Ontario, Manitoba and Quebec Adopt Useful Amendments to the Trade Reporting Rules

Margaret Grottenthaler and Alison Beer - 

I’d like to introduce Alison Beer and her first contribution to the Canadian Structured Finance Law blog.  Alison has recently joined Stikeman Elliott’s financial products group as a senior associate and we look forward to many future posts to keep you informed on legal developments in Canadian derivatives and securities financing markets.  Margaret

The anticipated amendments to the rules on reporting derivatives data in Ontario, Quebec and Manitoba are expected to come into force on July 29, 2016.  Highlights of the final amendments to OSC Rule 91-507 Trade Repositories and Derivatives Data Reporting; MSC Rule 91-507 Trade Repositories and Derivatives Data Reporting include:

  • Exempting inter-affiliate trades from reporting (and not just those between “local” counterparties)
  • Pushing back the effective date for requiring trade repositories to publicly report derivatives data to January 16, 2017
  • Simplifying the timing convention used for releasing derivatives data publicly: it’s now 48 hours after execution of the trade
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Consultation Draft #2 of the Capital Markets Stability Act Loses Weight

Margaret Grottenthaler -

The revised consultation draft of the federal Capital Markets Stability Act (CMSA) significantly scales back jurisdiction over market infrastructure and participants from the prior draft published in the fall of 2014 (see our previous post). The purposes of the CMSA continue – albeit in this newly slimmed-down form – to be to ensure the stability of Canada’s financial system through the management of certain types of systemic risk and to protect capital markets investors and others from “financial crimes”.

This post will review the main features of this new version of the CMSA as they relate to derivatives markets. Comments are due by July 6, 2016. 

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Consultation Draft #2 of the Capital Markets Stability Act Loses Weight

The revised consultation draft of the federal Capital Markets Stability Act (CMSA) significantly scales back jurisdiction over market infrastructure and participants from the prior draft published in the fall of 2014 (see our previous post). The purposes of the CMSA continue – albeit in this newly slimmed-down form – to be to ensure the stability of Canada’s financial system through the management of certain types of systemic risk and to protect capital markets investors and others from “financial crimes”.

This post will review the main features of this new version of the CMSA as they relate to derivatives markets. Comments are due by July 6, 2016. 

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Newly Introduced Canadian Bank Bail-In Amendments Affect Netting Laws

Margaret Grottenthaler - 

Proposed amendments to the Canada Deposit Insurance Corporation Act(CDIC Act) introduced in Bill C-15 enhance the resolution powers of CDIC and are intended to make Canada a Protocol-Eligible Regime under the ISDA 2015 Universal Stay Protocol. I am happily contemplating updating all of our capital netting opinions in light of the proposed changes, some of which affect the operation of the Act’s eligible financial contracts safe-harbour (EFC exemption). Those of you who read capital netting opinions for pleasure (or because you must in order to keep your jobs) will be most interested in the following features of the Bill. 

CDIC Can Make Broader Range of Orders

The CDIC Act restructuring regime allows CDIC to make a broader range of orders under s.39.13 with respect to an insolvent member institution (an Order), including, in the case of domestic systemically important banks, an order to convert its prescribed shares and liabilities to common shares (see the related post by Peter Hamilton here).

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Government of Canada introduces Bill to implement TLAC requirement and Bail-In Regime for D-SIBs

Peter Hamilton - 

New federal legislation will implement a total loss-absorbing capacity (TLAC) requirement and a bail-in capital regime for Canada’s Domestic Systemically Important Banks (D-SIBs). The legislation, which is contained in the Budget Implementation Act, 2016, No. 1 (Bill C-15), was introduced in the House of Commons on April 20, 2016. It also includes major amendments to the resolution regime for all deposit-taking banks under the Canada Deposit Insurance Corporation Act (CDIC Act).

The new legislation provides for a statutory power to designate D‑SIBs (none of Canada’s banks are Global Systemically Important Banks (G-SIBs)). It should be noted, however, that OSFI has already designated Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, and Toronto-Dominion Bank as D-SIBs, and one would assume that these existing designations will carry forward under the new legislation. From January 1, 2016, D-SIBs are subject to a Common Equity Tier 1 surcharge equal to 1% of risk-weighted assets (RWA). The 1% capital surcharge is to be periodically reviewed in light of national and international developments. 

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Canadian mandatory central counterparty clearing proposal limited to significant market participants

Margaret Grottenthaler -

The Canadian Securities Administrators (CSA) second version of proposed National Instrument 94-101 Mandatory Central Counterparty Clearing of Derivatives (the Clearing Rule) and proposed Companion Policy 94-101 (the Clearing CP) limit their application to direct clearing participants (and their affiliates) and major swap market participants.   For a rule directed primarily at reducing systemic risk, this is a sensible and welcome approach, and one that recognizes that the Canadian market comprises a relatively small part of the global market. Initially, the products mandated to clear will be certain interest rate derivatives. In this post we review the main features of the Clearing Rule.

The Clearing Rule will require a “local counterparty” to clear a “mandatory clearable derivative” if both counterparties meet certain criteria, and it sets out the process for determining which derivatives will be mandated for clearing.  

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Saskatchewan Securities Act amended to incorporate derivatives regulation framework

Margaret Grottenthaler -

On February 10, 2016, the amendments to the Securities Act (Saskatchewan) (the SSA) that incorporate a framework for derivatives regulation were proclaimed into force. 

Derivatives, not exchange contracts or futures contracts

In introducing the concept of a “derivative” and deleting references to “exchange contracts” and “futures contracts”, Saskatchewan adopts similar amendments previously made in respect of the Securities Act (Alberta).  The previous situation in Saskatchewan was that the definition of securities included “futures contracts” which in turn were defined widely enough to cover many over-the-counter derivatives transactions.  This resulted in securities dealer registration and prospectus requirements potentially applying to over-the-counter derivatives.  To deal with this, the Saskatchewan Financial Services Commission issued General Order 91-907 Over-The-Counter Derivatives (General Order 91-907) in November 2009 exempting certain derivatives (those between qualified parties, certain commodity derivatives) from the registration and prospectus requirements. Now derivatives are dealt with as a separate category of instrument (the term “derivative” is explicitly excluded from the definition of a “security”) as they are in Ontario and Alberta. 

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Derivatives product determination rule to be adopted by remaining provinces on May 1, 2016

Margaret Grottenthaler and William Scott -

Members of the Canadian Securities Administrators (CSA) from the provinces and territories of Canada other than Ontario, Manitoba and Quebec recently published their product determination rule, Multilateral Instrument 91-101 Derivatives: Product Determination (MI 91-101), which specifies the types of over-the-counter derivatives that will be subject to the new derivatives data reporting rule applicable in their jurisdictions.   We previously discussed the new derivatives data reporting rule, Multilateral Instrument 96-101 Trade Repositories and Derivatives Data Reporting (MI 96-101), in detail here

In addition, these members of the CSA have stated that they expect MI 91-101 to specify the types of OTC derivatives that will be subject to future rules relating to OTC derivatives.  MI 91-101 is expected to come into force on May 1, 2016 together with MI 96-101.

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Final rule for derivatives trade reporting proposed in remaining Canadian jurisdictions

William Scott and Margaret Grottenthaler -

Securities regulators in all the remaining provinces and territories of Canada have now published final rules in the form of Multilateral Instrument 91-101 Derivatives: Product Determination (MI 91-101) and Multilateral Instrument 96-101 Trade Repositories and Derivatives Data Reporting (MI 96-101) and related Companion Policies for their proposed derivatives trade reporting regime.  As we wrote in January 2015, these regulators are proposing a regime that is harmonized with but separate from the regime that has been adopted in Ontario, Manitoba and Quebec.

MI 96-101 sets out the requirements trade repositories have to meet to be recognized as entities to which market participants can report their trades and outlines the reporting obligations of derivatives market participants in respect of transactions which are in scope for reporting under MI 91-101.  While MI 96-101 is quite similar to the existing trade reporting rules in Ontario, Manitoba and Quebec, there are some noteworthy differences.  It is also anticipated that further amendments will be made to MI 96-101 to align it with amendments currently proposed in Ontario, Manitoba and Quebec.  These amendments are expected to come into effect at the same time as reporting under MI 96-101 comes into effect. 

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CSA publishes revised draft segregation and porting rules for customer collateral in cleared derivatives

William Scott and Margaret Grottenthaler -

As part of a series of developments in the area of derivatives regulation, the Canadian Securities Administrators (CSA) proposed a rule, on January 21, 2016, aimed at ensuring that clearing is carried out by clearing intermediaries and clearing agencies in a manner that protects customer collateral and positions and improves the ability of a derivatives clearing agency to withstand a clearing member default.  The rule will allow for different clearing models (principal to principal or FCM) and is broadly aligned with principles adopted in the US and other jurisdictions.  Comments are due by April 19.

Two types of entities are the focus of Proposed National Instrument 94-102 Derivatives: Customer Clearing and Protection of Customer Collateral and Positions (NI 94-102): clearing intermediaries (CI) and regulated clearing agencies (RCA). 

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