data if that disclosure could indirectly disclose the parties’ identities given the ability to make pretty good educated guesses in our smaller Canadian market. It isn’t, according to the CP, obligated to make that assessment, but it may have the discretion to do so.
For a more detailed review of the draft rules, see our attached paper.