On November 14, 2013, the Ontario Securities Commission (the “OSC”) published final OSC Rule 91-506 Derivatives: Product Determination and OSC Rule 91-507 Trade Repositories and Derivatives Data Reporting, a copy of which is available [here]. Once approved by the Minister of Finance, the rules will come into force on December 31, 2013. Similar rules were also issued by the Autorité des marchés financiers and  the Manitoba Securities Commission. These rules represent the first set of final rules issued by Canadian securities regulators addressing the regulation of over-the-counter derivatives in Canada. The discussion set out below focuses on the Ontario final rules.


In December 2012, the Canadian Securities Administrators Derivatives Committee (the “Committee”) released Consultation Paper 91-301 that set out model provincial rules dealing with product determination and trade reporting (collectively, the “ModelRules”). The Model Rules built, in part, on the Committee’s previously issued derivatives consultation papers. A copy of BLG’s Derivatives Bulletin describing the key concepts in the Model Rules can be found [here]. In June 2013, the OSC published its proposed rules, the Autorité des marchés financiers and the Manitoba Securities Commission published their proposed province-specific rules and the Alberta Securities Commission, the British Columbia Securities Commission, the New Brunswick Securities Commission, the Nova Scotia Securities Commission and the Financial and Consumer Affairs Authority of Saskatchewan published a multi-province consultation paper containing updated Model Rules. 27 comment letters were received on the proposed provincial rules. The final Ontario rules reflect the Committee’s response to those comments and the harmonized charges made to the province-specific rules.

OSC Rule 91-506 Derivatives: Product Determination (The “Scope Rule”)

The purpose of the Scope Rule is to define those instruments that are derivatives. Initially, the Scope Rule will only be relevant for purposes of OSC Rule 91-507. All other legislation, rules, notices or other policies applicable to derivatives will continue to apply. However, it is expected that the Scope Rule will apply to the rules that will address other aspects of OTC derivatives regulation. As these other regulations are published and finalized, consequential amendments may need to be made to the Scope Rule.

The Scope Rule determines which instruments are derivatives primarily by defining those that are excluded from being a derivative. Instruments that are not derivatives include:

  • those  governed  by  gaming control legislation
  • insurance or annuity contracts
  • currency exchange contracts, provided that the contract physically settles (as opposed to cash settlement) within two business days (rolling spot, FX forwards and similar trades are expressly identified as derivatives)
  • commodity  forward  contracts  where physical delivery is intended and the contract generally does not provide for cash settlement
  • bank and similar deposits and
  • those traded on certain stock exchanges (not including a derivatives trading facility).

For instruments that fall within the definition of both derivatives and securities, generally, those that meet the definition of securities only by reason of being an “investment contract” or an “option” are prescribed to be a derivative; otherwise, such instruments are prescribed not to be a derivative.

The Companion Policy to the Scope Rule further indicates that contracts entered into for consumer, business or non-profit purposes that do not involve investment, speculation or hedging, such as employment contracts, contracts for business purchase and sale transactions and commercial sale arrangements, are not derivatives.

While the Scope Rule is helpful in defining the universe of derivatives to be regulated by the proposed OTC derivatives regime, its limited initial application means that derivatives users must continue to consider the application of certain securities laws and instruments to their trades. The definition of derivative under the Scope Rule does, however, provide clarity to certain market participants, such as money services businesses and commodity risk management firms, that these businesses will be caught under the new OTC derivatives regime.

OSC Rule 91-507 Trade Repositories and Derivatives Data Reporting (The “TR Rule”)

The TR Rule covers two subjects: the requirements in order to become and operate a designated trade repository in Ontario, which become effective on December 31, 2013, and the requirements to report OTC derivative trades, which generally become effective as of July 2, 2014 (although the requirement of a reporting counterparty that is not a derivative dealer to report data only become effective on September 30, 2014 and transactions entered into before July 2, 2014 that expire or terminate on or before December 31, 2014 are not required to be reported).

For entities that wish to establish and operate a trade repository in Ontario, the TR Rule establishes the application process and addresses requirements relating to the general operations of a repository, including: governance; the board of directors; management; the chief compliance officer; fees; providing access to services; the acceptance of data; general communications; due process; data records, security and confidentiality; risk management; and outsourcing.

The other part of the TR Rule addresses the reporting requirements with respect to OTC derivative trades. Subject to a very narrow exemption for commodity trades other than cash or currency where the local counterparty is not a derivatives dealer and has less than $500,000 in aggregate notional value under all outstanding transactions, detailed derivatives data for each OTC transaction must be reported to a designated trade repository. If there is no designated trade repository that accepts derivatives data in respect of a particular trade or asset class, then the data must be reported electronically to the OSC.

The TR Rule includes rules to determine who has the obligation to report. Generally, the reporting counterparty will be the clearing agency for trades that are cleared through a recognized or exempt clearing agency or the derivatives dealer. For transactions between two derivatives dealers or between two local counterparties neither of which is a derivatives dealers, both parties have an obligation to report the transaction, but they may delegate this obligation to avoid double reporting. The intention of the TR Rule is to facilitate data reporting by a single counterparty. Although the reporting counterparty is permitted to delegate this duty to the other party, it should have procedures or contractual arrangements in place to ensure that reporting occurs. We expect that the reporting obligation will generally fall to the financial institution that is a party to the OTC derivative.

The report with respect to the initial creation of the trade is required to be made in real time unless it is not technologically practicable to do so. Life- cycle event data with respect to an existing trade must be reported by the end of the business day on which the life-cycle event occurs. The timing  for the reporting of valuation data depends upon the status of the reporting counterparty: derivatives dealers and clearing agencies are required to report daily and other reporting counterparties are required to report quarterly. The scope of the aggregate data that is required to be reported is quite detailed and will create an onerous reporting burden on financial institutions that write OTC derivatives trades.

The trade repository must make the trade data available to the OSC on a direct, continuous and timely basis. In addition, the counterparties to a transaction are to be provided with access to all derivatives data relevant to the particular trade and each, counterparty is deemed to have provided the consent required to release the data on such basis. Derivatives data is also to be made available on a periodic basis to the public. The public will be able to access aggregate data on open positions, volume, and number and price, as well as breakdowns, where applicable, by currency of denomination, geographic location of the  reference entity or asset, asset class, contract type, maturity, and whether the transaction is cleared.  Under the TR Rule, transaction level data reporting will not apply until December 31, 2014. This 6-month extension was a response to comments that the publication of transaction level data, even with the reporting delays provided for in the TR Rule, could cause harm to the Canadian derivatives market and market participants due to the less liquid nature of the Canadian derivatives market relative to other major  trading  jurisdictions. The Committee determined that a delayed effective date for this requirement would allow time to further consider the appropriateness of the timing of transaction level  public disclosure.

We expect that the TR Rule will have a significant impact on the business processes of derivative market participants and firms that trade in currency exchange contracts that do not meet the criteria in the carve-out for such contracts. An entity that trades OTC derivatives in Ontario needs to consider whether the trade is required to be reported, whether it is a reporting counterparty under the TR Rule, how it will address its or its counterparty’s obligations under the TR Rule in the applicable agreements, and what systems and processes it should put in place to meet its obligations and, if applicable, to capture, process and verify all the required data. As other provinces and territories in Canada adopt their TR Rule, market participants in Canada will need to work through the interaction of the TR Rules in each Canadian jurisdiction and consider whether reporting needs to be made to the trade repository or securities regulator in more than one jurisdiction.