CSA intend to publish national rule for clearing agencies

Alix d'Anglejan-Chatillon -

The Canadian Securities Administrators yesterday released an update on the proposed local rules designed to set out certain requirements in relation to the application process for seeking recognition as a clearing agency (or an exemption from the recognition requirement), which were published in December 2013.

As we discussed late last year, the proposed rules were published in substantially the same form by the Ontario Securities Commission, Quebec's Autorité des marchés financiers and the Manitoba Securities Commission, while the securities regulators in British Columbia, Alberta, Saskatchewan, New Brunswick and Nova Scotia announced an intention to develop a materially similar multilateral rule in the future.

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AMF proposes amendments to derivatives trade reporting regulation

Alix d'Anglejan-Chatillon -

On July 3, Quebec’s Autorité des marchés financiers (AMF) published for comment the Draft Regulation to amend Regulation 91-507 respecting Trade Repositories and Derivatives Data Reporting (the “Draft Regulation”). Regulation 91-507, which requires that all over-the-counter (OTC) derivatives transactions involving a local counterparty be reported to a recognized trade repository, came into force in Quebec on December 31, 2013, with reporting obligations becoming effective for the various market participants over the course of 2014 and 2015. The AMF is proposing the Draft Regulation in furtherance of its previously stated intent to make consequential amendments to Regulation 91-507 “to maintain a harmonized national oversight and reporting regime for OTC derivatives markets”.

As part of the changes proposed in the Draft Regulation, section 25 of Regulation 91-507, which imposes the reporting requirement on the dealer, would be amended to explicitly add Canadian financial institutions to the determination of the reporting counterparty. The reason for the addition is that Canadian financial institutions engaging in derivatives trading on their own behalf might not need to be registered as derivatives dealers under the Quebec Derivatives Act. For purposes of transaction reporting under Regulation 91-507, a Canadian financial institution would be the most technologically sophisticated counterparty.

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OSC changes to derivatives data reporting intended to alleviate reporting obligations

Margaret Grottenthaler -

The OSC announced the anticipated further amendments to OSC Rule 91-507 Trade Repositories and Derivatives Data Reporting (the TR Rule) to incorporate reporting in accordance with the Canadian Transaction Reporting Requirements issued by ISDA April 4, 2014 where transactions are between two dealers or two non-dealers, thus avoiding (hopefully) double reporting. In order to rely on the ISDA methodology: (i) each party to the transaction must agree to a multilateral agreement administered by and delivered to IDSA and under which the process set out in the ISDA methodology is required to be followed; (ii) the ISDA methodology process must be followed in determining the reporting counterparty in respect of that transaction; and (iii) each party to the transaction must consent to the release to the OSC by ISDA of information relevant in determining the applicability of the first two conditions. 

As we discussed in April, amendments were also recently announced to delay the effective date of reporting obligations under the rule and to lessen the burden on local end-user counterparties.

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Investment fund modernization: Phase 2 implementation to start in September of 2014

The Canadian Securities Administrators today announced the adoption of final amendments that will implement certain aspects of Phase 2 of the Modernization of Investment Fund Product Regulation Project.  The mandate of Phase 2 involved generally addressing the regulatory gap between non-redeemable investment funds and mutual funds by focusing on imposing certain core operational requirements on publicly offered non-redeemable investment funds that are generally analogous to the requirements applicable to mutual funds.

The final amendments to be adopted as of September 22, 2014 stem from proposed amendments published last year, and will involve the imposition of core investment restrictions for non-redeemable investment funds while also enhancing disclosure requirements regarding securities lending activities by investment funds.  The following is a summary of some of the final amendments that are set to come into force, which we will review in further detail in subsequent posts.  

Notably, the final amendments do not extend to the creation of a more comprehensive alternative funds framework (planned to be effected through an overhaul of National Instrument 81-104 Commodity Pools).  As previously announced by the CSA,  the “alternative funds proposals” have been deferred to allow for further review, along with related restrictions that were proposed with respect to investments in physical commodities, short selling, the use of derivatives and borrowing cash.

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OSFI releases expectations for pension plans considering longevity risk hedging

On June 9, the Office of the Superintendent of Financial Institutions released a policy advisory to provide guidance to administrators of federally regulated defined benefit pension plans that are considering entering into longevity risk hedging contracts.

While OSFI considers longevity risk hedging contracts to be permissible investments and pension plans are not required to inform plan members of the existence of such contracts, the advisory stresses that such investments must comply with legal regulations and the terms of the relevant pension plan.

The advisory also discusses the potential risks to pension plans and sets out the issues that a plan administrator should review when considering such contracts, including cost, acceptability under the law and terms of the plan, administrative complexity, duration, liquidity and actuarial valuation implications.

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ISDA releases FAQ for end-users on Canadian derivatives trade reporting obligations and standardized representations

Alix d'Anglejan-Chatillon and Margaret Grottenthaler -

As a follow-up to our earlier posts, the International Swaps and Derivatives Association, Inc. (ISDA) has developed, in consultation with industry participants in the ISDA Canada Working Group, a number of useful tools for buy-side participants, including asset managers, fund managers and other non-dealer market participants or “end-users” in the Canadian OTC derivatives markets.  On May 23, ISDA published a FAQ for Non-Dealers on Canadian Trade Reporting Obligations which outlines key regulatory requirements relating to the reporting of derivatives transaction data and the procedures developed by the derivatives industry to facilitate dealer and end-user compliance with the new requirements under Rule 91-507 as adopted by the Ontario Securities Commission (OSC), the Manitoba Securities Commission (MSC) and the Autorité des marchés financiers (AMF). 

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Industry Canada consulting on treatment of derivatives in Canadian insolvency legislation

Margaret Grottenthaler -

Derivatives market participants will want to pay close attention to Industry Canada’s recent discussion paper regarding its review of the Bankruptcy and Insolvency Act (BIA) and Companies’ Creditors Arrangement Act (CCAA). Several of the matters on which the ministry is seeking input relate to eligible financial contracts (EFCs), including the existing EFC safe-harbour provisions in these Acts. The Discussion Paper makes note of the recommendations made by the Insolvency Institute of Canada’s Report of the Task Force on Derivatives and to a report by Dr. Janis Sarra (Examining the Insolvency Toolkit: Report of the Public Meetings on the Canadian Commercial Insolvency Law System). Submissions are due July 15. The Minister of Industry intends to table a report in Parliament in September. This report will then be referred to committee and may lead to amendments to the BIA and CCAA.

Several of the IIC recommendations would positively contribute to certainty regarding the enforceability of close-out and collateral enforcement rights. These include express safe-harbours in receivership proceedings and clear priority over statutory trust and lien claims for financial collateral for eligible financial contracts.

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AMF publishes blanket exemption to extend TR reporting deadlines in Quebec

Alix d'Anglejan-Chatillon -

As a follow-up to our post of April 17, the AMF issued its blanket exemption decision on May 15 to extend the date for the commencement of over-the-counter (OTC) derivatives trade reporting under AMF Regulation 91-507 respecting Trade Repositories and Derivatives Data Reporting until October 31, 2014 for clearing houses and dealers, and until June 30, 2015 for all other OTC derivatives market participants.

In the accompanying notice, the AMF confirms its intention to make consequential amendments to Regulation 91-507 “to maintain a harmonized national oversight and reporting regime for OTC derivatives markets”. These amendments are expected to be broadly consistent with the amendments to the Ontario and Manitoba TR Rules released on April 17 and discussed in our April post. Both the blanket decision and the accompanying notice are currently available in French only.

Nova Scotia, Alberta, New Brunswick move to regulate derivatives

Last week, Nova Scotia introduced amendments to its Securities Act intended to further facilitate the harmonization of derivatives regulation across Canada. Specifically, the amendments would provide the Nova Scotia Securities Commission with the authority to, among other things, recognize clearing agencies, derivatives trading facilities and trade repositories and regulate the trading of derivatives through such facilities. Nova Scotia's proposed amendments follow Alberta's recent adoption of amendments to its Securities Act and New Brunswick's similar amendments, also intended to create frameworks for the regulation of over-the-counter derivatives in those provinces.

The amendments to both Alberta's and Nova Scotia's securities legislation also expand on the definition of "special relationship" in the context of insider trading, similar to changes made in Ontario last year, to include those considering or evaluating whether to make a take-over bid.

As we have discussed in recent months, Manitoba and Ontario also recently enacted legislation to provide for the regulation of derivatives, while substantive regulation has been adopted by those two provinces as well as Quebec.

Changes to Nova Scotia's statute have yet to be enacted, while Alberta's amendments come into force on proclamation. Changes to New Brunswick's legislation, meanwhile, are currently in force.

Amendments to derivatives trade reporting rule to lessen burden on local end-user counterparties

The Ontario Securities Commission, among other regulators, released amendments today to OSC Rule 91-507 Trade Repositories and Derivatives Data Reporting (the TR Rule). The amendments are intended to lessen the burden on local end-user counterparties, while also delaying the effective date of reporting obligations under the rule.

As we discussed last week, the CSA recently announced a delay in implementation of reporting obligations. Specifically, clearing agencies and dealers will now have to begin trade reporting on October 31, 2014, while all other OTC derivatives market participants will be required to report beginning on June 30, 2015. The requirement for trade repositories to make transaction-level reports publicly available will also be delayed to April 30, 2015.

The amendments also repeal provisions of the rules that established a fall-back mechanism requiring local non-dealer counterparties to monitor the transaction reporting of foreign dealer reporting counterparties. The amendment is intended to relieve a significant burden on local end-user counterparties.

Meanwhile, Quebec’s AMF today stated that it intends to formalize the delay in implementation dates by publishing a blanket exemption to be effective as of July 2, 2014. Further, it also intends to propose amendments to the TR Rule in order to “maintain a harmonized national oversight and reporting regime for OTC derivatives markets”, in the near future. The AMF advises that it therefore seeks to specify that reporting counterparties that are dealers, clearing houses or financial institutions will be required to report derivatives data pursuant to Part 3 of the TR Rule as of October 31, 2014.

Update: Here is an updated version of our previous article that reflects the recent amendments.