On May 29, 2017, the Ontario Securities Commission (OSC) hosted a half-day roundtable session to discuss the recently published Proposed National Instrument 93-101 – Derivatives: Business Conduct (Business Conduct Rule). Specific details regarding the Business Conduct Rule are discussed in our April 2017 Blakes Bulletin: Canadian Regulators Propose Broad Derivatives Dealer and Adviser Business Conduct Rules.
The roundtable session included a panel of buy-side and sell-side participants from the institutional market, followed by a separate panel of representatives for the retail market. The OSC presented a few general comments on the Business Conduct Rule and put questions to the panels to facilitate discussion. Attendees were invited to identify concerns with the Business Conduct Rule, however, the roundtable did not include a session where the OSC took questions on the rule or responded to feedback.
A transcript from the roundtable is expected to be posted to the OSC’s website in the near future. Highlights from the session are discussed below:
Timing for a Proposed Registration Rule: The notice from the Canadian Securities Administrators (CSA) regarding the proposed Business Conduct Rule originally indicated that a draft proposed derivatives dealer and derivatives adviser rule (Registration Rule) was expected to be published prior to the conclusion of the comment period for the Business Conduct Rule on September 1, 2017. However, it was announced at the roundtable that the CSA will not be publishing the proposed Registration Rule prior to September 1, 2017. The OSC expects a consultation draft of the Registration Rule will be published soon after that date. Recognizing that market participants may wish to comment on the Business Conduct Rule in the context of a proposed Registration Rule, the OSC has indicated that such feedback may be provided during the comment period applicable to the Registration Rule.
Application of the Business Conduct Rule: Suggestions were made by panellists to refine the criteria for determining if a market participant ought to be considered a derivatives dealer subject to the Business Conduct Rule requirements. These included clarifying the application of the business trigger test with respect to buy-side participants (including the suggestion that in order to qualify as a derivatives dealer a party ought to, at a minimum, be offering derivatives products in the market or acting as a market-maker), and establishing a de minimis trading activity exemption from derivatives dealer obligations. The OSC was also encouraged to carefully consider the specifics of exemptions available to foreign derivatives dealers.
Harmonization: A number of industry speakers commented on the value and importance of harmonizing the Business Conduct Rule with other domestic and international standards, in order to reduce the regulatory burden on market participants.
Other Means of Regulating Appropriate Business Conduct: While there was support for the principles advanced in the Business Conduct Rule, questions were raised regarding whether the proposal was needed given that many market participants already adhere to business conduct requirements, either by virtue of other regulatory obligations or internal codes of conduct.
Senior Management Oversight: The OSC characterized the senior management supervisory requirements as “innovative”, but noted that these oversight requirements are similar to those adopted in the U.K. and Hong Kong. Industry participants indicated that it would be of use if the regulators offered further guidelines concerning what they considered to be the appropriate level and involvement of senior management in respect of the oversight function.
Fair Dealing and Conflicts of Interest: The proposed Business Conduct Rule includes various requirements for written disclosures to be provided by derivatives dealers, both to sophisticated counterparties and retail investors. Some buy-side participants questioned the value of “boiler-plate” disclosure that may be offered in response to vague fair dealing and conflict requirements under the Business Conduct Rule.
Phase-in Period: One panellist noted that market participants will need time to design and implement new processes in order to comply with the Business Conduct Rule, and so a meaningful transition period is needed. It was noted that certain other jurisdictions have allowed for periods in excess of a year in order to phase-in similar rules.