Canadian Structured Finance Law : Canadian Structured Finance Law: Securitization/OTC Derivatives Blog by Stikeman Elliott Lawyers & Attorneys

Margaret Grottenthaler and Sumeet Thind -

As we discussed last month, the Canadian Securities Administrators Derivatives Committee recently published Consultation Paper 91-407 Derivatives: Registration, which contains regulatory proposals specific to the implementation of a registration regime for derivatives market participants in Canada. Under the Paper’s proposals, the imposition of “derivative-appropriate” registration requirements would be based on the type of activity conducted by derivative market participants regardless of the nature of the underlying asset.

The Committee developed the proposals in light of Canada’s G20 commitments to improve the regulation and oversight of OTC derivatives markets and with consideration of derivatives registration regimes in the U.S. and Europe. While the Committee also considered the existing securities regulatory framework, the proposed business triggers for derivatives registration and the requirements applicable to registrants would be substantially different than those applicable in the securities context, given the differences in the purpose of trading, the existence of risk-amplifying leverage in most categories of derivatives and the complexity of derivatives contracts.

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Margaret Grottenthaler -
 
According to the Ontario budget released today, personal property security legislation will be amended to make it easier for businesses and financial institutions to provide or obtain first‐priority security interests in cash collateral. Sound familiar? That’s what the last budget said. But the budget does recognize that significant progress has been made on the government's proposals, and key aspects will be finalized pursuant to further consultations.

I think we can read into that that the government generally accepts the approach of the OBA’s Personal Property Security Law sub-committee proposing a perfection by control regime for cash, but that there are some details to work out. We all know the devil is in the details though!

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Margaret Grottenthaler -

On May 1, the U.S. Securities and Exchange Commission proposed new rules and interpretive guidance setting out how the comprehensive regime for regulating swaps introduced by Dodd-Frank would apply to cross-border activities involving securities based swaps regulated by the SEC.

Of interest to Canadian market participants is that the SEC's proposals adopt a substituted compliance approach and provide some detail around how that will work in cross-border transactions. It proposes a regime whereby there may be substituted compliance accepted for some purposes (e.g. registration) but not others (e.g. trade reporting) depending on the SEC’s position with respect to regulation of that area in the substituted jurisdiction.

The SEC is accepting public comments on the proposed rules, including potential alternatives, for 90 days after publication in the Federal Register. For more information, see SEC Release No. 34-69490.

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The European Commission recently prepared a brief report of the OTC Derivatives Regulators Group that sets out the progress to date made among international regulators with regards to dealing with the extra-territorial aspects OTC derivatives regulation.

Specifically, the report considers such issues as (i) the scope of regulation and recognition, equivalence or substituted compliance for cross-border compliance; (ii) the bases for determinations of comparability of the applicable regime in a jurisdiction; (iii) the treatment of regulatory gaps; (iv) the understanding among regulators on the timing of new regulatory requirements; (v) the understanding on sharing of information and supervisory and enforcement cooperation; and (vi) data access.

The report also sets out the expected issues to be considered in the upcoming months, including with respect to identifying issues regarding the provision of information to trade repositories, as well as regulators' access to such trade repositories.

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The Canadian Securities Administrators today released the latest in a series of consultation papers considering the regulation of derivatives in Canada. Specifically, CSA Consultation Paper 91-407 considers the regulation of derivatives market participants through the implementation of a registration regime.

Under the recommended regime articulated by the paper, three categories of registration would be created, namely those of (i) derivatives dealers, being persons carrying on the business of trading in derivatives or holding themselves out to be carrying on that business; (ii) derivatives advisers, being those carrying on the business of advising others in respect of derivatives, or who hold themselves out to be in that business; and (iii) large derivative participants, being entities, other than derivatives dealers, that have a substantial aggregate derivatives exposure.

Those required to be registered under the proposed regime would then be subject to various requirements respecting such things as proficiency, solvency, honest dealing obligations, and gatekeeper and business conduct requirements in the case of derivatives dealers and advisers. Exemptions from registration requirements would also be available in certain circumstances. For example, clearing agencies would generally not have to register, and foreign derivatives advisers and dealers would be exempted from specific regulatory requirements where they are subject to equivalent requirements in their home jurisdictions.

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P. Jason Kroft, Jeff Hershenfield and Sumeet Thind -

Almost two years after the passage of the Dodd-Frank Act, the overhaul of the US derivatives market is rapidly shifting into the implementation phase. While most provisions of the Dodd-Frank Act are directed at US Swap Dealers (SDs) and Major Swap Participants (MSPs), some of the Dodd-Frank rules also affect Canadian counterparties that don't deal in or speculate with swaps but use swaps merely to hedge exposures in their business or investments (End-Users). By May 1, 2013, all End-Users must have provided their SDs with certain information and representations in order to enable SDs to comply with the Commodity Futures Trading Commission’s external business conduct rules (the Business Conduct Rules).

It is important to note that SDs will only continue offering and executing swaps with End-Users who have provided such information. As such, End-Users who have not already been contacted by their SD counterparties regarding this deadline may want to consider approaching the relevant SDs to discuss this matter, as these rules may have application for Canadian End-Users that engage in derivatives transactions with US Swap Dealers.

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The Ontario Securities Commission today released its draft statement of priorities for the upcoming year, which sets out the actions the OSC intends to take during fiscal 2013-2014.

Key OSC priorities include: (i) expanding outreach to the investor community; (ii) publishing an initial assessment of the application of the best interest standard for advisers and dealers; (iii) providing investors with more effective and meaningful disclosure through publication of a rule requiring advisers and dealers to provide cost disclosure and performance reporting in client statements, as well as publication of final proposals for delivery of Fund Facts; (iv) advancing the discussion on mutual fund fees and fees for other investment products; (v) considering the regulatory issues posed by new capital-raising strategies such as crowdfunding; (vi) examining issues associated with the evolution of markets, including electronic trading and the impact of the order protection rule; (vii) intensifying the enforcement program and targeting the most serious harm; and (viii) developing rules for an OTC derivatives regulatory framework, including for clearing and trade reporting.

The OSC is accepting comments on its draft statement until June 3, 2013. For more information, see OSC Notice 11-768.

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The Ontario Securities Commission yesterday released a staff notice setting out the issues that investment fund managers should consider in light of the recent federal budget. Specifically, under proposed amendments to the Income Tax Act, distributions to unitholders of a mutual fund resulting from partial or full settlements of a forward agreement will now be treated as income distributions.

According to OSC Staff, investment fund managers should consider the effects of these changes on their funds, specifically with respect to disclosure obligations, especially if the income conversion feature is an "essential" aspect of the fund. The notice also suggests that managers consider whether to cap affected funds to new and additional investments, whether changes to funds' investment objectives and strategies will be needed, and whether funds need to be restructured, reorganized or terminated.

For more information, see OSC Staff Notice 81-719.

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Amanda Linett and Ruth Elnekave -

The Canadian Securities Administrators (CSA) have published for comment proposed amendments to the reporting threshold, triggers and related disclosure requirements under Canada’s early warning reporting (EWR) regime intended to “provide greater transparency about significant holdings of issuers’ securities”.  These amendments could affect the conduct of certain equity derivative transactions and related hedging activities.

Currently, under the EWR regime, prescribed disclosure is required by any investor that acquires beneficial ownership of or the power to exercise control or direction over 10% or more of any class of a public company’s voting or equity securities. Additional reporting is required on each incremental acquisition of 2% as well as a change in a material fact contained in an earlier report. Certain eligible institutional investors (EIIs) can take advantage of relaxed timing requirements for early warning reporting under the alternative monthly reporting (AMR) regime.

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